G.R. No.

L-32811 March 31, 1980

FELIPE
C.
vs.
NICANOR LAPUZ and THE COURT OF APPEALS, respondents.

ROQUE, petitioner,

Taada, Sanchez, Taada, Taada for petitioner.

N.M. Lapuz for respondent.

GUERRERO, J.:
Appeal by certiorari from the Resolution of the respondent court 1 dated October 12, 1970 in CA-G.R.
No. L-33998-R entitled "Felipe C. Roque, plaintiff-appellee, versus Nicanor Lapuz, defendantappellant" amending its original decision of April 23, 1970 which affirmed the decision of the Court of
First Instance of Rizal (Quezon City Branch) in Civil Case No. Q-4922 in favor of petitioner, and the
Resolution of the respondent court denying petitioner's motion for reconsideration.
The facts of this case are as recited in the decision of the Trial Court which was adopted and affirmed by
the Court of Appeals:
Sometime in 1964, prior to the approval by the National Planning Commission of the consolidation and
subdivision plan of plaintiff's property known as the Rockville Subdivision, situated in Balintawak,
Quezon City, plaintiff and defendant entered into an agreement of sale covering Lots 1, 2 and 9, Block 1,
of said property, with an aggregate area of 1,200 square meters, payable in 120 equal monthly
installments at the rate of P16.00, P15.00 per square meter, respectively. In accordance with said
agreement, defendant paid to plaintiff the sum of P150.00 as deposit and the further sum of P740.56 to
complete the payment of four monthly installments covering the months of July, August, September, and
October, 1954. (Exhs. A and B). When the document Exhibit "A" was executed on June 25, 1954, the plan
covering plaintiff's property was merely tentative, and the plaintiff referred to the proposed lots appearing
in the tentative plan.
After the approval of the subdivision plan by the Bureau of Lands on January 24, 1955, defendant
requested plaintiff that he be allowed to abandon and substitute Lots 1, 2 and 9, the subject matter of their
previous agreement, with Lots 4 and 12, Block 2 of the approved subdivision plan, of the Rockville
Subdivision, with a total area of 725 square meters, which are corner lots, to which request plaintiff
graciously acceded.
The evidence discloses that defendant proposed to plaintiff modification of their previous contract to sell
because he found it quite difficult to pay the monthly installments on the three lots, and besides the two
lots he had chosen were better lots, being corner lots. In addition, it was agreed that the purchase price of
these two lots would be at the uniform rate of P17.00 per square (meter) payable in 120 equal monthly
installments, with interest at 8% annually on the balance unpaid. Pursuant to this new agreement,
defendant occupied and possessed Lots 4 and 12, Block 2 of the approved subdivision plan, and enclosed
them, including the portion where his house now stands, with barbed wires and adobe walls.

However, aside from the deposit of P150.00 and the amount of P740.56 which were paid under their
previous agreement, defendant failed to make any further payment on account of the agreed monthly
installments for the two lots in dispute, under the new contract to sell. Plaintiff demanded upon defendant
not only to pay the stipulated monthly installments in arrears, but also to make up-to-date his payments,
but defendant, instead of complying with the demands, kept on asking for extensions, promising at first
that he would pay not only the installments in arrears but also make up-to-date his payment, but later on
refused altogether to comply with plaintiff's demands.
Defendant was likewise requested by the plaintiff to sign the corresponding contract to sell in accordance
with his previous commitment. Again, defendant promised that he would sign the required contract to sell
when he shall have made up-to-date the stipulated monthly installments on the lots in question, but
subsequently backed out of his promise and refused to sign any contract in noncompliance with what he
had represented on several occasions. And plaintiff relied on the good faith of defendant to make good his
promise because defendant is a professional and had been rather good to him (plaintiff).
On or about November 3, 1957, in a formal letter, plaintiff demanded upon defendant to vacate the lots in
question and to pay the reasonable rentals thereon at the rate of P60.00 per month from August, 1955.
(Exh. "B"). Notwithstanding the receipt of said letter, defendant did not deem it wise nor proper to answer
the same.
In reference to the mode of payment, the Honorable Court of Appeals found
Both parties are agreed that the period within which to pay the lots in question is ten years. They however,
disagree on the mode of payment. While the appellant claims that he could pay the purchase price at any
time within a period of ten years with a gradual proportionate discount on the price, the appellee
maintains that the appellant was bound to pay monthly installments.
On this point, the trial court correctly held that
It is further argued by defendant that under the agreement to sell in question, he has the right or option to
pay the purchase price at anytime within a period of ten years from 1954, he being entitled, at the same
time, to a graduated reduction of the price. The Court is constrained to reject this version not only because
it is contradicted by the weight of evidence but also because it is not consistent with what is reasonable,
plausible and credible. It is highly improbable to expect plaintiff, or any real estate subdivision owner for
that matter, to agree to a sale of his land which would be payable anytime in ten years at the exclusive
option of the purchaser. There is no showing that defendant is a friend, a relative, or someone to whom
plaintiff had to be grateful, as would justify an assumption that he would have agreed to extend to
defendant such an extra- ordinary concession. Furthermore, the context of the document, Exhibit "B", not
to mention the other evidences on records is indicative that the real intention of the parties is for the
payment of the purchase price of the lot in question on an equal monthly installment basis for a period of
ten years (Exhibits "A", "II", "J" and "K").
On January 22, 1960, petitioner Felipe C, Roque (plaintiff below) filed the complaint against defendant
Nicanor Lapuz (private respondent herein) with the Court of First Instance of Rizal, Quezon City Branch,
for rescission and cancellation of the agreement of sale between them involving the two lots in question
and prayed that judgment be rendered ordering the rescission and cancellation of the agreement of sale,

the defendant to vacate the two parcels of land and remove his house therefrom and to pay to the plaintiff
the reasonable rental thereof at the rate of P60.00 a month from August 1955 until such time as he shall
have vacated the premises, and to pay the sum of P2,000.00 as attorney's fees, costs of the suit and award
such other relief or remedy as may be deemed just and equitable in the premises.
Defendant filed a Motion to Dismiss on the ground that the complaint states no cause of action, which
motion was denied by the court. Thereafter, defendant filed his Answer alleging that he bought three lots
from the plaintiff containing an aggregate area of 1,200 sq. meters and previously known as Lots 1, 2 and
9 of Block 1 of Rockville Subdivision at P16.00, P15.00 and P15.00, respectively, payable at any time
within ten years. Defendant admits having occupied the lots in question.
As affirmative and special defenses, defendant alleges that the complaint states no cause of action; that
the present action for rescission has prescribed; that no demand for payment of the balance was ever
made; and that the action being based on reciprocal obligations, before one party may compel
performance, he must first comply what is incumbent upon him.
As counterclaim, defendant alleges that because of the acts of the plaintiff, he lost two lots containing an
area of 800 sq. meters and as a consequence, he suffered moral damages in the amount of P200.000.00;
that due to the filing of the present action, he suffered moral damages amounting to P100,000.00 and
incurred expenses for attorney's fees in the sum of P5,000.00.
Plaintiff filed his Answer to the Counterclaim and denied the material averments thereof.
After due hearing, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, the Court renders judgment in favor of plain. plaintiff and against the defendant, as
follows:
(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in question (Lots 4
and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision) rescinded, resolved and
cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to pay plaintiff
the reasonable rental thereof at the rate of P60.00 per month from August, 1955 until he shall have
actually vacated the premises; and
(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as the costs of
the suit. (Record on Appeal, p. 118)
(a) Declaring the agreement of sale between plaintiff and defendant involving the lots in question (Lots 4
and 12, Block 2 of the approved subdivision plan of the Rockville Subdivision) rescinded, resolved and
cancelled;
(b) Ordering defendant to vacate the said lots and to remove his house therefrom and also to pay plaintiff
the reasonable rental thereof at the rate of P60.00 per month from August, 1955 until he shall have
actually vacated premises; and

(c) Condemning defendant to pay plaintiff the sum of P2,000.00 as attorney's fees, as well as the costs of
the suit. (Record on Appeal. p. 118)
Not satisfied with the decision of the trial court, defendant appealed to the Court of Appeals. The latter
court, finding the judgment appealed from being in accordance with law and evidence, affirmed the same.
In its decision, the appellate court, after holding that the findings of fact of the trial court are fully
supported by the evidence, found and held that the real intention of the parties is for the payment of the
purchase price of the lots in question on an equal monthly installment basis for the period of ten years;
that there was modification of the original agreement when defendant actually occupied Lots Nos. 4 and
12 of Block 2 which were corner lots that commanded a better price instead of the original Lots Nos. 1, 2
and 9, Block I of the Rockville Subdivision; that appellant's bare assertion that the agreement is not
rescindable because the appellee did not comply with his obligation to put up the requisite facilities in the
subdivision was insufficient to overcome the presumption that the law has been obeyed by the appellee;
that the present action has not prescribed since Article 1191 of the New Civil Code authorizing rescission
in reciprocal obligations upon noncompliance by one of the obligors is the applicable provision in relation
to Article 1149 of the New Civil Code; and that the present action was filed within five years from the
time the right of action accrued.
Defendant filed a Motion for Reconsideration of the appellate court's decision on the following grounds:
First Neither the pleadings nor the evidence, testimonial, documentary or circumstantial, justify the
conclusion as to the existence of an alleged subsequent agreement novatory of the original contract
admittedly entered into between the parties:
Second There is nothing so unusual or extraordinary, as would render improbable the fixing of ten ears
as the period within which payment of the stipulated price was to be payable by appellant;
Third Appellee has no right, under the circumstances on the case at bar, to demand and be entitled to
the rescission of the contract had with appellant;
Fourth Assuming that any action for rescission is availability to appellee, the same, contrary to the
findings of the decision herein, has prescribed;
Fifth Assumming further that appellee's action for rescission, if any, has not yet prescribed, the same is
at least barred by laches;
Sixth Assuming furthermore that a cause of action for rescission exists, appellant should nevertheless
be entitled to tile fixing of a period within which to comply with his obligation; and
Seventh At all events, the affirmance of the judgment for the payment of rentals on the premises from
August, 1955 and he taxing of attorney's fees against appellant are not warranted b the circumstances at
bar. (Rollo, pp. 87-88)
Acting on the Motion for Reconsideration, the Court of Appeals sustained the sixth ground raised by the
appellant, that assuming that a cause of action for rescission exists, he should nevertheless be entitled to
the fixing of a period within which to comply with his obligation. The Court of Appeals, therefore,
amended its original decision in the following wise and manner:

WHEREFORE, our decision dated April 23, 1970 is hereby amended in the sense that the defendant
Nicanor Lapuz is hereby granted a period of ninety (90) days from entry hereof within which to pay the
balance of the purchase price in the amount of P11,434,44 with interest thereon at the rate of 8% per
annum from August 17, 1955 until fully paid. In the event that the defendant fails to comply with his
obligation as above stated within the period fixed herein, our original judgment stands.
Petitioner Roque, as plaintiff-appellee below, filed a Motion for Reconsideration; the Court of Appeals
denied it. He now comes and appeals to this Court on a writ of certiorari.
The respondent Court of Appeals rationalizes its amending decision by considering that the house
presently erected on the land subject of the contract is worth P45,000.00, which improvements introduced
by defendant on the lots subject of the contract are very substantial, and thus being the case, "as a matter
of justice and equity, considering that the removal of defendant's house would amount to a virtual
forfeiture of the value of the house, the defendant should be granted a period within which to fulfill his
obligations under the agreement." Cited as authorities are the cases of Kapisanan Banahaw vs. Dejarme
and Alvero, 55 Phil. 338, 344, where it is held that the discretionary power of the court to allow a period
within which a person in default may be permitted to perform the stipulation upon which the claim for
resolution of the contract is based should be exercised without hesitation in a case where a virtual
forfeiture of valuable rights is sought to be enforced as an act of mere reprisal for a refusal of the debtor
to submit to a usurious charge, and the case of Puerto vs. Go Ye Pin, 47 O.G. 264, holding that to oust the
defendant from the lots without giving him a chance to recover what his father and he himself had spent
may amount to a virtual forfeiture of valuable rights.
As further reasons for allowing a period within which defendant could fulfill his obligation, the
respondent court held that there exists good reasons therefor, having in mind that which affords greater
reciprocity of rights (Ramos vs. Blas, 51 O.G. 1920); that after appellant had testified that plaintiff failed
to comply with his part of the contract to put up the requisite facilities in the subdivision, plaintiff did not
introduce any evidence to rebut defendant's testimony but simply relied. upon the presumption that the
law has been obeyed, thus said presumption had been successfully rebutted as Exhibit "5-D" shows that
the road therein shown is not paved The Court, however, concedes that plaintiff's failure to comply with
his obligation to put up the necessary facilities in the subdivision will not deter him from asking f r the
rescission of the agreement since this obligation is not correlative with defendant's obligation to buy the
property.
Petitioner assails the decision of the Court of Appeals for the following alleged errors:
I. The Honorable Court of Appeals erred in applying paragraph 3, Article 1191 of the Civil Code which
refers to reciprocal obligations in general and, pursuant thereto, in granting respondent Lapuz a period of
ninety (90) days from entry of judgment within which to pay the balance of the purchase price.
II. The Honorable Court of Appeals erred in not holding that Article 1592 of the same Code, which
specifically covers sales of immovable property and which constitutes an exception to the third paragraph
of Article 1191 of said Code, is applicable to the present case.
III. The Honorable Court of Appeals erred in not holding that respondent Lapuz cannot avail of the
provisions of Article 1191, paragraph 3 of the Civil Code aforesaid because he did not raise in his answer

or in any of the pleadings he filed in the trial court the question of whether or not he is entitled, by reason
of a just cause, to a fixing of a new period.
IV. Assuming arguendo that the agreement entered into by and between petitioner and respondent Lapuz
was a mere promise to sell or contract to sell, under which title to the lots in question did not pass from
petitioner to respondent, still the Honorable Court of Appeals erred in not holding that aforesaid
respondent is not entitled to a new period within which to pay petitioner the balance of P11,434.44
interest due on the purchase price of P12.325.00 of the lots.
V. Assuming arguendo that paragraph 3, Article 1191 of the Civil Code is applicable and may be availed
of by respondent, the Honorable Court of Appeals nonetheless erred in not declaring that aid respondent
has not shown the existence of a just cause which would authorize said Court to fix a new period within
which to pay the balance aforesaid.
VI. The Honorable Court of Appeals erred in reconsidering its original decision promulgated on April 23,
1970 which affirmed the decision of the trial court.
The above errors may, however, be synthesized into one issue and that is, whether private respondent is
entitled to the Benefits of the third paragraph of Article 1191, New Civil Code, for the fixing of period
within which he should comply with what is incumbent upon him, and that is to pay the balance of
P11,434,44 with interest thereon at the rate of 8% 1et annum from August 17, 1955 until fully paid since
private respondent had paid only P150.00 as deposit and 4 months intallments amounting to P740.46, or a
total of P890.46, the total price of the two lots agreed upon being P12,325.00.
For his part, petitioner maintains that respondent is not entitled to the Benefits of paragraph 3, Article
1191, NCC and that instead, Article 1592 of the New Civil Code which specifically covers sales of
immovable property and which constitute an exception to the third paragraph of Art. 1191 of aid Code, is
the applicable law to the case at bar.
In resolving petitioner's assignment of errors, it is well that We lay clown the oda provisions and pertinent
rulings of the Supreme Court bearing on the crucial issue of whether Art. 1191, paragraph 3 of the New
Civil Code applies to the case at Bar as held by the appellate court and supported by the private
respondent, or Art. 1592 of the same Code which petitioner strongly argues in view of the peculiar facts
and circumstances attending this case. Article 1191, New Civil Code, provides:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one at the obligors
should not comply with hat is incumbent upon him
The injured partner may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
Article 1592 also provides:

Art. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to
pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee
may pay, even after the expiration of the period, as long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a
new term.
The controlling and latest jurisprudence is established and settled in the celebrated case of Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-25885, January
31, 1972, 43 SCRA 93, originally decided in 1972, reiterated in the Resolution on Motion to Reconsider
dated August 18, 1972, 46 SCRA 381 and emphatically repeated in the Resolution on Second Motion for
Reconsideration promulgated November 16, 1978, 86 SCRA 309, which once more denied Maritimes
Second Motion for Reconsideration of October 7, 1972. In the original decision, the Supreme Court
speaking thru Justice J.B.L. Reyes said:
Under the circumstances, the action of Maritime in suspending payments to Myers Corporation was a
breach of contract tainted with fraud or malice (dolo), as distinguished from mere negligence (culpa),
"dolo" being succinctly defined as a "conscious and intention design to evade the normal fulfillment of
existing obligations" (Capistrano, Civil Code of the Philippines, Vol. 3, page 38), and therefore
incompatible with good faith (Castan, Derecho Civil, 7th Ed., Vol. 3, page 129; Diaz Pairo, Teoria de
Obligaciones, Vol. 1, page 116).
Maritime having acted in bad faith, it was not entitled to ask the court to give it further time to make
payment and thereby erase the default or breach that it had deliberately incurred. Thus the lower court
committed no error in refusing to extend the periods for payment. To do otherwise would be to sanction a
deliberate and reiterated infringement of the contractual obligations incurred by Maritime, an attitude
repugnant to the stability and obligatory force of contracts.
The decision reiterated the rule pointed out by the Supreme Court in Manuel vs. Rodriguez, 109 Phil. 1, p.
10, that:
In contracts to sell, where ownership is retained by the seller and is not to pass until the fun payment of
the price, such payment, as we said is a positive suspensive condition, the failure of which is not a breach,
casual or serious, but simply an event that prevented the obligation of the vendor to convey title from
acquiring binding i force in accordance with Article 1117 of the Old Civil Code. To argue that there was
only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where
non-payment is a resolutory condition, which is not the case." Continuing, the Supreme Court declared:
... appellant overlooks that its contract with appellee Myers s not the ordinary sale envisaged by Article
1592, transferring ownership simultaneously with the delivery of the real property sold, but one in which
the vendor retained ownership of the immovable object of the sale, merely undertaking to convey it
provided the buyer strictly complied with the terms of the contract (see paragraph [d], ante page 5). In
suing to recover possession of the building from Maritime appellee Myers is not after the resolution or
setting aside of the contract and the restoration of the parties to the status quo ante as contemplated by
Article 1592, but precisely enforcing the Provisions of the agreement that it is no longer obligated to part
with the ownership or possession of the property because Maritime failed to comply with the specific
condition precedent, which is to pay the installments as they fell due.

The distinction between contracts of sale and contracts to sell with reserved title has been recognized by
this Court in repeated decisions upholding the power of promisors under contracts to sell in case of failure
of the other party to complete payment, to extrajudicially terminate the operation of the contract, refuse
conveyance and retain the sums or installments already received, where such rights are expressly
provided for, as in the case at bar.
In the Resolution denying the first Motion for Reconsideration, 46 SCRA 381, the Court again speaking
thru Justice J.B.L. Reyes, reiterated the rule that in a contract to sell, the full payment of the price through
the punctual performance of the monthly payments is a condition precedent to the execution of the final
sale 4nd to the transfer of the property from the owner to the proposed buyer; so that there will be no
actual sale until and unless full payment is made.
The Court further ruled that in seeking to oust Maritime for failure to pay the price as agreed upon, Myers
was not rescinding (or more properly, resolving) the contract but precisely enforcing it according to its
expressed terms. In its suit, Myers was not seeking restitution to it of the ownership of the thing sold
(since it was never disposed of), such restoration being the logical consequence of the fulfillment of a
resolutory condition, expressed or implied (Art. 1190); neither was it seeking a declaration that its
obligation to sell was extinguished. What is sought was a judicial declaration that because the suspensive
condition (full and punctual payment) had not been fulfilled, its obligation to sell to Maritime never arose
or never became effective and, therefore, it (Myers) was entitled to repossess the property object of the
contract, possession being a mere incident to its right of ownership.
The decision also stressed that "there can be no rescission or resolution of an obligation as yet nonexistent, because the suspensive condition did not happen. Article 1592 of the New Civil Code (Art. 1504
of Old Civil Code) requiring demand by suit or notarial act in case the vendor of realty wants to rescind
does not apply to a contract to sell or promise to sell, where title remains with the vendor until fulfillment
to a positive condition, such as full payment of the price." (Manuel vs, Rodriguez, 109 Phil. 9)
Maritime's Second Motion for Reconsideration was denied in the Resolution of the Court dated
November 16, 1978, 86 SCRA 305, where the governing law and precedents were briefly summarized in
the strong and emphatic language of Justice Teehankee, thus:
(a) The contract between the parties was a contract to sell or conditional sale with title expressly reserved
in the vendor Myers Building Co., Inc. Myers until the suspensive condition of full and punctual payment
of the full price shall have been met on pain of automatic cancellation of the contract upon failure to pay
any of the monthly installments when due and retention of the sums theretofore paid as rentals. When the
vendee, appellant Maritime, willfully and in bad faith failed since March, 1961 to pay the P5,000.
monthly installments notwithstanding that it was punctually collecting P10,000. monthly rentals from
the lessee Luzon Brokerage Co., Myers was entitled, as it did in law and fact, to enforce the terms of the
contract to sell and to declare the same terminated and cancelled.
(b) Article 1592 (formerly Article 1504) of the new Civil Code is not applicable to such contracts to self
or conditional sales and no error was committed by the trial court in refusing to extend the periods for
payment.

(c) As stressed in the Court's decision, "it is irrelevant whether appellant Maritime's infringement of its
contract was casual or serious" for as pointed out in Manuel vs. Rodriguez, '(I)n contracts to self. whether
ownership is retained by the seller and is not to pass until the full payment of the price, such payment, as
we said, is a positive suspensive condition, the failure of which is not a breach, casual or serious, but
simply an event that prevented the obligation of the vendor to convey title from acquiring binding force ...
(d) It should be noted, however, that Maritimes breach was far from casual but a most serious breach of
contract ...
(e) Even if the contract were considered an unconditional sale so that Article 1592 of the Civil Code could
be deemed applicable, Myers' answer to the complaint for interpleaded in the court below constituted a
judicial demand for rescission of the contract and by the very provision of the cited codal article, 'after the
demand, the court may not grant him a new term for payment; and
(f) Assumming further that Article 1191 of the new Civil Code governing rescission of reciprocal
obligations could be applied (although Article 1592 of the same Code is controlling since it deals
specifically with sales of real property), said article provides that '(T)he court shall decree the rescission
claimed, unless there be just cause authorizing the fixing of a period' and there exists to "just cause" as
shown above for the fixing of a further period. ...
Under the first and second assignments of error which petitioner jointly discusses, he argues that the
agreement entered into between him and the respondent is a perfected contract of purchase and sale
within the meaning of Article 1475 of the New Civil Code which provides that "the 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. From that moment, the parties may reciprocally demand performance, subject to the
provisions of the law governing the form of contract."
Petitioner contends that "(n)othing in the decision of the courts below would show that ownership of the
property remained with plaintiff for so long as the installments have not been fully paid. Which yields the
conclusion that, by the delivery of the lots to defendant, ownership likewise was transferred to the latter."
(Brief for the Petitioner, p. 15) And he concludes that the sale was consummated by the delivery of the
two lots, the subject thereof, by him to the respondent.
Under the findings of facts by the appellate court, it appears that the two lots subject of the agreement
between the parties herein were delivered by the petitioner to the private respondent who took possession
thereof and occupied the same and thereafter built his house thereon, enclosing the lots with adobe stone
walls and barbed wires. But the property being registered under the Land Registration Act, it is the act of
registration of the Deed of Sale which could legally effect the transfer of title of ownership to the
transferee, pursuant to Section 50 of Act 496. (Manuel vs. Rodriguez, et al., 109 Phil. 1; Buzon vs.
Lichauco, 13 Phil. 354; Tuazon vs. Raymundo, 28 Phil. 635: Worcestor vs. Ocampo, 34 Phil. 646).
Hence, We hold that the contract between the petitioner and the respondent was a contract to sell where
the ownership or title is retained by the seller and is not to pass until the full payment of the price, such
payment being a positive suspensive condition and failure of which is not a breach, casual or serious, but
simply an event that prevented the obligation of the vendor to convey title from acquiring binding force.

In the case at bar, there is no writing or document evidencing the agreement originally entered into
between petitioner and private respondent except the receipt showing the initial deposit of P150.00 as
shown in Exh. "A" and the payment of the 4- months installment made by respondent corresponding to
July, 1954 to October, 1954 in the sum of P740.56 as shown in Exh. "B". Neither is there any writing or
document evidencing the modified agreement when the 3 lots were changed to Lots 4 and 12 with a
reduced area of 725 sq. meters, which are corner lots. This absence of a formal deed of conveyance is a
very strong indication that the parties did not intend immediate transfer of ownership and title, but only a
transfer after full payment of the price. Parenthetically, We must say that the standard printed contracts for
the sale of the lots in the Rockville Subdivision on a monthly installment basis showing the terms and
conditions thereof are immaterial to the case at bar since they have not been signed by either of the parties
to this case.
Upon the law and jurisprudence hereinabove cited and considering the nature of the transaction or
agreement between petitioner and respondent which We affirm and sustain to be a contract to sell, the
following resolutions of petitioner's assignment of errors necessarily arise, and so We hold that:
1. The first and second assignments of errors are without merit.
The overwhelming weight of authority culminating in the Luzon Brokerage vs. Maritime cases has laid
down the rule that Article 1592 of the New Civil Code does not apply to a contract to sell where title
remains with the vendor until full payment of the price as in the case at bar. This is the ruling in Caridad
Estates vs. Santero, 71 Phil. 120; Aldea vs. Inquimboy 86 Phil. 1601; Jocon vs. Capitol Subdivision,
Inc., L-6573, Feb. 28, 1955; Miranda vs. Caridad Estates, L-2077 and Aspuria vs. Caridad Estates, L2121 Oct. 3, 1950, all reiterated in Manuel vs. Rodriguez, et al. 109 Phil. 1, L-13435, July 27, 1960. We
agree with the respondent Court of Appeals that Art, 1191 of the New Civil Code is the applicable
provision where the obligee, like petitioner herein, elects to rescind or cancel his obligation to deliver the
ownership of the two lots in question for failure of the respondent to pay in fun the purchase price on the
basis of 120 monthly equal installments, promptly and punctually for a period of 10 years.
2. We hold that respondent as obligor is not entitled to the benefits of paragraph 3 of Art. 1191, NCC
Having been in default, he is not entitled to the new period of 90 days from entry of judgment within
which to pay petitioner the balance of P11,434.44 with interest due on the purchase price of P12,325.00
for the two lots.
Respondent a paid P150.00 as deposit under Exh. "A" and P740.56 for the 4-months installments
corresponding to the months of July to October, 1954. The judgment of the lower court and the Court of
Appeals held that respondent was under the obligation to pay the purchase price of the lots m question on
an equal monthly installment basis for a period of ten years, or 120 equal monthly installments.
Beginning November, 1954, respondent began to default in complying with his obligation and continued
to do so for the remaining 116 monthly interest. His refusal to pay further installments on the purchase
price, his insistence that he had the option to pay the purchase price any time in ten years inspire of the
clearness and certainty of his agreement with the petitioner as evidenced further by the receipt, Exh. "B",
his dilatory tactic of refusing to sign the necessary contract of sale on the pretext that he will sign later
when he shall have updated his monthly payments in arrears but which he never attempted to update, and
his failure to deposit or make available any amount since the execution of Exh "B" on June 28, 1954 up to
the present or a period of 26 years, are all unreasonable and unjustified which altogether manifest clear

bad faith and malice on the part of respondent puzzle making inapplicable and unwarranted the benefits
of paragraph 3, Art. 1191, N.C.C. To allow and grant respondent an additional period for him to pay the
balance of the purchase price, which balance is about 92% of the agreed price, would be tantamount to
excusing his bad faith and sanctioning the deliberate infringement of a contractual obligation that is
repugnant and contrary to the stability, security and obligatory force of contracts. Moreover, respondent's
failure to pay the succeeding 116 monthly installments after paying only 4 monthly installments is a
substantial and material breach on his part, not merely casual, which takes the case out of the application
of the benefits of pa paragraph 3, Art. 1191, N.C.C.
At any rate, the fact that respondent failed to comply with the suspensive condition which is the full
payment of the price through the punctual performance of the monthly payments rendered petitioner's
obligation to sell ineffective and, therefore, petitioner was entitled to repossess the property object of the
contract, possession being a mere incident to his right of ownership (Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc., et al. 46 SCRA 381).
3. We further rule that there exists no just cause authorizing the fixing of a new period within which
private respondent may pay the balance of the purchase price. The equitable grounds or considerations
which are the basis of the respondent court in the fixing of an additional period because respondent had
constructed valuable improvements on the land, that he has built his house on the property worth
P45,000.00 and placed adobe stone walls with barbed wires around, do not warrant the fixing of an
additional period. We cannot sanction this claim for equity of the respondent for to grant the same would
place the vendor at the mercy of the vendee who can easily construct substantial improvements on the
land but beyond the capacity of the vendor to reimburse in case he elects to rescind the contract by reason
of the vendee's default or deliberate refusal to pay or continue paying the purchase price of the land.
Under this design, strategem or scheme, the vendee can cleverly and easily "improve out" the vendor of
his land.
More than that, respondent has not been honest, fair and reciprocal with the petitioner, hence it would not
be fair and reasonable to the petitioner to apply a solution that affords greater reciprocity of rights which
the appealed decision tried to effect between the parties. As matters stand, respondent has been enjoying
the possession and occupancy of the land without paying the other 116 monthly installments as they fall
due. The scales of justice are already tipped in respondent,s favor under the amended decision of the
respondent court. It is only right that We strive and search for the application of the law whereby every
person must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith (Art. 19, New Civil Code)
In the case at bar, respondent has not acted in good faith. With malice and deliberate intent, he has twisted
the clear import of his agreement with the petitioner in order to suit his ends and delay the fulfillment of
his obligation to pay the land he had enjoyed for the last 26 years, more than twice the period of ten years
that he obliged himself to complete payment of the price.
4. Respondent's contention that petitioner has not complied with his obligation to put up the necessary
facilities in the Rockville Subdivision is not sufficient nor does it constitute good reason to justify the
grant of an additional period of 90 days from entry of judgment within which respondent may pay the
balance of the purchase price agreed upon. The Judgment of the appellate court concedes that petitioner's
failure to comply with his obligation to put up the necessary facilities in the subdivision will not deter him

from asking for the rescission of the agreement since his obligation is not correlative with respondent's
obligation to buy the property. Since this is so conceded, then the right of the petitioner to rescind the
agreement upon the happening or in the event that respondent fails or defaults in any of the monthly
installments would be rendered nugatory and ineffective. The right of rescission would then depend upon
an extraneous consideration which the law does not contemplate.
Besides, at the rate the two lots were sold to respondent with a combined area of 725 sq. meters at the
uniform price of P17.00 per sq. meter making a total price of P12,325.00, it is highly doubtful if not
improbable that aside from his obligation to deliver title and transfer ownership to the respondent as a
reciprocal obligation to that of the respondent in paying the price in full and promptly as the installments
fall due, petitioner would have assumed the additional obligation "to provide the subdivision with
streets ... provide said streets with street pavements concrete curbs and gutters, fillings as required by
regulations, adequate drainage facilities, tree plantings, adequate water facilities" as required under
Ordinance No. 2969 of Quezon City approved on May 11, 1956 (Answer of Defendant, Record on
Appeal, pp. 35-36) which was two years after the agreement in question was entered intoJune, 1y54.
The fact remains, however, that respondent has not protested to the petitioner nor to the authorities
concerned the alleged failure of petitioner to put up and provide such facilities in the subdivision because
he knew too well that he has paid only the aggregate sum of P890.56 which represents more or less 7% of
the agreed price of P12,325.00 and that he has not paid the real estate taxes assessed by the government
on his house erected on the property under litigation. Neither has respondent made any allegation in his
Answer and in all his pleadings before the court up to the promulgation of the Resolution dated October
12, 1970 by the Court of Appeals, to the effect that he was entitled to a new period within which to
comply with his obligation, hence the Court could not proceed to do so unless the Answer is first
amended. (Gregorio Araneta, Inc. vs. Philippine Sugar Estates Development Co., Ltd., G.R. No. L-22558,
May 31, 1967, 20 SCRA 330, 335). It is quite clear that it is already too late in the day for respondent to
claim an additional period within which to comply with his obligation.
Precedents there are in Philippine jurisprudence where the Supreme Court granted the buyer of real
property additional period within which to complete payment of the purchase price on grounds of equity
and justice as in (1) J.M. Tuazon Co., Inc. vs. Javier, 31 SCRA 829 where the vendee religiously satisfied
the monthly installments for eight years and paid a total of P4,134.08 including interests on the principal
obligation of only P3,691.20, the price of the land; after default, the vendee was willing to pay all arrears,
in fact offered the same to the vendor; the court granted an additional period of 60 days -from receipt of
judgment for the vendee to make all installment in arrears plus interest; (2) in Legarda Hermanos vs.
Saldaa, 55 SCRA 324, the Court ruled that where one purchase, from a subdivision owner two lots and
has paid more than the value of one lot, the former is entitled to a certificate of title to one lot in case of
default.
On the other hand there are also cases where rescission was not granted and no new or additional period
was authorized. Thus, in Caridad Estates vs. Santero, 71 Phil. 114, the vendee paid, totalling P7,590.00 or
about 25% of the purchase price of P30,000.00 for the three lots involved and when the vendor demanded
revocation upon the vendee's default two years after, the vendee offered to pay the arears in check which
the vendor refused; and the Court sustained the revocation and ordered the vendee ousted from the
possession of the land. In Ayala y Cia vs. Arcache, 98 Phil. 273, the total price of the land was
P457,404.00 payable in installments; the buyer initially paid P100,000.00 or about 25% of the agreed

price; the Court ordered rescission in view of the substantial breach and granted no extension to the
vendee to comply with his obligation.
The doctrinal rulings that "a slight or casual breach of contract is not a ground for rescission. It must be so
substantial and fundamental to defeat the object of the parties" (Gregorio Araneta Inc. vs. Tuazon de
Paterno, L-2886, August 22, 1962; Villanueva vs. Yulo, L-12985, Dec. 29,1959); that "where time is not
of the essence of t agreement, a slight delay on the part of one party in the performance of his obligation
is not a sufficient ground for the rescission of the agreement"( Biando vs. Embestro L-11919, July 27,
1959; cases cited in Notes appended to Universal Foods Corporation vs. Court of Appeals, 33 SCRA 1),
convince and persuade Us that in the case at bar where the breach, delay or default was committed as
early as in the payment of the fifth monthly installment for November, 1954, that such failure continued
and persisted the next month and every month thereafter in 1955, 1956, 1957 and year after year to the
end of the ten-year period in 1964 (10 years is respondent's contention) and even to this time, now more
than twice as long a time as the original period without respondent adding, or even offering to add a
single centavo to the sum he had originally paid in 1954 which represents a mere 7% of the total price
agreed upon, equity and justice may not be invoked and applied. One who seeks equity and justice must
come to court with clean hands, which can hardly be said of the private respondent.
One final point, on the supposed substantial improvements erected on the land, respondent's house. To
grant the period to the respondent because of the substantial value of his house is to make the land an
accessory to the house. This is unjust and unconscionable since it is a rule in Our Law that buildings and
constructions are regarded as mere accessories to the land which is the principal, following the Roman
maxim "omne quod solo inadeficatur solo cedit" (Everything that is built on the soil yields to the soil).
Pursuant to Art. 1191, New Civil Code, petitioner is entitled to rescission with payment of damages which
the trial court and the appellate court, in the latter's original decision, granted in the form of rental at the
rate of P60.00 per month from August, 1955 until respondent shall have actually vacated the premises,
plus P2,000.00 as attorney's fees. We affirm the same to be fair and reasonable. We also sustain the right
of the petitioner to the possession of the land, ordering thereby respondent to vacate the same and remove
his house therefrom.
WHEREFORE, IN VIEW OF THE FOREGOING, the Resolution appealed from dated October 12, 1970
is hereby REVERSED. The decision of the respondent court dated April 23, 1970 is hereby
REINSTATED and AFFIRMED, with costs against private respondent.
SO ORDERED.

PERLA PALMA GIL, VICENTE HIZON, JR., and ANGEL PALMA GIL, petitioners, vs. HON.
COURT OF APPEALS, HEIRS OF EMILIO MATULAC, CONSTANCIO MAGLANA, AGAPITO
PACETES & The REGISTER OF DEEDS OF DAVAO CITY, respondents.
DECISION
CALLEJO, SR., J.:
For review on appeal by certiorari are the Decision[1] of the Court of Appeals in CA-G.R. CV. No. 43188
promulgated on March 19, 1996, and its Resolution [2] dated October 17, 1996, denying the petitioners
Motion for Reconsideration of the said decision.
The appealed decision affirmed in toto the judgment of the Regional Trial Court, Davao City, Branch 16,
in Civil Case No. 15,356 which dismissed the complaint of the herein petitioners.
The Antecedents
Concepcion Palma Gil, and her sister, Nieves Palma Gil, married to Angel Villarica, were the co-owners
of a parcel of commercial land with an area of 829 square meters, identified as Lot No. 59-C, covered by
Transfer Certificate of Title (TCT) No. 432 located in Davao City. The spouses Angel and Nieves
Villarica had constructed a two-storey commercial building on the property. On October 13, 1953,
Concepcion filed a complaint against her sister Nieves with the then Court of First Instance of Davao
City, docketed as Civil Case No. 1160 for specific performance, to compel the defendant to cede and
deliver to her an undivided portion of the said property with an area of 256.2 square meters. After due
proceedings, the court rendered judgment on April 7, 1954 in favor of Concepcion, ordering the defendant
to deliver to the plaintiff an undivided portion of the said property with an area of 256.2 square meters:
A la vista de los datos expuestos, el Juzgado dicta sentencia condenando a la demanda, Nieves Palma Gil
de Villarica, cumpla con los terminos del documento (Exh. A) ordenando a aquella que otogue los
documentos necesarios traspasando a favor de la demandante (CONCEPCION PALMA GIL), 256 metros
cuadrados con 20 centimetros del Lote No. 56-C descrito mas particularmente en el Certificado de Titulo
No. 432.[3]
Nieves appealed to the Court of Appeals which affirmed the assailed decision. In due course, the decision
became final and executory. On motion of the plaintiff (Concepcion), the court issued a writ of execution.
Nieves, however, refused to execute the requisite deed in favor of her sister. On April 27, 1956, the court
issued an order authorizing ex-officio Sheriff Eriberto Unson to execute the requisite deed of transfer to
the plaintiff over an undivided portion of the property with a total area of 256.2 square meters. Instead of
doing so, the sheriff had the property subdivided into four lots namely, Lot 59-C-1, with an area of 218
square meters; Lot 59-C-2, with an area of 38 square meters; Lot 59-C-3, with an area of 14 square
meters; and Lot 59-C-4, with an area of 560 square meters, all covered by a subdivision plan. The sheriff
thereafter executed a Deed of Transfer to Concepcion over Lot 59-C-1 and Lot 59-C-2 with a total area of
256.2 square meters.
On October 24, 1956, Concepcion executed a deed of absolute sale over Lot 59-C-1 in favor of Iluminada
Pacetes. In the said deed, the area of Lot 59-C-1 appeared as 256 square meters although under the

subdivision plan, the area of the property was only 218 square meters. The vendee obliged herself to pay
the said amount, to wit:
1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00 to be paid upon the signing of
this instrument; and the balance of P14,100.00 to be paid upon the delivery of the corresponding
Certificate of Title in the name of the VENDEE.[4]
Under the deed of absolute sale, the parties further agreed as follows:
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the
signing of this agreement, undertake and work for the issuance of the corresponding Certificate of Title of
the said Lot No. 59-C-1 in her favor with the proper government office or offices, to the end that the same
can be duly transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE
shall collect and receive any and all rentals and such other income from the land above-described for her
own account and benefit, this right of the VENDEE to begin from December 1, 1956.[5]
In the meantime, Nieves filed a motion in Civil Case No. 1160 to compel the sheriff to report on his
compliance with the courts Order dated April 27, 1956. The motion was denied. A motion for
reconsideration of the denial met the same fate. Nieves appealed to the Court of Appeals, which appeal
was docketed as CA-G.R. No. 22438-R.
In a parallel development, Concepcion filed a complaint for unlawful detainer against the spouses Angel
and Nieves Villarica with the Municipal Trial Court docketed as Civil Case No. 2246. On October 4,
1956, the court rendered judgment in favor of the plaintiff and against the defendants, the decretal portion
of which reads as follows:
From the foregoing, it is indeed evident and clear that the herein defendants have been unlawfully
withholding possession of the land from the plaintiff, and hereby finds in favor of the plaintiff, and
against the defendants, ordering the latter to vacate the premises described in the complaint, removing
whatever improvements they have constructed thereon. The defendants are further judged to pay the
plaintiff the amount of ONE HUNDRED FIFTY PESOS (P150.00) a month from the time of the filing of
this complaint until the lot is finally vacated in concept of rentals, deprived of the plaintiff due to the
unlawful possession of the defendants, and to pay the costs of this suit. [6]
The decision became final and executory but the plaintiff did not file any motion for a writ of execution.
The spouses Angel and Nieves Villarica filed a complaint on October 24, 1956 against the sheriff and
Concepcion with the Court of First Instance of Davao City, docketed as Civil Case No. 2151 for the
nullification of the deed of transfer executed by the sheriff. [7]
On December 21, 1956, Iluminada Pacetes filed a motion to intervene in Civil Case No. 2151, as vendee
of the property subject of the case, which was granted by the court. She then filed a motion to dismiss the
complaint. The court granted the motion. Nieves appealed to the Court of Appeals which appeal was
docketed as CA-G.R. No. 22008-R. Nieves appeals in Civil Cases Nos. 1160 and 2151 were certified by
the CA to this Court, docketed as G.R. No. L-15799 and G.R. No. L-15801.

On the basis of the deed of transfer executed by Sheriff Iriberto A. Unson, the Register of Deeds issued
TCT No. 7450 over Lot 59-C-1 and 59-C-2 on July 17, 1957 in the name of Concepcion, with a total area
of 256.2 square meters. However, the latter failed to transfer title to the property to and under the name of
Iluminada Pacetes. Consequently, the latter did not remit the balance of the purchase price of the property
to Concepcion.
In the interim, the spouses Angel and Nieves Villarica executed a real estate mortgage over Lot 59-C-4 in
favor of Prudential Bank as security for a loan. On August 4, 1959, Concepcion died intestate and was
survived by Nieves Villarica and her nephews and nieces. Iluminada filed a motion in Civil Case No.
1160 for her substitution as party-plaintiff in lieu of the deceased Concepcion. On August 2, 1961, the
court issued an order granting the motion.
On August 31, 1961, this Court rendered judgment in G.R. Nos. L-15799 and L-15801 setting aside the
deed of transfer executed by the sheriff in favor of Concepcion Palma Gil, and remanding the records to
the trial court for further proceedings. [8] In compliance with the Decision of this Court in G.R. No. L15801, the trial court conducted further proceedings in Civil Case No. 1160 and discovered that the
defendant had mortgaged Lot 59-C-4 to the Prudential Bank. Consequently, the court issued an order
onFebruary 17, 1964, declaring that the defendant had waived the benefits of the Decision of the Court
on August 31, 1961 in G.R. No. L-15801; thus, the conveyance of the property made by Concepcion in
favor of Iluminada on October 24, 1956 must stand. Nieves filed a motion for the reconsideration of the
said order but the court denied the same in an Order dated February 29, 1964. Nieves appealed the order
to the CA which dismissed the appeal for her failure to file a record on appeal. Nieves filed a petition for
review with this Court docketed as G.R. No. L-28363.
More than five years having elapsed without the decision in Civil Case No. 2246 being enforced,
Iluminada filed a complaint docketed as Civil Case No. 4413 in the Court of First Instance of Davao City,
for the revival and execution of the decision of the Municipal Trial Court in Civil Case No. 2246 (the
unlawful detainer case). The plaintiff therein averred that, as Concepcions successor-in-interest, she
acquired the right of action to enforce the decision in Civil Case No. 2246. The defendants, on the other
hand, averred that Iluminada had not yet paid the balance of the purchase price of Lot 59-C-1; hence, she
had not acquired title over the lot and the right to evict the defendant. The deed of absolute sale executed
by Concepcion in favor of the plaintiff was an executory, not an executed deed. On January 26, 1965, the
court rendered judgment in favor of the defendants and dismissed the complaint. The decretal portion
reads:
IN VIEW OF THE FOREGOING, the Court believes that the plaintiff herein has not been properly and
legally subrogated to the rights and action of deceased Concepcion Palma Gil and, hence, for these
reasons the Court dismisses this case without pronouncement as to costs.
The counterclaim is also hereby ordered dismissed. [9]
On March 16, 1966, Iluminada Pacetes and Agapito Pacetes executed a deed of absolute sale over Lot 59C-1 and Lot 59-C-2 in favor of Constancio B. Maglana forP110,000.00, covered by TCT No. 7450. [10] The
spouses-vendors undertook to secure title over the lots under the name of the vendee within ninety days.

On May 15, 1974, this Court denied the petition for certiorari filed by Nieves in G.R. No. L-28363.
[11]
The Court, in part, ruled:
But while the issue at bar exclusively involves the timeliness of the appeal of the petitioners to the Court
of Appeals, this Court has nonetheless examined and analyzed the substantive aspects of this case and is
satisfied that the ORDERS of the trial court complained of are morally just.
Accordingly, the instant appeal is dismissed and the resolution of the Court of Appeals dated July 31,
1967 and its resolution dated October 18, 1967 are affirmed.[12]
The decision of the Court became final and executory.
On May 5, 1975, the spouses Agapito and Iluminada Pacetes filed a complaint against Nieves in the Court
of First Instance of Davao City, docketed as Civil Case No. 8836 for the recovery of possession of Lot 59C-1 and Lot 59-C-2. The Pacetes spouses claimed that Lot 59-C-2 was included in TCT No. 7450 under
the name of Concepcion. The spouses prayed that judgment be rendered in their favor after due
proceedings thus:
PRAYER
PREMISES CONSIDERED, it is most respectfully prayed that:
1.

During the pendency of this case, Defendant be ordered:

a.
To refrain from collecting rentals from the tenants or occupants of the building erected in
said Lot 59-C-1; in that the tenants be directed to pay their rental to the plaintiff;
b.
To demolish her aforesaid building of strong materials and vacate the premises of Lot 59-C-1
and Lot 59-C-2.
2.

After hearing, Defendant be ordered to:

a.
Pay the Plaintiffs the amount consisting of compensation for the use of the land they have been
depribed (sic) of to receive and enjoy since October 24, 1956 due to the unwarranted and illegal
occupation of the said lots by defendant;
b.
Pay Plaintiffs moral and exemplary damages in such amount as the Honorable Court may fix
considering the facts and the law;
c.

Pay Plaintiffs such expenses of litigation as may be proven during the trial, and

d.

Pay Plaintiffs expenses for services of counsel they had to incurr (sic) in this complaint.

3.

OTHER RELIEFS consonant with justice and equity are prayed for.[13]

On May 10, 1977, Nieves Villarica executed a lease agreement with Virginia Jorge and Anita Vergara over
Lots 59-C-1 and 59-C-2. The lessees took actual possession of the leased property.
In their Answer to the complaint in Civil Case No. 8836, the defendants averred, by way of defense, that
the complaint was barred by the decision of the CFI in Civil Case No. 4413, which ruled that the Deed of

Absolute Sale executed by Concepcion in favor of Iluminada was merely an executory, but not an
executed contract. After the plaintiffs had rested their case, the defendants filed a motion to dismiss
(demurrer to evidence). On October 29, 1975, the court issued an order dismissing the complaint on the
ground that the action was barred by the decision of the court in Civil Case No. 4413. [14] Thus, Virginia
Jorge and Anita Vergara continued to be in physical possession of the property.
In the meantime, on August 8, 1977, Iluminada consigned with the court in Civil Case No. 1160 the
amount of P11,983.00 only as payment of the purchase price of the property. Iluminada was issued
receipts for the amount.[15] As successor-in-interest of Concepcion, she likewise filed a motion for
execution in Civil Case No. 1160 for the eviction of the defendant Nieves Villarica and all those acting for
and in her behalf. The court issued an order on August 19, 1977 granting the motion. The defendants
filed a motion for reconsideration of the order claiming that Iluminada was not a party to the case which
the court denied on September 2, 1977. The defendant filed another motion for reconsideration which was
likewise denied on September 16, 1977. The defendant filed a petition for certiorari with the Court of
Appeals docketed as CA-G.R. No. 62957-R, which petition was dismissed on August 26, 1980. The CA
ruled that Iluminada Pacetes was the real party-in-interest as the vendee of the property. The defendant
filed a petition with this Court docketed as G.R. No. L-56399.
In the meantime, Iluminada filed a petition with the RTC docketed as Miscellaneous Case No. 4715 for
the issuance of an owners duplicate of TCT No. 7450. On March 22, 1978, the court granted the petition
and ordered the Register of Deeds to issue an owners duplicate of the said title under the name of
Concepcion Gil. Iluminada presented the said order and the deed of absolute sale executed
by Concepcion in her favor. On May 9, 1978, the Register of Deeds issued TCT No. 61514 over Lot 59C-1, with an area of 218 square meters, in the name of Iluminada Pacetes. [16]
On April 21, 1980, TCT No. 73412 was issued by the Register of Deeds of Davao City in favor of
Constancio Maglana over Lot 59-C-1 only.[17] The next day, Constancio Maglana executed a deed of sale
not only over Lot 59-C-1 but also Lot 59-C-2, in favor of Emilio Matulac for the purchase price
of P150,000.00.[18] On the basis of the said deed, the Register of Deeds issued TCT No. 80631 to and
under the name of Emilio Matulac over the two lots.
In the meantime, Angel Villarica had died on April 20, 1974. On July 7, 1981, his heirs, including his
widow Nieves, executed an Extra-Judicial Settlement of Estate of Deceased in which the latter waived,
ceded and transferred to her children Teresita Magpantay, Antero P.G. Villarica, Zenaida V. Alovera,
Emperatriz V. Garcia, Napoleon P.G. Villarica and Rupendo P.G. Villarica her rights and interests over the
property covered by TCT No. 7450.[19]
On January 13, 1982, this Court affirmed the resolution of the Court of Appeals, in CA-G.R. No. 62975-R
and dismissed the petition for certiorari in G.R. No. L-56399, thus, paving the way for the execution of
the decision of the trial court in Civil Case No. 1160, per its Order dated August 19, 1977. Emilio Matulac
filed a motion for the issuance of a writ of execution. The Court granted the motion on February 18, 1982.
Nieves filed a motion for the reconsideration of the order which the court denied in its Order dated March
17, 1982. Virginia Jorge and Anita Vergara, the lessees, filed a motion for reconsideration but the court
denied the motion. Nonetheless, the lessees were allowed to stay in the property until April 9, 1982.
However, the lessees refused to vacate the property after said date.

On April 10, 1982, Emilio Matulac filed a motion in Civil Case No. 1160 for the issuance of a writ of
execution and an order of demolition. On April 20, 1982, the trial court issued an order granting the
motion for a writ of execution on April 30, 1982. The court also issued a special order for the demolition
of the buildings on the property. The buildings on the property, including the properties owned by Virginia
Jorge and Anita Vergara, were demolished on June 14, 1982. Emilio Matulac thereafter commenced the
construction of a building thereon. The defendant Nieves Villarica, in the meantime, filed a motion in
Civil Case No. 1160 to annul the proceedings, including the writ of execution issued by the court, and the
issuance of a restraining order.
For their part, Virginia Jorge and Anita Vergara filed a petition for certiorari with this Court docketed as
G.R. No. L-60690 for the nullification of the aforesaid orders and the writ of demolition issued by the
trial court in Civil Case No. 1160.
Three of the surviving heirs of Concepcion Gil, namely, Perla Palma Gil, Vicente Hizon, Jr. and Angel
Palma Gil, through their first cousin, Atty. Vicente Villarica, one of Nieves Villaricas children, filed on
June 17, 1982, a complaint against Emilio Matulac, Constancio Maglana, Agapito Pacetes, and the
Register of Deeds, with the Court of First Instance, docketed as Civil Case No. 15,356 for the cancellation
of the deed of sale executed by Concepcion in favor of Iliminada Pacetes; the deed of sale executed by the
latter in favor of Constancio Maglana; the deed of sale executed by the latter in favor of Emilio Matulac,
as well as TCT Nos. 61514, 73412 and 80631 under the respective names of the vendees.
The plaintiffs alleged, inter alia, that the deed of absolute sale executed by Concepcion in favor of
Iluminada over Lots 59-C-1 and 59-C-2 was a contract to sell, an executory contract, as declared by the
Court of First Instance in Civil Cases Nos. 4413 and 8836, and not an executed contract; the defendant
spouses Agapito and Iluminada Pacetes failed to pay the balance of the purchase price of the property
during the lifetime of Concepcion; hence, what was embodied in the said deed was not fulfilled by the
vendee. Consequently, the sale is null and void.
The plaintiffs prayed for the issuance of a temporary restraining order and a writ of preliminary injunction
to enjoin the defendant Emilio Matulac from continuing with the construction of a building on the
property. The plaintiffs likewise prayed that after due proceedings, judgment be rendered in their favor
and against the defendants, thus:
WHEREFORE, in view of the aforecited reasons it is most respectfully prayed that:
1)
An order be rendered immediately enjoining defendant Matulac from doing further work in the
construction of the building and enjoining him from entering the premises and the land subject of this
complaint and after trial making the injunction above-mentioned permanent, ordering the removal of any
structure and other construction within the plaintiffs above-described property and thereafter, upon said
defendants failure to do so authorizing plaintiffs to order said removal at defendants expense.
2)

Judgment be rendered ordering:

a. Defendant Register of Deeds to cancel TCT No. T-61514, T-73412 and T-80631 and issued (sic) a new
Transfer Certificate of Title in the name of the above-mentioned heirs of the late Concepcion Palma Gil
nullifying the deeds of sale, Annexes B, C, and D hereof;

b. Defendants Pacetes, Maglana and Matulac jointly and solidarily liable to plaintiffs for moral and
exemplary damages as may be granted by this Honorable Court and the amount of P25,000.00 as
attorneys fees; and
c. Litigation expenses and other reliefs as may be justified under this case. [20]
In his answer to the complaint, defendant Emilio Matulac interposed the following special and affirmative
defenses: (a) he is the lawful owner of the property; (b) the action is barred by the Decision of this Court
in G.R. No. L-56399; (c) the plaintiffs are estopped from assailing the sale to him of the property; and (d)
he is a purchaser in good faith.
On November 29, 1982, the court issued an order in Civil Case No. 1160, denying the motion for the
nullification of the proceedings and for a writ of preliminary injunction. Nieves filed a motion for
reconsideration of the order. On February 18, 1983, the court issued an order denying the motion. Nieves
filed a petition with the Court of Appeals for the nullification of the same.
In the meantime, Emilio Matulac died intestate and was substituted by his heirs Sonia Matulac, Josephine
Matulac and Gregorio Matulac.[21] A petition was filed with the RTC of Davao City for the settlement of
his estate docketed as SP-No. 2747. The Court appointed Sonia Matulac as administratrix of the estate.
The CA rendered a decision granting the petition and ordering the trial court to conduct further
proceedings to implement the August 19, 1977 Order. Sonia Matulac filed a petition for review on
certiorari with this Court docketed as G.R. No. 85538 for the nullification of the decision of the CA.
On November 24, 1989, this Court rendered a Decision dismissing the petition in G.R. No. L-60690. This
Court said:
When We dismissed on September 16, 1974, the petition for certiorari filed by defendants questioning the
orders, dated December 7, 1961 and December 17, 1964, in effect We had confirmed the sale by plaintiff
in Civil case No. 1160, Concepcion Palma Gil, of Lot 59-C-1 and 59-C-2 to Illuminada Pacetes and
affirmed the ruling of the trial court that defendants had waived the benefit of Our Resolution rendered on
August 31, 1961.[22]
Meanwhile, one of the plaintiffs, Perla Palma Gil in Civil Case No. 15,356, was appointed by the court as
administratrix of the estate of Concepcion on December 29, 1989,[23] and filed in the said case a motion to
intervene as plaintiff in her capacity as administratrix in behalf of all the heirs of Concepcion.[24] The heirs
of Emilio Matulac opposed the motion considering that they, and not the estate of Concepcion, owned the
subject property; thus the claim of the plaintiff should be filed in SP-No. 2747. On April 7, 1990, the said
motion was denied by the trial court.[25] The said court declared:
Being already a plaintiff together with the other plaintiffs in thise (sic) case, said intervention by plaintiff
Perla Palma Gil is not absolutely necessary and imperative. It would only delay the early disposition of
the case if allowed.
On January 8, 1990, this Court dismissed the petition in G.R. No. 85538. The petitioners filed a motion
for reconsideration and on July 2, 1992, this Court granted the motion and reversed the decision of the
CA. This Court ruled in the said case as follows:

When Concepcion Palma Gil, plaintiff in Civil Case No. 1160 sold the land in question to Iluminada
Pacetes on October 24, 1956, the latter became the new owner of the property. By virtue of the order of
substitution issued by the court, said new owner (Pacetes) became a formal party---the party plaintiff. As
the new party plaintiff, Pacetes had the right to move for the issuance of a writ of execution, which was
correctly granted by the trial court in the questioned Order dated August 19, 1977.
The subsequent transfers of the property from Pacetes to Maglana, and then from Maglana to herein
movant Matulac, was acquired pendente lite. The latter (Matulac) as the latest owner of the property, was,
as aptly put by the trial court, subrogated to all the rights and obligations of Pacetes. He is thus the party
who now has a substantial interest in the property. Matulac is a real party-in- interest subrogated to all the
rights of Iluminada Pacetes, including the right to the issuance of a writ of execution in his name. Hence,
the questioned orders of the lower court datedNovember 29, 1982 and February 18, 1983 as well as the
Writ of Possession issued pursuant to the aforementioned orders are valid. They do not in any way run
counter to the order of the lower court dated August 19, 1977, which granted the motion for execution
filed by Pacetes, who, as earlier pointed out, was succeeded in all his rights and interests, by herein
petitioner, Matulac.
Although the dispositive portion of the judgment rendered in Civil Case No. 1160 did not award the
parties their respective shares in the property, the power of the court to issue the order of execution cannot
be limited to what is stated in the dispositive portion of the judgment. As held in Paylago vs. Nicolas (189
SCRA 728 [1990]), the body of the decision must be consulted in case of ambiguity in the dispositive
portion. Hence, in Jorge vs. Consolacion (supra), we ruled that the execution of the judgment cannot be
limited to its dispositive portion, considering the continued failure of the defendant Nieves Palma GilVillarica, to comply with what was required of her in the judgment. Respondents deprived petitioner
Concepcion Palma Gil and her successors-in-interest of their legal right to possess the land.
[26]
(Underscoring supplied)
On June 11, 1993, the trial court rendered judgment in Civil Case No. 15,356 in favor of the defendants.
The trial court ruled that this Court had affirmed, in G.R. No. 85538 and G.R. No. L-60690, the sales of
the property from Concepcion Palma Gil to Iluminada Pacetes, then to Constancio Maglana and to Emilio
Matulac; hence, the trial court was barred by the rulings of this Court. The plaintiffs appealed to the CA
with the following assignment of errors:
I.
The trial court erred in not holding that Iluminada Pacetes had no right to sell or transfer the two
(2) parcels of land to Constancio Maglana;
II.
That the trial court erred in not declaring the sale of the properties in question from Iluminada
Pacetes to Constancio Maglana, thence, from Constancio Maglana to Emilio Matulac NULL and VOID;
III.

That the trial court erred in dismissing the complaint;

IV. That the trial court erred in not ordering the cancellation of transfer Certificate of Title No. T-80631
in the name of Emilio Matulac and the issuance of a new title in the name of Concepcion Palma Gil;
V.

That the trial court erred in not holding the appellees liable for damages to the appellants. [27]

In the meantime, on June 29, 1994, the estate of Emilio Matulac executed a deed of sale of real estate in
which the estate sold Lots 59-C-1 and 59-C-2 and the building thereon to the Prudential Education Plan,
Inc. for P7,000,000.00.[28] On March 19, 1996, the CA rendered a decision affirming the decision assailed
therein and dismissing the appeal. The CA ruled that the deed of absolute sale executed by Concepcion in
favor of Iluminada Pacetes was a deed of absolute sale over Lots 59-C-1 and 59-C-2, under which the
ownership over the property subject thereof was transferred to the vendee. Moreover, the validity of the
sales of the subject lots by Concepcion to Iluminada, by the latter to Constancio Maglana, and by the
latter to Emilio Matulac, had been confirmed by this Court in G.R. No. L-60690 and G.R. No.
85538. Although Iluminada paid the balance of the purchase price of the property only on August 8,
1977, the payment was still timely, in light of Article 1592 of the New Civil Code. Besides, the property
had already been sold to the respondents Constancio Maglana and Emilio Matulac.
The appellants, now petitioners in this case, assert that private respondents Agapito and Iluminada Pacetes
failed to pay the balance of the purchase price in the amount ofP14,100.00. They did consign and deposit
the amount of P11,983.00, but only on August 8, 1977, twenty one years from the execution of the Deed
of Absolute Sale in favor of the said spouses, without the latter instituting an action for the cancellation
of their obligation. According to the petitioners, the consignation made by Iluminada Pacetes of the
amount did not produce any legal effect. Furthermore, private respondents Constancio Maglana and
Emilio Matulac were not purchasers in good faith because at the time they purchased the respective
properties, the two-storey building constructed by the spouses Angel and Nieves Villarica on the said
property was still existing. Hence, the decision of the CA should be reversed and set aside.
In their Comment on the petition, private respondents Constancio Maglana and Agapito Pacetes averred
that the action of the petitioners in the court a quo was barred by the Decision of this Court in G.R. No. L60690 on November 24, 1989.
THE RULING OF THE COURT
The petition is denied due course.
We note that the petitioners failed to implead all the compulsory heirs of the deceased Concepcion Gil in
their complaint. When she died intestate, Concepcion Gil, a spinster, was survived by her sister Nieves,
and her nephews and nieces, three of whom are the petitioners herein.
Upon Concepcions demise, all her rights and interests over her properties, and the rights and obligations
under the Deed of Absolute Sale executed in favor of Iluminada Pacetes, were transmitted to her sister,
and her nephews and nieces[29] by way of succession, a mode of acquiring the property, rights and
obligation of the decedent to the extent of the value of the inheritance of the heirs. The heirs stepped into
the shoes of the decedent upon the latters death. [30]
In their complaint, the petitioners alleged that:
7. That upon the death of the late Concepcion Palma Gil, her heirs namely: A. Children of the deceased
Pilar Palma Gil Rodriguez; B. Children of the deceased Asuncion Palma Gil Hizon one of whom is
plaintiff Vicente Hizon, Jr.; C. Nieves Palma Gil Villarica; D. David Palma Gil one of whom is plaintiff
Angel Palma Gil; E. Perla Palma Gil; and F. Children of the deceased Jose Palma Gil, ipso facto became
co-owners of the said subject property by operation of law; [31]

When she testified, petitioner Palma Gil stated that:

ATTY. GALLARDO:
With the Courts permission.
Q

You said that you are one of the 3 plaintiffs in this case?

Yes, sir.

Q Now, aside from these 3 plaintiffs who are supposed to be the heirs of the late Concepcion Palma Gil,
there are also other heirs who were not included as plaintiffs in this case?
A Yes, because that time when they demolished the building and I accompanied Atty. Villarica at the
site where they had the demolition, we found out that during the confrontation that we have to hurry and
file the case right away. So we were not able to contact all the heirs and I have contacted . . .since 3 of us
were there during the demolition, so we decided that I will be one, and Angel Palma Gil was also there
and also Vicente Hizon Jr. whom I contacted at the Apo View Hotel and I contacted also Julian
Rodriguez, another cousin thru telephone and he told us to go ahead and file the case. We cannot get all
the heirs. We cannot gather all of them and we will have a hard time asking them to sign, so we just filed
the case.
Q You are telling the court that the other heirs were not included because they were not available to sign
the complaint?
A

They were not there during the demolition.

When was the case filed?

June 14, the demolition was on June 14, 1982.

ATTY. QUITAIN:
The best evidence would be the complaint, Your Honor.
ATTY. GALLARDO:
Q

It appears in the complaint that it was filed sometime on June 16, 1982?

We had it on June 14 the demolition, and we filed it right away because we were in a hurry.

Q Since June 16, 1982 up to the present the other heirs did not do anything to be included in the
complaint?
ATTY. QUITAIN:
The best evidence would be the motion for intervention and it would seem that compaero is
contending that there is a need to include all heirs. Under the civil law on property even one co-owner
may file a case.[32]

Although the petitioners sought leave from the trial court to amend their complaint to implead the
intestate estate of the deceased Concepcion Gil through her administratrix Perla Palma Gil, as party
plaintiff, the trial court denied the petitioners plea. The petitioners manifested to the trial court that they
would assign the denial of their plea as one of the assigned errors in case of appeal to the CA. They failed
to do so. The petitioners were duty bound to implead all their cousins as parties-plaintiffs; otherwise, the
trial court could not validly grant relief as to the present parties and as to those who were not impleaded.
[33]

Being indispensable parties, the absence of the surviving sister, nephews and nieces of the decedent in the
complaint as parties-plaintiffs, and in this case, as parties-petitioners, renders all subsequent actions of the
trial court null and void for want of authority to act, not only as to the absent parties, but even as to those
present. Hence, the petition at bar should be dismissed. [34]
Even if we were to brush aside this procedural lapse and delve into the merits of the case, a denial in due
course is inevitable.
Article 1191[35] in tandem with Article 1592[36] of the New Civil Code are central to the issues at bar.
Under the last paragraph of Article 1169 of the New Civil Code, in reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his obligation, delay in the other
begins. Thus, reciprocal obligations are to be performed simultaneously so that the performance of one is
conditioned upon the simultaneous fulfillment of the other.[37] The right of rescission of a party to an
obligation under Article 1191 of the New Civil Code is predicated on a breach of faith by the other party
that violates the reciprocity between them.[38]
That the deed of absolute sale executed by Concepcion Gil in favor of Iluminada Pacetes is an executory
contract and not an executed contract is a settled matter. In a perfected contract of sale of realty, the right
to rescind the said contract depends upon the fulfillment or non-fulfillment of the prescribed condition.
We ruled that the condition pertains in reality to the compliance by one party of an undertaking the
fulfillment of which would give rise to the demandability of the reciprocal obligation pertaining to the
other party.[39] The reciprocal obligation envisaged would normally be, in the case of the vendee, the
payment by the vendee of the agreed purchase price and in the case of the vendor, the fulfillment of
certain express warranties.[40]
In another case, we ruled that the non-payment of the purchase price of property constitutes a very good
reason to rescind a sale for it violates the very essence of the contract of sale. In Central Bank of the
Philippines v. Bichara,[41] we held that the non-payment of the purchase price of property is a resolutory
condition for which the remedy is either rescission or specific performance under Article 1191 of the New
Civil Code. This is true for reciprocal obligations where the obligation is a resolutory condition of the
other.[42] The vendee is entitled to retain the purchase price or a part of the purchase price of realty if the
vendor fails to perform any essential obligation of the contract. Such right is premised on the general
principles of reciprocal obligations.[43]
In this case, Concepcion Gil sold Lot 59-C-1 to Iluminada Pacetes for P21,600.00 payable as follows:

1. The purchase price of P21,600.00 shall be paid as follows: P7,500.00, to be paid upon the signing of
this instrument; and the balance of P14,100.00, to be paid upon the delivery of the corresponding
Certificate of Title in the name of the VENDEE.
Concepcion Gil obliged herself to transfer title over the property to and under the name of the vendee
within 120 days from the execution of the deed.
2. That the VENDOR shall, within the period of ONE HUNDRED TWENTY (120) DAYS, from the
signing of this agreement, undertake and work for the issuance of the corresponding Certificate of Title of
the said Lot No. 59-C-1 in her favor with the proper government office or offices, to the end that the same
can be duly transferred in the name of the herein VENDEE, by virtue thereof.
3. That pending the full and complete payment of the purchase price to the VENDOR, the VENDEE shall
collect and receive any and all rentals and such other income from the land above-described for her own
account and benefit, this right of the VENDEE to begin from December 1, 1956.
That it is further stipulated that this contract shall be binding upon the heirs, executors and administrators
of the respective parties hereof.
And I, CONCEPCION PALMA GIL, with all the personal circumstances above-stated, hereby confirm all
the terms and conditions stipulated in this instrument.[44]
The vendee paid the downpayment of P7,500.00. By the terms of the contract, the obligation of the
vendee to pay the balance of the purchase price ensued only upon the issuance of the certificate of title by
the Register of Deeds over the property sold to and under the name of the vendee, and the delivery thereof
by the vendor Concepcion Gil to the latter. Concepcion failed to secure a certificate of title over the
property. When she died intestate on August 4, 1959, her obligation to deliver the said title to the vendee
devolved upon her heirs, including the petitioners. The said heirs, including the petitioners failed to do so,
despite the lapse of eighteen years since Concepcions death.
Iluminada was not yet obliged on August 8, 1977 to pay the balance of the purchase price of the property,
but as a sign of good faith, she nevertheless consigned the amount of P11,983.00, part of the balance of
the purchase price of P14,000.00, with the court in Civil Case No. 1160. The court accepted the
consignation and she was issued receipts therefor. Still, the heirs of Concepcion Gil, including the
petitioners, failed to deliver the said title to the vendee. Iluminada was compelled to file, at her expense, a
petition with the RTC docketed as Miscellaneous Case No. 4715 for the issuance of an owners duplicate
of TCT No. 7450 covering the property sold which was granted by the court on March 22, 1978. It was
only on May 9, 1978 that Iluminada managed to secure TCT No. 61514 over the property under her
name. Upon the failure of the heirs to comply with the decedents prestation, Iluminada Pacetes was
impelled to resort to legal means to protect her rights and interests.
The petitioners, as successors-in-interest of the vendor, are not the injured parties entitled to a rescission
of the deed of absolute sale. It was Concepcions heirs, including the petitioners, who were obliged to
deliver to the vendee a certificate of title over the property under the latters name, free from all liens and
encumbrances within 120 days from the execution of the deed of absolute sale on October 24, 1956, but
had failed to comply with the obligation.

The consignation by the vendee of the purchase price of the property is sufficient to defeat the right of the
petitioners to demand for a rescission of the said deed of absolute sale. [45]
It bears stressing that when the vendee consigned part of the purchase price with the Court and secured
title over the property in her name, the heirs of Concepcion, including the petitioners, had not yet sent any
notarial demand for the rescission of the deed of absolute sale to the vendee, or filed any action for the
rescission of the said deed with the appropriate court.
Although the vendee consigned with the Court only the amount of P11,983.00, P2,017.00 short of the
purchase price of P14,000.00, it cannot be claimed that Concepcionwas an unpaid seller because under
the deed of sale, she was still obligated to transfer the property in the name of the vendee, which she
failed to do so. According to Article 1167 of the New Civil Code:
Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore,
it may be decreed that what has been poorly done be undone. (1098)
The vendee (Iluminada) had to obtain the owners duplicate of TCT No. 7450 and thereafter secure its
transfer in her name. Pursuant to Article 1167, the expenses incurred by the vendee should be charged
against the amount of P2,617.00 due to the heirs of Concepcion Gil as the vendors successors-in-interest.
In sum, the decision of the CA affirming the decision of the RTC dismissing the complaint of the
petitioners is affirmed.
IN LIGHT OF ALL THE FOREGOING, the petition for review is DENIED for lack of merit.
SO ORDERED.

SPOUSES ORLANDO A. RAYOS and MERCEDES T. RAYOS, petitioners, vs. THE COURT OF
APPEALS and SPOUSES ROGELIO and VENUS MIRANDA, respondents.
DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals[2] in CA-G.R. CV No.
46727 which affirmed the Decision[3] of the Regional Trial Court of Makati, Branch 62, in Civil Case No.
15639 for specific performance and damages, and Civil Case No. 15984 for sum of money and damages.
The two (2) cases stemmed from the following antecedent facts:
On December 24, 1985, petitioner Orlando A. Rayos, a practicing lawyer, and his wife, petitioner
Mercedes T. Rayos, secured a short-term loan from the Philippine Savings Bank (PSB) payable within a
period of one (1) year in quarterly installments of P29,190.28, the first quarterly payment to start on
March 24, 1986. The loan was evidenced by a promissory note which the petitioners executed on
December 24, 1985.[4] To secure the payment of the loan, the petitioners-spouses executed, on the same
date, a Real Estate Mortgage over their property covered by Transfer Certificate of Title (TCT) No.
100156 located in Las Pias, Metro Manila.[5]
On December 26, 1985, the petitioners, as vendors, and the respondents, Spouses Miranda, as vendees,
executed a Deed of Sale with Assumption of Mortgage over the subject property for the price
of P214,000.00. However, on January 29, 1986, the petitioners-spouses, likewise, executed a Contract to
Sell the said property in favor of the respondents for P250,000.00 with the following condition:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute
Sale in favor of the BUYER that the payment of capital gains tax shall be for the account of the SELLER
and that documentary stamps, transfer tax, registration expenses for the transfer of title including the
notarization and preparation of this Contract and subsequent documents if any are to be executed, real
estate taxes from January 1, 1986 and other miscellaneous expenses shall be for the account of the
BUYER; the SELLER hereby represents that all association dues has been paid but that subsequent to the
execution of this Contract the payment of the same shall devolve upon the BUYER. [6]
The petitioners obliged themselves to execute a deed of absolute sale over the property in favor of the
respondents upon the full payment of the purchase price thereof.
Respondent Rogelio Miranda filed an application dated May 4, 1986 with the PSB to secure the approval
of his assumption of the petitioners obligation on the loan, and appended thereto a General Information
sheet.[7] Respondent Rogelio Miranda stated therein that he was the Acting Municipal Treasurer of Las
Pias and had an unpaid account with the Manila Banking Corporation in the amount of P18,777.31. The
PSB disapproved his application. Nevertheless, respondent Rogelio Miranda paid the first quarterly
installment on the petitioners loan on March 21, 1986 in the amount of P29,190.28. The said amount
was paid for the account of the petitioners. Respondent Rogelio Miranda, likewise, paid the second
quarterly installment in the amount of P29,459.00 on June 23, 1986, also for the account of the
petitioners.[8]
In the meantime, respondent Rogelio Miranda secured the services of petitioner Orlando Rayos as his
counsel in a suit he filed against the Manila Banking Corporation, relative to a loan from the bank in the
amount of P100,000.00. Both parties agreed to the payment of attorneys fees, as follows:
Our agreement is as follows:

1.
You will pay me P700.00 as filing fee and other miscellaneous expenses which I personally received
from you this morning;
2.
Award to you of any amount in terms of moral, exemplary or actual and other forms of damages
shall accrue to you in the amount of 70% thereof;
3.

30% of the award to you in the concept of No. 2 hereof shall pertain to me as my contingent fee;

4.
All attorneys fees that the court shall award to me or by the management of TMBC if they agree to
extrajudicially settle shall pertain exclusively to me;
5.

Execution of judgment expenses shall be for your account;

6.
Should the case be appealed, my contingent fee shall increase by 10% if the appeal is to the
Intermediate Appellate Court on questions of facts and law, and if appealed from there to the Supreme
Court, then another 10% shall accrue to me.[9]
On May 14, 1986, petitioner Orlando Rayos filed respondent Rogelio Mirandas complaint against the
bank with the Regional Trial Court of Makati, docketed as Civil Case No. 13670. [10] In the meantime, the
latter paid the third quarterly installment on the PSB loan account amounting to P29,215.66, for which the
bank issued a receipt for the account of the petitioners.
The parties executed a Compromise Agreement in Civil Case No. 13670 in which they agreed that each
party shall pay for the respective fees of their respective counsels. [11] The trial court rendered judgment on
October 23, 1986 based on the said compromise agreement. [12] Petitioner Orlando Rayos demanded the
payment of attorneys fees in the amount of P5,631.93, but respondent Rogelio Miranda refused to pay.
On November 12, 1986, petitioner Orlando Rayos wrote to respondent Rogelio Miranda and enclosed a
copy of his motion in Civil Case No. 13670 for the annotation of his attorneys lien at the dorsal portion
of the latters title used as security for the loan with the Manila Banking Corporation. [13] The respondent
opposed the motion, claiming that the petitioner agreed to render professional services on a contingent
basis.[14]
Petitioner Orlando Rayos again wrote respondent Rogelio Miranda on November 30, 1986, reminding the
latter of the last quarterly payment of his loan with the PSB. He also advised the respondent to thereafter
request the bank for the cancellation of the mortgage on his property and to receive the owners duplicate
of his title over the same. Petitioner Orlando Rayos also wrote that their dispute over his attorneys fees in
Civil Case No. 13670 should be treated differently.[15]
Petitioner Orlando Rayos then received a Letter dated November 27, 1986 from the PSB, reminding him
that his loan with the bank would mature on December 24, 1986, and that it expected him to pay his loan
on or before the said date.[16] Fearing that the respondents would not be able to pay the amount due,
petitioner Orlando Rayos paidP27,981.41[17] to the bank on December 12, 1986, leaving the balance
of P1,048.04. In a Letter dated December 18, 1986, the petitioner advised the PSB not to turn over to the
respondents the owners duplicate of the title over the subject property, even if the latter paid the last
quarterly installment on the loan, as they had not assumed the payment of the same. [18]

On December 24, 1986, respondent Rogelio Miranda arrived at the PSB to pay the last installment on the
petitioners loan in the amount of P29,223.67. He informed the bank that the petitioners had executed a
deed of sale with assumption of mortgage in their favor, and that he was paying the balance of the loan,
conformably to said deed. On the other hand, the bank informed the respondent that it was not bound by
said deed, and showed petitioner Orlando Rayos Letter dated December 18, 1986. The respondent was
also informed that the petitioners had earlier paid the amount of P27,981.41 on the loan. The bank
refused respondent Rogelio Mirandas offer to pay the loan, and confirmed its refusal in a Letter dated
December 24, 1986.[19]
On even date, respondent Rogelio Miranda wrote the PSB, tendering the amount of P29,223.67 and
enclosed Interbank Check No. 01193344 payable to PSB. [20]Thereafter, on December 29, 1986, the
petitioners paid the balance of their loan with the bank in the amount of P1,081.39 and were issued a
receipt therefor.[21] On January 2, 1987, the PSB wrote respondent Rogelio Miranda that it was returning
his check.[22]
On January 2, 1987, respondent Rogelio Miranda filed a complaint against the petitioners and the PSB for
damages with a prayer for a writ of preliminary attachment with the RTC of Makati. The case was
docketed as Civil Case No. 15639 and raffled to Branch 61 of the court. The respondent alleged inter
alia that the petitioners and the PSB conspired to prevent him from paying the last quarterly payment of
the petitioners loan with the bank, despite the existence of the deed of sale with assumption of mortgage
executed by him and the petitioners, and in refusing to turn over the owners duplicate of TCT No.
100156, thereby preventing the transfer of the title to the property in his name. Respondent Rogelio
Miranda prayed that:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against
defendants, ordering the latter, jointly and severally, as follows:
(a) To pay to plaintiff the sum of P267,197.33, with legal interest from date of demand, as actual or
compensatory damages representing the unreturned price of the land;
(b)

To pay to plaintiff the sum of P500,000.00 as consequential damages;

(c)

To pay to plaintiff the sum of P1,000,000.00 as moral damages;

(d) To pay to plaintiff the sum of P100,000.00 as exemplary damages by way of example or correction
for the public good;
(e)

To pay to plaintiff the sum of P100,000.00 for and as attorneys fees;

(f)

To pay for the costs of suit; and

(g) That a Writ of Attachment be issued against the properties of defendant Rayos spouses as security
for the satisfaction of any judgment that may be recovered.
PLAINTIFF FURTHER PRAYS for such other remedies and relief as are just or equitable in the
premises.[23]

The trial court granted the respondents plea for a writ of preliminary attachment on a bond
of P260,000.00. After posting the requisite bond, the respondent also filed a criminal complaint against
petitioner Orlando Rayos for estafa with the Office of the Provincial Prosecutor of Makati, docketed as
I.S. No. 87-150. He, likewise, filed a complaint for disbarment in this Court against petitioner Orlando
Rayos, docketed as Administrative Case No. 2974. Unaware of the said complaint, the petitioner wrote
the respondent on January 3, 1986 that as soon as his payment to the PSB of P29,223.67 was refunded,
the owners duplicate of the title would be released to him. [24] On January 5, 1986, petitioner Orlando
Rayos wrote respondent Rogelio Miranda, reiterating that he would release the title in exchange for his
cash settlement of P29,421.41.[25] The respondent failed to respond.
In the meantime, the PSB executed on January 8, 1987 a Release of Real Estate Mortgage in favor of the
petitioners,[26] and released the owners duplicate of title of TCT No. 100156. [27] On January 17, 1987,
petitioner Orlando Rayos wrote respondent Rogelio Miranda, reiterating his stance in his Letters of
January 3 and 5, 1987.
In the meantime, the petitioners received the complaint in Civil Case No. 15639 and filed their Answer
with Counterclaim in which they alleged that:
14. That plaintiff has no cause of action against defendants Rayos, the latter are willing to deliver the title
sought by plaintiff under the terms set out in their letters dated January 3, 5, 17, and 20, hereto marked as
Annexes 1, 1-A, 1-B and 1-C;[28]
Petitioner Orlando Rayos filed a complaint on February 1, 1987 against respondent Rogelio Miranda with
the Regional Trial Court of Makati, docketed as Civil Case No. 15984 for Specific Performance with
Damages for the collection of the amount of P29,223.67 which he had paid to the PSB on December 12
and 19, 1986, and his attorneys fees in Civil Case No. 13670. The trial court consolidated the cases in
Branch 62 of the RTC.
Respondent Rogelio Miranda filed an Amended Complaint in Civil Case No. 15639 for specific
performance with damages, impleading the officers of the PSB as parties-defendants. He alleged that of
the purchase price of the property of P214,000.00, he had paid the entirety thereof to the petitioners, and
that petitioner Orlando Rayos acted unethically in trying to collect P5,631.93 from him as his attorneys
fees in Civil Case No. 13670, and in having such claim annotated at the dorsal portion of his title over the
property he mortgaged to the Manila Banking Corporation.
Respondent Rogelio Miranda prayed that, after due proceedings, judgment be rendered in his favor, thus:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of plaintiff and against
defendants, as follows:
(a) Ordering defendants spouses Orlando A. Rayos and Mercedes T. Rayos to deliver forthwith to plaintiff
the Owners Duplicate of Transfer Certificate of Title No. 100156, Registry of Deeds for Pasay City;
(b) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P1,000,000.00 as moral
damages;

(c) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P867,197.33 as exemplary
damages by way of example or correction for the public good;
(d) Ordering defendants, jointly and severally, to pay to plaintiff the sum of P100,000.00 for and as
attorneys fees;
(e) Ordering defendants, jointly, to pay the costs of suit; and
(f) Ordering the issuance of a Writ of Attachment against the properties of defendants Rayos spouses as
security for the satisfaction of any judgment that may be recovered.
PLAINTIFF further prays for such other remedies and relief as are just or equitable in the premises. [29]
In the meantime, petitioner Orlando Rayos filed an Amended Complaint in Civil Case No. 15984
impleading his wife and that of respondent Rogelio Miranda as parties to the case. On March 4, 1987, the
trial court issued an Order granting the petitioners motion in Civil Case No. 15639 for the discharge of
the attachment on their property.[30] The court also denied the respondents motion for reconsideration of
the Order of the court. The respondents, thereafter, filed a petition for review with the Court of Appeals
for the nullification of the said Order.
On July 9, 1987, the public prosecutor dismissed the charge of estafa against petitioner Orlando Rayos.
[31]
The respondents appealed the resolution to the Department of Justice.
On May 26, 1987, the PSB and its officers filed their Answer in Civil Case No. 15639, and alleged the
following by way of special and/or affirmative defenses, thus:
27. The application for the plaintiff to assume the mortgage loan of the defendants Spouses Rayos was
not approved, and it was NOT even recommended by the Marketing Group of defendant PSBank for
approval by its Top Management, because the credit standing of the plaintiff was found out to be not
good;
28. The acceptance of the payments made by the plaintiff for three (3) amortizations on the loan of
defendants Spouses Rayos was merely allowed upon the insistence of the plaintiff, which payments were
duly and accordingly receipted, and said acceptance was in accordance with the terms of the Real Estate
Mortgage executed by the defendants Spouses Rayos in favor of the defendant PSBank and is also
allowed by law;[32]
The parties in Civil Case No. 15639 agreed to submit the case for the trial courts decision on the basis of
their pleadings and their respective affidavits. In a Resolution dated July 26, 1988, then Undersecretary
of Justice Silvestre Bello III affirmed the Public Prosecutors resolution in I.S. No. 87-150. [33]
On January 30, 1989, the petitioners sold the property to Spouses Mario and Enriqueta Ercia
for P144,000.00. The said spouses were not impleaded as parties-defendants in Civil Case No.
15639. On May 18, 1989, the petitioners filed an amended complaint in Civil Case No. 15984, appending
thereto a copy of the Contract to Sell in favor of the respondents. The trial court admitted the said
complaint.

On November 15, 1989, this Court rendered its Decision dismissing the complaint for disbarment against
Rayos.[34]
On January 29, 1993, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered, as follows:
I. (a) In Civil Case No. 15639, this Court orders plaintiff Rogelio Miranda to refund to spouses Orlando
and Mercedes T. Rayos the total sum of P29,069.45, Rayos paid to PS Bank as the last amortization and
as release of mortgage fee, without any interest; and upon receipt of the sum of P29,069.45 from Rogelio
Miranda, Spouses Orlando and Mercedes T. Rayos shall deliver to Rogelio Miranda Transfer Certificate
of Title No. 100156 of the Registry of Deeds of Pasay City; and, deliver to Rogelio Miranda the
possession of the parcel of land described in the said title;
(b) Dismissing the complaint for damages of Plaintiff Rogelio Miranda against Spouses Orlando and
Remedios (sic) T. Rayos, Philippine Savings Bank, Jose Araullo, Cesar I. Valenzuela, Dionisio
Hernandez, Nestor E. Valenzuela, Raul T. Totanes, and Belinda Lim, for insufficiency of evidence; while
the counterclaims of PS Bank, Jose Araullo, Cesar Valenzuela, Dionisio Hernandez, Nestor E. Valenzuela,
Raul Totanes, and Belinda Lim, are likewise dismissed for insufficiency of evidence.
(c) The counterclaims of Spouses Orlando and Mercedes T. Rayos will be treated in Civil Case No.
15984;
II. In Civil Case No. 15984, this Court orders Defendant Rogelio Miranda to pay to Plaintiff Orlando
Rayos the sum of P4,133.19 at 12% interest per annum, from the date of the filing of the complaint on
Feb. 11, 1987 until fully paid.
No costs in both cases.
SO ORDERED.[35]
The petitioners appealed the decision to the Court of Appeals contending that:
I. THE COURT A QUO COMMITTED A GRAVE ERROR IN NOT FINDING THAT ROGELIO A.
MIRANDA COMMITTED A BREACH OF CONTRACT IN NOT PAYING THE FULL CONTINGENT
FEE OF 30% IN WRITING IN THE MANILABANK CASE AND BECAUSE OF THAT BREACH, HE
CANNOT NOW DEMAND SPECIFIC PERFORMANCE AND THE COURT A QUO SHOULD HAVE
LEFT THE PARTIES AS THEY ARE;
II. THE COURT A QUO SIMILARLY COMMITTED AN ERROR IN NOT FINDING THAT THE
DECISION IN SEVA VS. ALFREDO BERWIN & CO. & MEDEL IS APPLICABLE FOUR SQUARE
WHEREBY HE WHO BREACHES HIS CONTRACT IS NOT ENTITLED TO SPECIFIC
PERFORMANCE;[36]
On July 27, 1998, the Court of Appeals rendered judgment affirming with modification the decision of the
RTC, thus:

WHEREFORE, premises considered, the appealed decision of the Regional Trial Court of Makati City, is
hereby AFFIRMED, with the modification abovestated. [37]
The petitioners filed the instant petition, and ascribed the following errors on the appellate court:
I. THE COURT OF APPEALS (CA) COMMITTED AN ERROR IN NOT FINDING THAT THE
PRIVATE RESPONDENT MIRANDA COMMITTED THE FIRST BREACH FOR FAILURE TO
ASSUME THE LOAN THUS HE FAILED TO SURROGATE (sic) HIMSELF TO PSB.
II. THE CA COMMITTED AN ERROR IN FINDING THAT PETITIONERS PRE-EMPTED PRIVATE
RESPONDENT MIRANDA IN DEPOSITING THE LAST AMORTIZATION WHEN MIRANDA HAD
NO LEGAL STANDING WITH PSB DUE TO THE LATTERS NON-APPROVAL OF THE
ASSUMPTION OF THE LOAN.
III. THE CA COMMITTED AN ERROR IN FINDING BOTH PARTIES GUILTY OF FIRST
VIOLATING THE OBLIGATIONS INCUMBENT UPON THEM EVEN INFERRING THAT
PETITIONERS COMMITTED THE BREACH FIRST BUT LATER CONCLUDING THAT THE
BREACH WAS COMMITTED BY BOTH PARTIES. IT DID NOT MAKE A CORRECT
ASSESSMENT OF WHO ACTUALLY COMMITTED THE FIRST BREACH.
IV. THE CA COMMITTED AN ERROR IN NOT ALLOWING THE OFFSET IF ITS DECISION
STOOD OF THE AMOUNT OF P4,133.19 PLUS 12% INT. P.A. FROM THE FILING OF THE
COMPLAINT (CV 15984), THUS, ENTIRELY DISREGARDING THE DECISION OF THE TRIAL
COURT IN SAID CASE ALLOWING ONLY THE DECISION IN CV 15639.
V. THE CA COMMITTED AN ERROR IN NOT APPLYING THE DECSION (sic) LAID DOWN IN
SEVA VS. ALFRED BERWIN & CO. AND MEDEL THAT A PERSON HIMSELF AT FAULT
CANNOT ENFORCE SPECIFIC PERFORMANCE.[38]
The petitioners assert that the Court of Appeals erred in not finding that the respondents first committed a
breach of their contract to sell upon their failure to pay the amount due for the last quarterly installment of
their loan from the PSB. The petitioners fault the Court of Appeals for not relying on the resolution of
Undersecretary Silvestre Bello III affirming the dismissal of the criminal complaint for estafa in I.S. No.
87-150, as cited by this Court in its decision in Miranda v. Rayos,[39] where it was also held that petitioner
Orlando Rayos paid the last quarterly installment because he thought that the respondents would not be
able to pay the same. The petitioners argue that they had no other alternative but to pay the last quarterly
installment due on their loan with the PSB, considering that they received a demand letter from the bank
on November 28, 1986, coupled by its denial of the respondents request to assume the payment of the
loan. They insist that they did not block the respondents payment of the balance of the loan with the
bank. The petitioners contend that even if the parties committed a breach of their respective obligations
under the contract to sell, it behooved the Court of Appeals to apply Article 1192 of the Civil Code in the
instant case, which reads:
The power to rescind obligation is implied in reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.
The petition has no merit.
The assailed ruling of the Court of Appeals reads:
After due study, the Court finds that there was no basis in fact and law for the appellants to usurp the
payment of the last amortization on the mortgage upon the parcel of land it had conveyed to the
Mirandas. Even if the appellants wanted to keep their good credit standing, they should not have
preempted Miranda in paying the final amortization. There is no sufficient showing that Miranda was in
danger of defaulting on the said payment. In fact, it appears that he approached the bank to tender
payment, but he was refused by the bank, because he was beaten to the draw, so to speak, by the
appellants. Appellants were able to do so because, for some reasons, the Mirandas assumption of the
mortgage has not been approved by the bank. In doing so, the appellants had unilaterally cancelled the
deed of sale with assumption of mortgage, without the consent of the Mirandas. This conduct by the
appellants is, to say the least, injudicious as under Article 1308 of the Civil Code, contracts must bind
both contracting parties and their validity or compliance cannot be left to the will of one of them.
Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into,
no party can renounce it unilaterally or without the consent of the other. It is a general principle of law
that no one may be permitted to change his mind or disavow and go back upon his own acts, or to proceed
contrary thereto, to the prejudice of the other party. In a regime of law and order, repudiation of an
agreement validly entered into cannot be made without any ground or reason in law or in fact for such
repudiation.
In the same way that the Rayos spouses must respect their contract with the Mirandas for the sale of real
property and assumption of mortgage, Rogelio Miranda has to recognize his obligations under his
agreement to pay contingent attorneys fees to Orlando Rayos.[40]
The Court of Appeals erred in so ruling.
The findings and disquisitions of the Court of Appeals cannot prevail over our findings in Miranda v.
Rayos,[41] a case which involves the same parties, and where we held that the petitioners cannot be faulted
for paying the amortization due for the last quarterly installment on their loan with the PSB:
It is difficult to imagine that complainant would be so nave as to be totally unaware of the provisions of
the original contract between the PSB and the spouses Rayos. He is a degree holder (A.B. Pre-Law and
B.S.C.) and Acting Municipal Treasurer of Las Pias. In short, he is not an ordinary layman. As a buyer
with a knowledge of law, it was unnatural for him to read the provisions of the real estate mortgage
wherein it is provided, among others, that the sale of the property covered by the mortgage does not in

any manner relieve the mortgagor of his obligation but that on the contrary, both the vendor and the
vendee, or the party in whose favor the alienation or encumbrance is made shall be, jointly and severally,
liable for said mortgage obligations. There is every reason to believe that it was pursuant to the said
provision in the real estate mortgage that complainant tried to assume the loan obligation of the Rayoses
by filling up and submitted the loan application (page 30, records) sent by Orland Rayos. By signing the
loan application and the general information sheet (page 31, records) in connection with said application,
complainant showed that he knew that there was a need to formally apply to the bank in order for him to
assume the mortgage.
We find respondent spouses version that when complainants application to assume the mortgage loan
was disapproved he begged that he be allowed to pay the quarterly amortization credible, owing to the
fact that complainant made the payments for the account of the Rayoses. Hence, complainant knew that
since his application to the PSB was not approved, there was no substitution of parties and so he had to
pay for the account of respondent spouses as shown by the receipts issued by the PSB.
As for the charge that Rayos paid the last installment to block complainant from getting the title and
transferring the same to his name, respondents version is more satisfactory and convincing. Respondent
Orland Rayos paid the last amortization when it became apparent that complainant would not be able to
give the payment on the due date as he was still trying to sell his Lancer car. Even if complainant was
able to pay the last installment of the mortgage loan, the title would not be released to him as he knew
very well that his application to assume the mortgage was disapproved and he had no personality as far as
PSB was concerned.[42]
Contrary to the ruling of the Court of Appeals, the petitioners did not unilaterally cancel their contract to
sell with the respondents when they paid the total amount ofP29,062.80 to the PSB in December 1986.
[43]
In fact, the petitioners wrote the respondents on January 3, 5 and 17, 1987, that they were ready to
execute the deed of absolute sale and turn over the owners duplicate of TCT No. 100156 upon the
respondents remittance of the amount of P29,223.67. The petitioners reiterated the same stance in their
Answer with Counterclaim in Civil Case No. 15639. The petitioners cannot, likewise, be faulted for
refusing to execute a deed of absolute sale over the property in favor of the respondents, and in refusing
to turn over the owners duplicate of TCT No. 100156 unless the respondents refunded the said
amount. The respondents were obliged under the contract to sell to pay the said amount to the PSB as
part of the purchase price of the property. On the other hand, it cannot be argued by the petitioners that
the respondents committed a breach of their obligation when they refused to refund the said amount.
It bears stressing that the petitioners and the respondents executed two interrelated contracts, viz: the
Deed of Sale with Assumption of Mortgage dated December 26, 1985, and the Contract to Sell dated
January 29, 1986. To determine the intention of the parties, the two contracts must be read and
interpreted together.[44] Under the two contracts, the petitioners bound and obliged themselves to execute a
deed of absolute sale over the property and transfer title thereon to the respondents after the payment of
the full purchase price of the property, inclusive of the quarterly installments due on the petitioners loan
with the PSB:
3. That upon full payment of the consideration hereof, the SELLER shall execute a Deed of Absolute
Sale in favor of the BUYER that the payment of capital gains tax shall be for the account of the SELLER
and that documentary stamps, transfer tax, registration expenses for the transfer of title including the

notarization and preparation of this Contract and subsequent documents if any are to be executed, real
estate taxes from January 1, 1986 and other miscellaneous expenses shall be for the account of the
BUYER; the SELLER hereby represents that all association dues has been paid but that subsequent to the
execution of this Contract the payment of the same shall devolve upon the BUYER. [45]
Construing the contracts together, it is evident that the parties executed a contract to sell and not a
contract of sale. The petitioners retained ownership without further remedies by the respondents [46] until
the payment of the purchase price of the property in full. Such payment is a positive suspensive
condition, failure of which is not really a breach, serious or otherwise, but an event that prevents the
obligation of the petitioners to convey title from arising, in accordance with Article 1184 of the Civil
Code.[47] InLacanilao v. Court of Appeals,[48] we held that:
It is well established that where the seller promised to execute a deed of absolute sale upon completion of
payment of the purchase price by the buyer, the agreement is a contract to sell. In contracts to sell, where
ownership is retained by the seller until payment of the price in full, such payment is a positive
suspensive condition, failure of which is not really a breach but an event that prevents the obligation of
the vendor to convey title in accordance with Article 1184 of the Civil Code.
The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the
obligation of the petitioners to sell and deliver the title to the property, rendered the contract to sell
ineffective and without force and effect. [49] The parties stand as if the conditional obligation had never
existed. Article 1191 of the New Civil Code will not apply because it presupposes an obligation already
extant.[50] There can be no rescission of an obligation that is still non-existing, the suspensive condition
not having happened.[51]
However, the respondents may reinstate the contract to sell by paying the P29,223.67, and the petitioners
may agree thereto and accept the respondents late payment. [52]In this case, the petitioners had decided
before and after the respondents filed this complaint in Civil Case No. 15639 to accept the payment
of P29,223.67, to execute the deed of absolute sale over the property and cause the transfer of the title of
the subject property to the respondents. The petitioners even filed its amended complaint in Civil Case
No. 15984 for the collection of the said amount. The Court of Appeals cannot, thus, be faulted for
affirming the decision of the trial court and ordering the petitioners to convey the property to the
respondents upon the latters payment of the amount of P29,223.67, provided that the property has not
been sold to a third-party who acted in good faith.
IN VIEW OF ALL THE FOREGOING, the petition is DENIED DUE COURSE. The Decision of the
Court of Appeals in CA-G.R. CV No. 46727 is AFFIRMED, except as to the factual finding that the
petitioners usurped the payment of the last amortization on the mortgage upon the parcel of land. Costs
against the petitioners.
SO ORDERED.

G.R. No. L-13246

March 30, 1960

FEDERICO
CALERO, plaintiff-appellant,
vs.
EMILIA CARRION Y SANTA MARINA, ET AL., defendants-appellees.
Ramirez
and
Carlos, Laurea and Associates for appellees.

Ortigas

for

appellant.

BARRERA, J.:
From the order of the Court of First Instance of Manila (in Civil Case No. 31409) dismissing his
complaint, on the ground of prescription, plaintiff Federico Calero interposed this appeal directly
to this Court on questions purely of law.
On December 20, 1956, plaintiff filed with the abovementioned court a complaint which, in part,
reads:
xxx

xxx

xxx

3. Que a principios del ao de l937, el demandante propuso a don Enrique Carrion, padre de las
demandadas, el siguiente negocio: adquirir entre los dos una finca en la Plaza Santa Cruz, por al
precio de P250,000.00, de los cuales se pagarian P25,000.00 al contado y el resto a plazos, en diez
aos; en el bien entendido de que para pagar la suma de P25,000.00, don Enrique Carrion
aportaria P15,000.00 y el demandante aportaria los P10,000.00 restantes.
4. Que despues de examinar la finca, don Enrique Carrion acepto la proposicion del demandante, y
le autoriza cerrar la transaccion, a nombre de sus hijas, es decir, de las dos (2) demandadas
principales en este asunto.
5. Que en el entretanto, don Enrique Carrion se ausento de Filipinas, continuando las negociaciones
su apoderado y administrador, don Santiago Carrion quien tambien era el apoderado y
administrador de las demandadas.
6. Que cuarido se fue a preparar la escritura de compra, don Santiago Carrion, como apoderado de
las demandadas, explico al demandante que era muy complicado constituir una communidad de
bienes en esa finca, pues habria necesidad de rendir cuentas mensuales, y consultarse en caso de
reparaciones, mejoras, etc.
7. Que para evitar estas dificultades, don Santiago Carrion propuso comprar la finca a nombre
exclusive de las demandadas, con la obligacion de pagar al demandante el veinte por ciento (20%)
de los beneficios, cuando se vendiera la finca.
8. Que el demandante acepto esa proposicion, en el bien enteridido de que la finca seria vendida tan
pronto como se encontrara un comprador por una cantidad no menor de P300,000.00.
9. Que debido a la confianza que existia entre las partes, el demandante acepto esa proposicion,
como ya se ha dicho, y las partes otorgaron el dia 28 de mayo de 1937, un contrato formal, en el
cual se hizo constar el ultimo convenio celebrado por las partes, es decir, quea a la venta de la finca
situada en la Plaza Santa Cruz, las demandadas pagarian al demandante,

una cantidad equivalente un VEINTE POR CIENTO (20%) de cualquier cantidad que se obtenga
de la venta de los mencionados edificios y terrenos, despues de descontar el importe total pagado
por dichas demandadas.
12. Que la verdadera intension de las partes al otorgar el contrato exhibito "A" era dar al
demandante una participacion del veinte por ciento (20%), en todos los beneficios, rentas y
utilidades de la finca descrita en ese contrato.
13. Que desde el ao 1937 el demandante ha hecho varias ofertas a las demandadas CARRION,
para vender esa finca al precio ofrecido por los compradores.
14. Que ahora el demandante tiene un comprador de dicha finca por la suma de P1,455,900.00, pero
las demandadas CARRION Continuan negandose a vender dicha linea por ese precio, a pesar de la
enorme ganancia que representa esa transaccion.
15. Que durante todo el tiempo transcurrido desde el ao 1937 hasta la fecha, las demandadas
CARRION se han lucrado con las rentas de esa finca, sin dar ninguna participacion al demandante,
quien hasta la fecha no ha recibido un centime de dicha finca por ningun concepto.
16. Que debido a los actos de las demandadas CARRION, el demandante ha sufrido y sigue
sufriendo daos y perjuicios en una cantidad inestimable con certeza, pero que. por lo menos, debe
ser el veinte por ciento (20%) de los beneficios liquidos obtenidos de es finca por las demandadas
CARRION.
17. Que el demandante ha requerido a las demandadas CARRION a rendir cuentas de la
Administracion de esa finca, a lo cual tambien se han negado.
18. Que si vende esa finca ahora en la cantidad de P1,455,900.00, las demandadas CARRION
tendrian un beneficio liquido de P1,205,900.00, o sea, la diferencia entre el precio de venta antes
mencionado y los P250,000.00 pagados por dicha finca; y por consiguiente, el demandante tenria
derecho a percibir la suma de P241,180.00, o sea, el veinte por ciento (20%) de los beneficios
obtenidos, de conformalidad exhibito "A" de esta demanda.
19. Que las demandadas CARRION se han negado a rendir cuentas de los beneficios obtenidos de
disha finca y a pagar la participacion del demandante, a pesar de los repetidos requeriment de
dicho demandante.
xxx

xxx

xxx

POR TANTO, el demandante ruega al Hon. Juzgado se sirva dictar sentencia:

(A) Ordenando a las demandadas CARRION que rindan cuenta completa y detallada de los
ingresos y gastas de la finca mencionada en el exhibit "A" desde el dia 28 de mayo de 1937 hasta
fecha de la venta, entregando al demandante un veinte por ciento (20%) del producto liquido de
dichas cuentas, en pago de los daos y perjuicios ya sufridos hasta la fecha;
(B) Ordenando a las demandadas que vendan esa finca descrita en el exhibito "A"', por un precio
no menor de P1,455,900.00 en el plazo de tres (3) meses, o de lo contrario paguen al demandante la

cantidad de P241,180.00, que representa el veinte por ciento (20%) de los beneficios obtenidos, con
sus intereses legales desde esta fecha hasta su completo pago.
On February 2, 1957, defendants Emilia Carrion, Maria Carrion, Jose Falco, and Manuel Perez
Guzman (the last two as husbands, respectively, of the first two), filed a motion to dismiss, on the
grounds that (1) the complaint states no cause of action, and (2) the plaintiff's cause of action, if
any, is barred by the Statute of Limitations (Sec. 1[e], Rule 8, Rules of Court). To this motion,
plaintiff filed an opposition on March 16, 1957. On June 1, 1957, the court required plaintiff to
amend his complaint, in an order which, in part, reads:
. . . inasmuch as plaintiff concedes in his answer (opposition) to the motion to dismiss that ". . . por
tratarse de una obligaicion sin plazo fijo, este debe ser determinado por el Hon. Juzgado", it is
plaintiff's duty to amend his complaint to this effect, because there is nothing either in its
allegations or in its prayer asking that this Court fix a reasonable period for the sale of the said
property with a view to having defendants comply with their obligations under the parties'
aforesaid agreement.
. . . defendants' obligation has not even become demandable in view of the suspensive condition
found in the parties' agreement.
WHEREFORE, it is ordered that plaintiff amend his complaint within twenty (20) days from notice
hereof, failing which the same will be dismissed.
Complying with the above order of the court, plaintiff, on June 15, 1957, filed an amended
complaint which is identical to the original complaint, except that it contained the following new
Paragraph 15 and a new prayer, to wit:
15. Que el contrato exhibito "A" no establece un plazo determinado para la venta de la finca
descrita en el mismo contrato, aunque la intencion de que hubiera un plazo es evidente de la
naturaleza, circunstancias y condiciones del mismo contrato; y el Hon. Juzgado debe sealar dicho
plazo, de acuerdo con el articulo 1197 del nuevo Codigo Civil.
POR TANTO, el demandante ruega al Hon. Juzgado se sirva dictar sentencia:
(A) Sealando un plazo de tres (3) meses para que las demandadas CARRION vendan la finca
decrita en el exhibito "A" al precio mas alto en el mercado, pero no menos de la oferta actual de
P1,455,99.00;
(B) Ordenando a las demandadas CARRION que paguen al demandante el viente por ciento (20%)
de los beneficios obtenidos en la venta de dicha finca; . . . .
On July 18,1957, defendant renewed their motion to dismiss, on the grounds that (1) the amended
complaint states no cause of action (2) the plaintiff's cause of action, if any, is barred by the Statute
of Limitations (Sec. 1[e], Rule 8, Rule of Court), and (3) the plaintiff's original complaint being
without cause of action, it cannot be amended and/or cured by said amended complaint which
changes plaintiff's theory of the case. In connection with the second ground mentioned, defendants
stated:

Plaintiff's right of action accrued in the year 1937 when the first of plaintiffs alleged various offers
to defendants to sell the property at price offered by buyers was refused by defendants (Pars. 13
and 14 of Complaint). It is patent, therefore, that is, ten (10) years from the year 1937. Considering
that plaintiff's complaint was filed on December 21, 1956, plaintiff's cause of action if any, is
obviously unenforceable and barred by the Statue of Limitations.
To this motion, plaintiff filed his opposition on August 2, 1957, to which defendants filed a rejoinder
on August 8, 1957. To this rejoinder, plaintiff filed a counter-reply on August 12, 1957.
On August 21, 1957, the court issued an order denying defendant's motion to dismiss. From this
order, defendants filed a motion for reconsideration on August 27, 1957, which was duly opposed by
plaintiff on September 7, 1957. On September 16, 1957, defendants filed a rejoinder to said
opposition.
On October 1, 1957, the court issued an order dismissing plaintiff's complaint on the ground of
prescription, as follows:
ORDER
This Court has before it (1) defendants's MOTION FOR RECONSIDERATION of the order of this
Court dated August 21, 1957, (2) CONTESTACION DEL DEMANDANTE A LA MOCION DE
RECONSIDERACION, and (3) defendants' REJOINDER TO COTESTACION DEL
DEMANDANTE A LA MOCION DE RECONSIDERACION.
It is true that heretofore this Court did not entertain defendants' motion to dismiss plaintiff's
original complaint; that on June 1, 1957, plaintiff was given twenty (20) days to amend his
complaint; that on June 15, 1957, the amended complaint was filed; that on July 22, 1957,
defendants again put in a motion to dismiss the said amended complaint, and that on August 21,
1957, this Court also denied this latter motion to dismiss. Defendants, however, have filed a motion
for reconsideration of the order just mentioned of the ground that plaintiff's action under his
amended complaint has already prescribed, and this Court has to pass upon the said motion for
reconsideration.
Concretely, defendants now contend that plaintiff's action asking this Court to fix the period for the
fulfillment of defendants' obligation, which is the subject matter of his amended complaint, has
already prescribed under the law and the applicable authorities. While this Court in conscience
believes that defendants have such obligation to plaintiff under the express terms and conditions of
the parties' agreement Exhibit A, nevertheless it cannot ignore defendants' aforesaid contention
that plaintiff's action asking this Court to fix a period for the fulfillment of the said obligation has
in fact already prescribed. For one thing, this action which may be brought under Article 1197 of
the New Civil Code cannot be said to be imprescriptible. For another, as pointed out by defendants,
in the case of Gonzales vs. Jose, 66 Phil., 369, among others, it was pertinently held that "The action
to ask the court to fix the period has already prescribed in accordance with section 43(1) of the
Code of Civil Procedure. This period of prescription is ten years, which has already elapsed from
the execution of the promissory notes until the filing of the action on June 1, 1934." Inasmuch as in
the instance case, the parties agreement Exhibit A was executed on May 28, 1937, plaintiff's action

to fix the period for the fulfillment of defendants' obligation thereunder should have been filed
within ten (10) years from the date just mentioned, following the said decision based on Section 43
(1) of the Code of Civil Procedure, in relation to Article 1116 of the New Civil Code. It is plain to see
therefore that plaintiff's present action commenced only on December 21, 1956, is already long
barred by prescription.
At page 2 of plaintiff's CONTESTACION DEL DEMANDANTE A LA MOCION DE
RECONSIDERACION, the position is taken that En este asunto el plazo de prescripcion comienza
cuando nace el derecho de accion. Plaintiff's cause of action in the present case is to have this Court
fix the period which the parties had left to conjecture in their agreement Exhibit A, and the said
cause of action arose right after the execution of said agreement on May 28, 1937, and lapsed ten
(10) years after said date. Plaintiff further state that "ademas, en nuestro asunto actual este Hon.
Juzgado ya ha resuelto que el derecho de accion ni siquiera habla comenzado". What this Court
really said on this point in its order of June 1, 1957 is the following: "As just intimated, defendants'
obligation has not even become demandable in view of the suspensive condition found in the
parties' agreement". Reference therefore is clearly made to defendants' obligation to plaintiff under
Exhibit A, and not to plaintiff's right to ask for the fixing of the period contemplated by the parties
in the said agreement. Plaintiff finally submits that "para que se acepte una mocion de
sobreseimiento, el fundaments debe ser indubitable, (Seccion 3, Regla 8 del Reglamento de los
Tribunates.)" and that "El hecho de que este Hon. Juzgado haya denegado ya dos mociones de
sobresiemientos, es la mejor prueba de que su fundamento es por lo menos muy dudoso". It may
be gathered from the record of this case that this Court has all along been inclined to try it on the
merits with a view to getting at the truth and rendering judgment accordingly. However, it now
finds itself faced with a defense, namely, prescription, so clear and unanswerable that, to overlook
the same, would be to disregard legal as well judical precepts.
Finding defendants' MOTION FOR RECONSIDERATION of the order of this Court dated August
21, 1957 to be meritorious, the said reconsideration is hereby granted, and plaintiff's amended
complaint is hereby dismissed, with costs against him.
SO ORDERED.
From the above-quoted order, plaintiff filed a motion for reconsideration on October 3, 1957, which
was duly opposed by defendants on October 18, 1957. On October 23, 1957, the court denied said
motion. Hence, this appeal.
Plaintiff claims that the lower court erred in dismissing his complaint, contending that (a) the
agreement Exhibit A attached to the amended complaint and made an integral part thereof, created
"un fideicomiso implicito" or an implied trust, which is not subject to prescription, and (b) that
even admitting the obligation is subject to a suspensive undetermined period (not condition), the
action to have such period fixed by the court has not yet prescribed. In support of his submission
that the agreement created an implied trust, plaintiff-appellant cites the provisions of Articles 1452
and 1453 of the new Civil Code which read as follows:

ART. 1452. If two or more persons agree to purchase property and by common consent the legal
title is taken in the name of one of them for the benefit of all, a trust is created by force of law in
favor of the others in proportion to the interest of each.
ART. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it
for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose
benefit is contemplated.
The contention is without merit, Article 1452 abovequoted is inapplicable to this case for the reason
that there is absolutely no stipulation in the contract, Exhibit A, that there would be a joint
purchase of the property and that the legal title thereto was to be placed in the name of the
defendants for the benefit of themselves and herein plaintiff. The recitals in the contracts preceding
the paragraph containing the obligation assumed by the defendants, merely refer to the services
rendered by the plaintiff as broker who negotiated the sale of the property to the defendants and
which the defendants agreed to compensate. Nothing contained therein would indicate that the
property was being purchased for the benefit of the plaintiff and the defendants. The obligation
assumed by the defendants is clear and unequivocal in that:
por y en consideracion, a los trabajos, sugestiones, concejos y ayuda hasta ahora prestados por Don
Federico Calero en relacion con la compra de los bienes vedidos a las Sras. EMILIA CARRION Y
STA. MARINA Y MARIA DE LAS MERCEDES CARRION Y SANTA MARINA los trabajos y
concejos que dicho seorpromete seguir dando a los apoderados de las mismas en relacion con la
venta, arriendo, administracion y mejoramiente de los mencionados bienes, por lapresente, libre y
volunta riamente, Don Santiago Carrion, en su capacidad de apoderado de las mencionadas Da.
EMILIA CARRION Y STA. MARINA y Da. MARIA DE LAS MERCEDES CARRION Y SANTA
MARINA y de la manera mas solemne como sea necessario y eficaz en derecho, promete pagar a
don Federico Calero sus sucesores y cesionarios, una cantidad equivalente a UN VEINTE POR
CIENTO (20%) de cualquer cantidad que se obtenga de la venta de los mencionados edificios y
terrenos, despues de degcontar el importe total pagado por Ias Sras. EMILIA CARRION Y STA.
MARINA Y MARIA DE LAS MERCEDES CARRION Y SANTA MARINA a la due a de los
mismos El Hogar Filipino, entendiendose ademas que este veinte por ciento sera tomado de
la ganancia liquida que les represents a las nuevas dueas ta venta de los bienes mencionmados ya sea
por mediacion del Sr. Calero o sin ella. (par. 5 of Exh. A). (Emphasis supplied.).
The terms of the contract admit no doubt that the 20% to be paid the plaintiff is of any amount
which may be obtained by the sale of the property after deducting the purchase price thereof, which
shall be taken from the liquidated benefit obtained by the owners out of the sale of the said
property.
Neither is Article 1453 applicable, because there is absolutely nothing in the agreement which even
remotely indicates that the property was conveyed to the defendants in reliance upon their declared
intention to hold it for, or transfer it to, another or the grantor.
Even the very allegations of plaintiff's complaint clearly reflect the true nature of the agreement. It
appears therefrom that although the original parties to purchase the property tribute P10,000.00
and the defendants to put up P15,000.00 on account of the down payment of P25,000.00), the same

was abandoned and the parties subsequently agreed that the defendants would buy the property
exclusively in their name and for their own account because "era muy complicado constituir una
comunidad de bienes en esa finca, pues abria necesidad de rendir cuentas mensuales, y consultares
en caso de reparaciones, mejoras, etc." and that the plaintiff "acepto esa proposicion, en el bien
entendido de que la finca seria vendida tan pronto como se encontrara un comprador por una
cantidad no menor de P300,000.00" "con la obligacion (on the part of the defendants) de pagar al
demandante el veinte por ciento (20%) de los beneficios, cuando se vendiera la finca", and that,
lastly, "el demandado acepto esa proposicion, como ya se ha dicho, y las partes otorgaron el dia 28
de marzo de 1937, un contrato formal en el cual se hizo constar el ultimo convenio celebrado por las
partes, es decir, que a la venta de la finca situada en la Plaza Santa Cruz, las demandadas pagarian
al demandante,
una cantidad equivalente a un Veinte Por Ciento (20%) de cualquier cantidad que se obtenga de la
ventade los mencionados edificios y terrenos, despues de descontar el importe total pagado por
dichas demandadas. (See paragraphs 3, 6, 7, 8 and 9 of the amended complaint.)
Plaintiff-appellant next contends that the lower court also erred in dismissing his complaint on the
finding that plaintiff's right of action to have the period fixed for the sale of the property had
already prescribed. It is urged that the time for enforcing their right of action to have the period
judicially determined did not begin to run until the defendants had been formally demanded and
they refused to sell the property. It was only then, it is argued, that the period of prescription
started to run. This seems to be illogical. Before the period is fixed, the defendants' obligation to sell
is suspended and they, therefore, cannot be compelled to act. For this reason, a complaint to enforce
immediately the principal obligation subject to the suspensive period before this is fixed, will not
prosper. But this is not to say that the plaintiff has no cause of action. His cause of action under the
agreement is to have the court fix the period and after the expiration of that period, to compel the
performance of the principal obligation to sell. And this right to have the period judicially fixed is
born from the date of the agreement itself which contains the undetermined period. Extrajudicial
demand is not essential for the creation of this cause of action to have the period fixed. 1 It exists by
operation of law from the moment such an agreement subject to an undetermined period is entered
into, whether the period depends upon the will of the debtor alone, or of the parties themselves, or
where from the nature and the circumstances of the obligation it can be inferred that a period was
intended.
This is the clear intendment of Article 1197 of the New Civil Code as well as Article 1128 of the
Spanish Civil Code and the applicable doctrine laid down by this Court. 2 And since the agreement
was executed on May 28, 1937 and the complaint to have the period fixed was filed on December 21,
1956 or after almost 20 years, plaintiff's action is clearly and indisputably barred under the Statute
of Limitations.
Wherefore, finding no reversible error in the order appealed from, the same is hereby affirmed,
with costs against the plaintiff-appellant. So ordered.

G.R. No. 93397 March 3, 1997

TRADERS
ROYAL
BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and
CENTRAL BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals
dated January 29, 1990, 1 affirming the nullity of the transfer of Central Bank Certificate of
Indebtedness (CBCI) No. D891, 2 with a face value of P500,000.00, from the Philippine
Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB),
under a Repurchase Agreement 3 dated February 4, 1981, and a Detached Assignment 4 dated April
27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action
was originally filed as a Petition for Mandamus 5 under Rule 65 of the Rules of Court, to compel the
Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders
Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a
"Detached Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and
delivered unto Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to
Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000)
and having an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by
the transferor intended to complete the assignment through the registration of the transfer in the
name of PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby
irrevocably authorized the said issuer (Central Bank) to transfer the said bond/certificates on the
books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . .,
whereby, for and in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND
(P500,000.00), PhilFinance sold, transferred and delivered to petitioner CBCI 4-year, 8th series,
Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those previously
acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase
CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED

NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27,
1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when
the checks it issued in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner
to enable the latter to have its title completed and registered in the books of the respondent. And by
means of said Detachment, Philfinance transferred and assigned all, its rights and title in the said
CBCI (Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the said
issuer (respondent herein) to transfer the said bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached
Assignments (Annexes "B" and "D"), to the Securities Servicing Department of the respondent,
and requested the latter to effect the transfer of the CBCI on its books and to issue a new certificate
in the name of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so
notwithstanding petitioner's valid and just title over the same and despite repeated demands in
writing, the latest of which is hereto attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with the
petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has been
registered) by the registered owner hereof, in person or by his attorney duly authorized in writing,
and similarly noted hereon, and upon payment of a nominal transfer fee which may be required, a
new Certificate shall be issued to the transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient
authorizations in writing executed by the registered owner, Filriters, and its transferee,
PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a
transfer of ownership over the CBCI and issuing a new certificate to the transferee devolves upon
the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in
its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central
Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for
Interpleader 6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation
(Filriters), the registered owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as
an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust
fund doctrine and to the prejudice of policyholders and to all who have present or future claim
against policies issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of
Filriters, without any board resolution, knowledge or consent of the board of directors of Filriters,
and without any clearance or authorization from the Insurance Commissioner, executed a detached
assignment purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, VicePresident-Treasury of Filriters (both of whom were holding the same positions in Philfinance),
without any consideration or benefit redounding to Filriters and to the grave prejudice of Filriters,
its policy holders and all who have present or future claims against its policies, executed similar
detached assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without the
knowledge and consent of directors of Filriters, and not duly authorized in writing by the Board, as
requiring by Article V, Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the
corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the assignment is void
from the beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of directors of
Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement
under the Insurance Code for its existence as an insurance company and the pursuit of its business
operations. The assignment of the CBCI is illegal act in the sense of malum in se or malum
prohibitum, for anyone to make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is
immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency
of Filriters (and has in fact helped in placing Filriters under conservatorship), an inevitable result
known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not
payable to bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered
owner as the absolute owner and that the value of the registered certificates shall be payable only to
the registered owner; a sufficient notice to plaintiff that the assignments do not give them the
registered owner's right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the
registered certificates are payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a
regular transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by
the Insurance Code and its assignment or transfer is expressly prohibited by law. There was no
attempt to get any clearance or authorization from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular
course of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all
or substantially all" of the assets of Filriters, which requires the affirmative action of the
stockholders (Section 40, Corporation [sic] Code. 7
In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same
CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The
dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty
Assurance Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent
assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void
and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and
to pay the value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance
Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance
Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED. 9

The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals
likewise failed. The findings of the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed
of assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine
Underwriters Finance Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No.
D891, which was still registered in the name of Filriters, to appellant Traders Royal Bank (TRB).
The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance
the right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy
back the note on maturity date, it executed a deed of assignment, dated April 27, 1981, conveying to
appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No.
D891 in its name before the Security and Servicing Department of the Central Bank (CB). Central
Bank, however, refused to effect the transfer and registration in view of an adverse claim filed by
defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank
in the Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower
court as a case of interpleader when CB prayed in its amended answer that Filriters be impleaded
as a respondent and the court adjudge which of them is entitled to the ownership of CBCI No.
D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and
having acquired the said certificate from Philfinance as a holder in due course, its possession of the
same is thus free fro any defect of title of prior parties and from any defense available to prior
parties among themselves, and it may thus, enforce payment of the instrument for the full amount
thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since
the instrument clearly stated that it was payable to Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the words of negotiability which serve as an
expression of consent that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better
known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness",
which provided that any "assignment of registered certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance
merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing
operations.
Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind
Filriters and violated as the same time Central Bank Circular No. 769 which has the force and
effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters
equity and the two corporations have identical corporate officers, thus demanding the application
of the doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the
CBCI from registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance
of CBCI, as actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the
transfer of the CBCI from Filriters to Philfinance was null and void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer,
of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED
THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a
fixed sum of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation,
the registered owner hereof." Very clearly, the instrument is payable only to Filriters, the registered
owner, whose name is inscribed thereon. It lacks the words of negotiability which should have
served as an expression of consent that the instrument may be transferred by negotiation. 15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission
that the same is a negotiable instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone
relating to the protection of holders in due course, and the freedom of negotiability is the
foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d,
32). This freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay a
sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the
intention of the parties is to control, if it can be legally ascertained. While the writing may be read
in the light of surrounding circumstance in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The
duty of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with
existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since
it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that
the transfer was for "value received", there was really no consideration involved. What happened
was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation. Thus, for
lack of any consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central
Bank Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under which the note was issued. Published in the
Official Gazette on November 19, 1980, Section 3 thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on
behalf of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment did not therefore bind
Filriters and violated at the same time Central Bank Circular No. 769 which has the force and

effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or
transfer to Traders Royal Bank and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate
fiction to defraud TRB into purchasing the subject CBCI, which purchase now is refused
registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate
officers, if the principle of piercing the veil of corporate entity were to be applied in this case, then
TRB's payment to Philfinance for the CBCI purchased by it could just as well be considered a
payment to Filriters, the registered owner of the CBCI as to bar the latter from claiming, as it has,
that it never received any payment for that CBCI sold and that said CBCI was sold without its
authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI was
merely borrowed by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's)
financing operations, if it were to be consistent therewith, on the issued raised by TRB that there
was a piercing a veil of corporate entity, the Court of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the payment by TRB to Philfinance should be construed
as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an
equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere
alter ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished
one corporation from a seemingly separate one, were it not for the existing corporate fiction. But to
do this, the court must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It
is the protection of the interests of innocent third persons dealing with the corporate entity which
the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners
insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by

Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which
could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders and from other corporations may be
disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent
corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate
personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it
acquired the subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should
have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title
over the same or its authority to assign the certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership
of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at
any office of the Bank or any agency duly authorized by the Bank, and such registration is noted
hereon. After such registration no transfer thereof shall be valid unless made at said office (where
the Certificates has been registered) by the registered owner hereof, in person, or by his attorney,
duly authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee
which may be required, a new Certificate shall be issued to the transferee of the registered owner
thereof. The bank or any agency duly authorized by the Bank may deem and treat the bearer of this
Certificate, or if this Certificate is registered as herein authorized, the person in whose name the
same is registered as the absolute owner of this Certificate, for the purpose of receiving payment
hereof, or on account hereof, and for all other purpose whether or not this Certificate shall be
overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to
require Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a nonowner was disposing of the registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules
and Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which
provides that:

Sec. 3. Assignment of Registered Certificates. Assignment of registered certificates shall not be

valid unless made at the office where the same have been issued and registered or at the Securities
Servicing Department, Central Bank of the Philippines, and by the registered owner thereof, in
person or by his representative, duly authorized in writing. For this purpose, the transferee may be
designated as the representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is
only fair, as everyone must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular,
which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O.
Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for and
in favor of Filriters, did not have the necessary written authorization from the Board of Directors of
Filriters to act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and
therefore void and inexistent, as there was no consideration for the same. This is fatal to the
petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the
Traders Royal Bank. Nemo potest nisi quod de jure potest no man can do anything except what he
can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital
reserves, which are required by law 24 to be maintained at a mandated level. This was pointed out
by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony given before the court
on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face
value of P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance Commission
sometime in early 1981 and this CBCI No. 891 was among the CBCI's that were found to be
missing.
Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891
before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal
reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of
the Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance

Commission requires this reserve to be invested preferably in government securities or government

binds. This is how this CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law.
Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters cannot
bind the said corporation, not without the approval of its Board of Directors, and the maintenance
of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over
the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29,
1990 is hereby AFFIRMED.
SO ORDERED.

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners, vs. COURT OF
APPEALS and TRADERS ROYAL BANK,respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] to annul the Decision[2] dated 16 July 1999 of the Court of
Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000 denying the
motion for reconsideration. The Court of Appeals affirmed with modification the
Decision[3] dated 31
August
1992 rendered
by
Branch
113
of
theRegional Trial Court of Pasay City (trial court). The trial courts Decision declared petitioner
Alfredo Ching (Ching) liable to respondent Traders Royal Bank (TRB) for the payment of the
credit accommodations extended to Philippine Blooming Mills, Inc. (PBM).
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1.

P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106; [4]

2.

P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113; [5] and

3.

P3,500,000 under the trust loan covered by a notarized Promissory Note. [6]

Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate
officer, Ching signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL
BANK, its successors and assigns, the due and punctual payment by the following individuals
and/or companies/firms, hereinafter called the DEBTOR(S), of such amounts whether due or not,
as indicated opposite their respective names, to wit:
NAME OF DEBTOR(S)
PHIL. BLOOMING MILLS CORP.

AMOUNT OF OBLIGATION
TEN MILLION PESOS

(P 10,000,000.00)
owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all
notes, drafts, overdrafts and other credit obligations of every kind and nature contracted/incurred
by said DEBTOR(S) in favor of said CREDITOR.
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness
herein secured at maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its
successors and assigns, the prompt payment, without demand or notice from said CREDITOR, of
such notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be

indebted or may hereafter become indebted to the CREDITOR, together with all interests, penalty
and other bank charges as may accrue thereon and all expenses which may be incurred by the
latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to
be performed under any contracts, evidencing indebtedness/obligations and any supplements,
amendments, charges or modifications made thereto, including but not limited to, the due and
punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand,
protest and notice of dishonor of any and all such instruments, loans, advances, credits, or other
indebtedness or obligations hereinbefore referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not
contingent upon the pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or
they may have against the DEBTOR(S) or the securities or liens it or they may possess; and I/WE
hereby agree to be and remain bound upon this suretyship, irrespective of the existence, value or
condition of any collateral, and notwithstanding also that all obligations of the DEBTOR(S) to you
outstanding and unpaid at any time may exceed the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as
attorneys fees a sum equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal
and interest) then unpaid, exclusive of all costs or expenses for collection allowed by law.
[7] (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his
capacity as Senior Vice President of PBM. Ching later accomplished and delivered to TRB trust
receipts, which acknowledged receipt in trust for TRB of the merchandise subject of the letters of
credit. Under the trust receipts, PBM had the right to sell the merchandise for cash with the
obligation to turn over the entire proceeds of the sale to TRB as payment of PBMs
indebtedness. Letter of Credit No. 479 AD, covered by Trust Receipt No. 106, has a face value of
US$591,043, while Letter of Credit No. 563 AD, covered by Trust Receipt No. 113, has a face value
of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of
__ per centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally undertake
and agree to pay on demand on the said BANK, all sums and amounts of money which said BANK
may call upon them to pay arising out of, pertaining to, and/or in any manner connected with this
receipt. In case it is necessary to collect the draft covered by the Trust Receipt by or through an
attorney-at-law, the undersigned hereby further agree(s) to pay an additional of 10% of the total

amount due on the draft as attorneys fees, exclusive of all costs, fees and other expenses of
collection but shall in no case be less than P200.00[8] (Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker in
the notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to
pay the TRADERS ROYAL BANK or order, at its Office in 4 th Floor, Kanlaon Towers Bldg., Roxas
Blvd., Pasay City, the sum of Pesos: THREE MILLION FIVE HUNDRED THOUSAND ONLY
(P3,500,000.00), Philippine Currency, with the interest rate of Eighteen Percent (18%) per annum
until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an additional
amount equivalent to two per cent (2%) of the principal sum per annum, as penalty and collection
charges in the form of liquidated damages until fully paid, and the further sum of ten percent (10%)
thereof in full, without any deduction, as and for attorneys fees whether actually incurred or not,
exclusive of costs and other judicial/extrajudicial expenses; moreover, I/We jointly and severally,
further empower and authorize the TRADERS ROYAL BANK at its option, and without notice to
set off or to apply to the payment of this note any and all funds, which may be in its hands on
deposit or otherwise belonging to anyone or all of us, and to hold as security therefor any real or
personal property which may be in its possession or control by virtue of any other contract.
[9] (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD)
for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) forP1,191,137.13. PBM
also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and
Exchange Commission (SEC), docketed as SEC Case No. 2250. [10]The petition sought to suspend
payment of PBMs obligations and prayed that the SEC allow PBM to continue its normal business
operations free from the interference of its creditors. One of the listed creditors of PBM was TRB.
[11]

On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the
rehabilitation receivership of Kalaw, Escaler and Associates. [12]
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB
filed with the trial court a complaint for collection against PBM and Ching. TRB asked the trial
court to order defendants to pay solidarily the following amounts:
(1)
P6,612,132.74 exclusive of interests, penalties, and bank charges [representing its
indebtedness arising from the letters of credit issued to its various suppliers];
(2)
P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing
from the trust loan of 27 April 1981 evidenced by a promissory note];

(3)
P783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from
the money market loan of 1 April 1981 evidenced by a promissory note];
(4)
To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in the
event plaintiff can not recover the full amount of PBMs indebtedness from the latter;
(5)

The sum equivalent to 10% of the total sum due as and for attorneys fees;

(6)
Such other amounts that may be proven by the plaintiff during the trial, by way of
damages and expenses for litigation.[13]
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC
had already placed PBM under receivership. [14] The trial court thus dismissed the complaint
against PBM.[15]
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial
court had no jurisdiction over the subject matter of the case. PBM and Ching invoked the
assumption of jurisdiction by the SEC over all of PBMs assets and liabilities. [16]
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his
personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension
of payments is not binding on TRB; and (3) Presidential Decree No. 1758 (PD No. 1758),
[17] which Ching relied on to support his assertion that all claims against PBM are suspended, does
not apply to Ching as the decree regulates corporate activities only.[18]
In its order dated 15 August 1983,[19] the trial court denied the motion to dismiss with respect to
Ching and affirmed its dismissal of the case with respect to PBM. The trial court stressed that TRB
was holding Ching liable under the Deed of Suretyship. As Chings obligation was solidary, the
trial court ruled that TRB could proceed against Ching as surety upon default of the principal
debtor PBM. The trial court also held that PD No. 1758 applied only to corporations, partnerships
and associations and not to individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari
and Prohibition[20] before the Court of Appeals. The appellate court granted Chings petition and
ordered the dismissal of the case. The appellate court ruled that the SEC assumed jurisdiction over
Ching and PBM to the exclusion of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision[21] before this Court. In Traders Royal Bank v. Court of
Appeals,[22] this Court upheld TRB and ruled that Ching was merely a nominal party in SEC Case
No. 2250. Creditors may sue individual sureties of debtor corporations, like Ching, in a separate
proceeding before regular courts despite the pendency of a case before the SEC involving the debtor
corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation comaker of PBM. He claimed that the SEC had already issued a decision [23]approving a revised
rehabilitation plan for PBMs creditors, and that PBM obtained the credit accommodations for
corporate purposes that did not redound to his personal benefit. He further claimed that even as a

surety, he has the right to the defenses personal to PBM. Thus, his liability as surety would attach
only if, after the implementation of payments scheduled under the rehabilitation plan, there would
remain a balance of PBMs debt to TRB. [24] Although Ching admitted PBMs availment of the credit
accommodations, he did not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the SECappointed receiver.[25] Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much?[26]
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of
TRB, and Ms. Carla Pecson, manager of the International Department of TRB, as witnesses. Both
witnesses testified to the following:
1.
The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBMs
liabilities to TRB up to P10,000,000;[27]
2.
The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD
for US$591,043, and the actual availment by PBM of the full proceeds of the credit accommodation;
[28]

3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for
US$156,000, and the actual availment by PBM of the full proceeds of the credit accommodation;
[29] and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note dated 27
April 1981 wherein Ching bound himself solidarily with PBM;[30] and
5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.[31]
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human
Resources Department of TRB, as witness. Ching sought to establish that TRBs Board of Directors
adopted a resolution fixing the PBM account at an amount lower than what TRB wanted to collect
from Ching. The trial court allowed Atty. Aranda to testify over TRBs manifestation that the
Answer failed to plead the subject matter of his testimony. Atty. Aranda produced TRB Board
Resolution No. 5935, series of 1990, which contained the minutes of the special meeting of TRBs
Board of Directors held on 8 June 1990.[32] In the resolution, the Board of Directors advised TRBs
Management not to release Alfredo Ching from his JSS liability to the bank. [33] The resolution
also stated the following:
a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall
be applied directly to the account (as remitted per hereto attached schedule). The amount of P1.373
million shall be considered as full payment of PBMs account. (The receiver is amenable to this
alternative)

The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the
above and conforme to PISCOR and PBM. Subsequent deposits shall start on the 3 rd year and
annually thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain outstanding in
the books of the Bank. Said balance will equal the deposits to be remitted to the Bank for a period
of 17 years.[34]
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never
complied with or implemented. Not only was there no initial deposit of P150,000 as required in the
resolution, TRB also disapproved the document prepared by the receiver, which would have
released Ching from his suretyship.[35]
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The
trial court explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the
Philippine Blooming Mills. Indisputably, under the Deed of Suretyship defendant Ching
unconditionally agreed to assume PBMs liability to the plaintiff in the event PBM defaulted in the
payment of the said obligation in addition to whatever penalties, expenses and bank charges that
may occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J), defendant
Ching bound himself jointly and severally with PBM in the payment of the latters obligation to the
plaintiff. The obligation being solidary, the plaintiff Bank can hold Ching liable upon default of the
principal debtor. This is explicitly provided in Article 1216 of the New Civil Code already quoted
above.[36]
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff
bank in the amount of P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY
THREE THOUSAND FIVE HUNDRED FIFTY EIGHT & 16/100) as of October 31, 1991, and to
pay the legal interest thereon from such date until it is fully paid. To pay plaintiff 5% of the entire
amount by way of attorneys fees.
SO ORDERED.[37]
The Ruling of the Court of Appeals
On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed
nature of the obligation as provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to him, or

pertain to his own share. With respect to those which personally belong to the others, he may avail
himself thereof only as regards that part of the debt for which the latter are responsible.
Ching claimed that his liability should likewise be reduced since the equitable apportionment of
PBMs remaining assets among its creditors under the rehabilitation proceedings would have the
effect of reducing PBMs liability. He also claimed that the amount for which he was being held
liable was excessive. He contended that the outstanding principal balance, as stated in TRB Board
Resolution No. 5893-1990, was only P5,650,749.09.[38] Ching also contended that he was not liable
for interest, as the loan documents did not stipulate the interest rate, pursuant to Article 1956 of the
Civil Code.[39] Finally, Ching asserted that the Deed of Suretyship executed on 21 July 1977could not
guarantee obligations incurred after its execution.[40]
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case for
decision.[41]
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation
receivership, and if in the affirmative, for how much. [42]
The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts,
Undertaking, Deed of Surety, and the 3.5 Million Peso Promissory Note upon which TRBs action
rested. He is, therefore, presumed to be liable unless he presents evidence showing payment,
partially or in full, of these obligations (Investment and Underwriting Corporation of the
Philippines v. Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching can answer separately
for the obligations of debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine
Blooming Mills, Inc., and Alfredo Ching, 178 SCRA 738 [1990], and Traders Royal Bank v.
Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the
rehabilitation receivers are limited to the existing assets of the corporation. [43]
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to
the amount of liability of defendant Alfredo Ching which is lowered from P19,333,558.16
toP15,773,708.78 with legal interest of 12% per annum until it is fully paid.
SO ORDERED.[44]
The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.
Hence, this petition.

Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
PETITIONER ALFREDO CHING WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM
LONG AFTER THE EXECUTION OF THE DEED OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE
PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT
PRIVATE RESPONDENT HAD PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER
ALFREDO CHING LIABLE FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER
ANNUM UNTIL FULLY PAID DESPITE THE FACT THAT UNDER THE REHABILITATION
PLAN OF PETITIONER PBM, WHICH WAS APPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.
[45]

Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not
yet in existence at the time of its execution. Specifically, Ching maintained that the Deed of
Suretyship could not answer for debts contracted by PBM in 1980 and 1981. Ching contended that
no accessory contract of suretyship could arise without an existing principal contract of
loan. Ching likewise argued that TRB could no longer claim on the trust receipts because TRB had
already taken the properties subject of the trust receipts. Ching likewise maintained that his
obligation as surety could not exceed the P1,373,415 apportioned to PBM under the SEC-approved
rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought
before the trial court. Furthermore, TRB pointed out that Ching never presented PBMs
rehabilitation plan before the trial court. TRB also stated that the Supreme Court ruling in Traders
Royal Bank v. Court of Appeals[46] constitutes res judicata between the parties. Therefore, TRB could
proceed against Ching separately from PBM to enforce in full Chings liability as surety.[47]
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial courts denial of Chings motion to have the case
dismissed against him. The petition is a thinly veiled attempt to make this Court reconsider its
decision in the prior case of Traders Royal Bank v. Court of Appeals.[48] This Court has already
resolved the issue of Chings separate liability as a surety despite the rehabilitation proceedings
before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could
not assume jurisdiction over his person and properties. The Securities and Exchange Commission
was empowered, as rehabilitation receiver, to take custody and control of the assets and properties

of PBM only, for the SEC has jurisdiction over corporations only [and] not over private individuals,
except stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being
a nominal party in SEC Case No. 2250, Chings properties were not included in the rehabilitation
receivership that the SEC constituted to take custody of PBMs assets. Therefore, the petitioner
bank was not barred from filing a suit against Ching, as a surety for PBM. An anomalous situation
would arise if individual sureties for debtor corporations may escape liability by simply co-filing
with the corporation a petition for suspension of payments in the SEC whose jurisdiction is limited
only to corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by
Article 1216 of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual
stockholders and members. Being an officer or stockholder of a corporation does not make ones
property the property also of the corporation, for they are separate entities (Adelio Cruz vs.
Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC
jurisdiction over his person or property, for jurisdiction does not depend on the consent or acts of
the parties but upon express provision of law (Tolentino vs. Social Security System, 138 SCRA 428;
Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the credit
accommodations TRB extended to PBM. The decision amounts to res judicata[49] which bars Ching
from raising the same issue again. Hence, the only question that remains is the amount of Chings
liability. Nevertheless, we shall resolve the issues Ching has raised in his attempt to escape liability
under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the execution
of the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to
amounts PBM may now be indebted or may hereafter become indebted to TRB.
The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code provides:
A guaranty may also be given as security for future debts, the amount of which is not yet known;
there can be no claim against the guarantor until the debt is liquidated. A conditional obligation
may also be secured. (Emphasis supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals[50] that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which
may not be known at the time the guaranty is executed. This is the basis for contracts denominated

as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single
transaction, but which contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits, and
contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes
liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those
arising in the future, which are within the description or contemplation of the contract of guaranty,
until the expiration or termination thereof. A guaranty shall be construed as continuing when by
the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be
used from time to time either indefinitely or until a certain period; especially if the right to recall
the guaranty is expressly reserved. Hence, where the contract states that the guaranty is to secure
advances to be made from time to time, it will be construed to be a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as
payment of any debt, any indebtedness, or any sum, or the guaranty of any transaction, or
money to be furnished the principal debtor at any time, or on such time that the principal
debtor may require, have been construed to indicate a continuing guaranty.
Whether Chings liability is limited
to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated in
PBMs rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the
Civil Code which reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which
are derived from the nature of the obligation and of those which are personal to him, or pertain to
his own share. With respect to those which personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the latter are responsible.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of the
loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the
surety. Thus, Ching cannot use PBMs failure to pay in full as justification for his own reduced
liability to TRB. As surety, Ching agreed to pay in full PBMs loan in case PBM fails to pay in full
for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of
PBMs loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully collected.
(Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution
states that PBMs outstanding loans may be reduced to P1.373 million subject to certain conditions

like the payment of P150,000 initial payment.[51] The resolution also states that TRB should not
release Chings solidary liability under his surety. The resolution even directs TRBs management
to study Chings criminal liability under the trust documents.[52]
Chings own witness testified that Resolution No. 5935 was never implemented. For one, PBM or
its receiver never paid the P150,000 initial payment to TRB. TRB also rejected the document that
PBMs receiver presented which would have released Ching from his suretyship. Clearly, Ching
cannot rely on Resolution No. 5935 to escape liability under his suretyship.
Chings attempts to have this Court review the factual issues of the case are improper. It is not a
function of the Supreme Court to assess and evaluate again the evidence, testimonial and
evidentiary, adduced by the parties particularly where the findings of both the trial court and the
appellate court coincide on the matter.[53]
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust
receipts. Other than his bare allegations, Ching has not shown proof of payment or settlement with
TRB. Atty. Vicente Aranda, TRBs corporate secretary and First Vice President of its Human
Resource Management Department, testified that the conditions in the TRB board resolution
presented by Ching were not met or implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you
to condition or step No. 1, which reads: a) Accept the P1.373 million deposits remitted over a
period of 17 years or until 2006 which shall be applied directly to the account (as remitted per
hereto attached schedule). The amount of P1.373 million shall be considered as full payment of
PBMs account. (The receiver is amenable to this alternative.) The initial deposit/remittance which
amounts to P150,000.00 shall be remitted upon approval of the above and conforme of PISCOR
[xxx] and PBM. Subsequent deposits shall start on the 3 rd year and annually thereafter (every June
30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable. Now
Mr. Witness, would you be in a position to inform [the court] if these conditions listed in item (a) in
Resolution No. 5935, series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in
the amount of P150,000.00 which have to be done with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court if those conditions
were met? Because your initial answer was yes.
A

Yes sir, I am in a position to state that these conditions were not met.

Q Let me refer you to the condition listed as item (b) of the same resolution which I read and
quote: Write off immediately P4.278 million. The balance of P1.373 million to remain
outstanding in the books of the bank. Said balance will be remitted to the Bank for a period of 17

years. Mr. Witness, would you be in a position to inform the court if the bank implemented that
particular condition?
A In the implementation of this settlement the receiver prepared a document for approval and
conformity of the bank. The said document would in effect release the suretyship of Alfredo Ching
and for that reason the bank refused or denied fixing its conformity and approval with the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these
conditionalities [sic] was because the former defendant corporation requested that the suretyship of
Alfredo Ching be released, is that correct?
A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx
the bank would release the suretyship of Alfredo Ching, that is why the bank is not amenable to
such a document.
Q Despite this approved resolution the bank, because of said requirement or conformity did not
seek to implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed in that document
because it was the condition of the board that the suretyship should not be released but the
document being presented to the bank for signature and conformity in effect if signed would release
the suretyship. So it would be a violation with the approval of the board so the bank did not sign the
conformity.[54]
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts
when TRB, together with other creditor banks, took hold of PBMs inventories, including the goods
covered by the trust receipts. Ching asserts that this act of TRB released him from liability under
the suretyship. Ching forgets that he executed, on behalf of PBM, separate Undertakings for each
trust receipt expressly granting to TRB the right to take possession of the goods at any time to
protect TRBs interests. TRB may exercise such right without waiving its right to collect the full
amount of the loan to PBM. The Undertakings also provide that any suspension of payment or any
assignment by PBM for the benefit of creditors renders the loan due and demandable. Thus, the
separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and take possession of said
merchandise with the right to sell and dispose of the same under such terms and conditions it may
deem best, or of the proceeds of such of the same as may then have been sold, wherever the said
merchandise or proceeds may then be found and all the provisions of the Trust Receipt shall apply
to and be deemed to include said above-mentioned merchandise if the same shall have been made
up or used in the manufacture of any other goods, or merchandise, and the said BANK shall have
the same rights and remedies against the said merchandise in its manufactured state, or the product
of said manufacture as it would have had in the event that such merchandise had remained [in] its
original state and irrespective of the fact that other and different merchandise is used in completing

such manufacture. In the event of any suspension, or failure or assignment for the benefit of
creditors on the part of the undersigned or of the non-fulfillment of any obligation, or of the nonpayment at maturity of any acceptance made under said credit, or any other credit issued by the said
BANK on account of the undersigned or of the non-payment of any indebtedness on the part of the
undersigned to the said BANK, all obligations, acceptances, indebtedness and liabilities whatsoever
shall thereupon without notice mature and become due and payable and the BANK may avail of the
remedies provided herein.[55] (Emphasis supplied)
Presidential Decree No. 115 (PD No. 115), otherwise known as the Trust Receipts Law, expressly
allows TRB to take possession of the goods covered by the trust receipts. Thus, Section of 7 of PD
No. 115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale
of the goods, documents or instruments released under a trust receipt to the entrustee to the extent
of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the enforcement of all other rights conferred
on him in the trust receipt provided such are not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments subject
of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to
comply with any of the terms and conditions of the trust receipt or any other agreement between the
entruster and the entrustee, and the entruster in possession of the goods, documents or instruments
may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than
five days after serving or sending of such notice, sell the goods, documents or instruments at public
or private sale, and the entruster may, at a public sale, become a purchaser. The proceeds of any
such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to
the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c)
to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive any
surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed
sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid
ordinary mail to the entrustees last known business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching
remained liable for the entire amount of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Chings credit obligations with TRB, Chings
liability is what the Deed of Suretyship stipulates, plus the applicable interest and penalties. The
trust receipts, as well as the Letter of Undertaking dated 16 April 1980[56] executed by PBM,
stipulate in writing the payment of interest without specifying the rate. In such a case, the
applicable interest rate shall be the legal rate, which is now 12% per annum. [57] This is in
accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise
known as the Usury Law, the Monetary Board, in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the loan or forbearance of any money, goods or credits and

the rate allowed in judgments, in the absence of express contract as to such rate of interest, shall be
twelve per cent (12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18%
interest per annum plus 2% penalty interest per annum in case of default. This stipulated interest
should continue to run until full payment of the P3,500,000 trust loan. In addition, the accrued
interest on all the credit accommodations should earn legal interest from the date of filing of the
complaint pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal amounts as of
the filing of the complaint with the trial court on 13 May 1983 wereP959,611.96 under Trust Receipt
No. 106, P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the trust loan. As extracted
from TRBs Statement of Account as of 31 October 1991, [58] the accrued interest on the trust
receipts and the trust loan as of the filing of the complaint on 13 May 1983
were P311,387.51[59] under Trust Receipt No. 106, P338,739.81[60] under Trust Receipt No. 113,
and P1,287,616.44[61] under the trust loan. The penalty interest on the trust loan amounted
to P137,315.07.[62] Ching did not rebut this Statement of Account which TRB presented during
trial.
Thus, the following is the summary of Chings liability under the suretyship as of 13 May 1983, the
date of filing of TRBs complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)
Outstanding Principal
Accrued Interest (12% per annum)

959,611.96
311,387.51

2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal
Accrued Interest (12% per annum)

P 1,191,137.13
338,739.82

3. On the Trust Loan (Promissory Note)

Outstanding Principal
Accrued Interest (18% per annum)
Accrued Penalty Interest (2% per annum)

P 3,500,000.00
1,287,616.44
137,315.07

WHEREFORE,
we AFFIRM the
decision
of
the
Court
of
Appeals
with MODIFICATION. Petitioner Alfredo Ching shall pay respondent Traders Royal Bank the
following (1) on the credit accommodations under the trust receipts, the total principal amount
of P2,150,749.09 with legal interest at 12% per annum from 14 May 1983 until full payment; (2) on

the trust loan evidenced by the Promissory Note, the principal sum of P3,500,000 with 20% interest
per annum from 14 May 1983 until full payment; (3) on the total accrued interest as of 13 May
1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until full payment. Petitioner
Alfredo Ching shall also pay attorneys fees to respondent Traders Royal Bank equivalent to 5% of
the total principal and interest.
SO ORDERED.

G.R. No. 85161 September 9, 1991

COUNTRY BANKERS INSURANCE CORPORATION and ENRIQUE SY, petitioners,
vs.
COURT
OF
APPEALS
and
OSCAR
VENTANILLA
ENTERPRISES
CORPORATION, respondents.
Esteban C. Manuel for petitioners.
Augusta Gatmaytan for OVEC.

MEDIALDEA, J.:p
Petitioners seek a review on certiorari of the decision of the Court of Appeals in CA-G.R. CV No.
09504 "Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises
Corporation" affirming in toto the decision of the Regional Trial Court, Cabanatuan City, Branch
XXV, to wit:
WHEREFORE, the complaint of the plaintiff Enrique F. Sy is dismissed, and on the counterclaim
of the defendant O. Ventanilla Enterprises Corporation, judgment is hereby rendered:
1. Declaring as lawful, the cancellation and termination of the Lease Agreement (Exh. A) and the
defendant's re-entry and repossession of the Avenue, Broadway and Capitol theaters under lease on
February 11, 1980;
2. Declaring as lawful, the forfeiture clause under paragraph 12 of the Id Lease Agreement, and
confirming the forfeiture of the plaintiffs remaining cash deposit of P290,000.00 in favor of the
defendant thereunder, as of February 11, 1980;
3. Ordering the plaintiff to pay the defendant the sum of P289,534.78, representing arrears in
rentals, unremitted amounts for amusement tax delinquency and accrued interest thereon, with
further interest on said amounts at the rate of 12% per annum (per lease agreement) from
December 1, 1980 until the same is fully paid;
4. Ordering the plaintiff to pay the defendant the amount of P100,000.00, representing the
P10,000.00 portion of the monthly lease rental which were not deducted from the cash deposit of the
plaintiff from February to November, 1980, after the forfeiture of the said cash deposit on February
11, 1980, with interest thereon at the rate of 12% per annum on each of the said monthly amounts
of P10,000.00 from the time the same became due until it is paid;
5. Ordering the plaintiff to pay the defendant through the injunction bond, the sum of P100,000.00,
representing the P10,000.00 monthly increase in rentals which the defendant failed to realize from
February to November 1980 result from the injunction, with legal interest thereon from the finality
of this decision until fully paid;

6. Ordering the plaintiff to pay to the defendant the sum equivalent to ten per centum (10%) of the
above-mentioned amounts of P289,534.78, P100,000.00 and P100,000.00, as and for attorney's fees;
and
7. Ordering the plaintiff to pay the costs. (pp. 94-95, Rollo)
The antecedent facts of the case are as follows:
Respondent Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner
Enrique F. Sy, as lessee, entered into a lease agreement over the Avenue, Broadway and Capitol
Theaters and the land on which they are situated in Cabanatuan City, including their airconditioning systems, projectors and accessories needed for showing the films or motion pictures.
The term of the lease was for six (6) years commencing from June 13, 1977 and ending June
12,1983. After more than two (2) years of operation of the Avenue, Broadway and Capitol Theaters,
the lessor OVEC made demands for the repossession of the said leased properties in view of the Sy's
arrears in monthly rentals and non-payment of amusement taxes. On August 8,1979, OVEC and Sy
had a conference and by reason of Sy's request for reconsideration of OVECs demand for
repossession of the three (3) theaters, the former was allowed to continue operating the leased
premises upon his conformity to certain conditions imposed by the latter in a supplemental
agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of
July 31, 1979) was reduced to P71,028.91 as of December 31, 1979. However, the accrued
amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had
accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of P4,000.00
from his monthly rental with the obligation to remit the said deductions to the city government.
Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy demanding
payment of the arrears in rentals and amusement tax delinquency. The latter demand was with
warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital Theaters on
February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977
and their supplemental letter-agreement of August 13, 1979. But notwithstanding the said demands
and warnings SY failed to pay the above-mentioned amounts in full Consequently, OVEC
padlocked the gates of the three theaters under lease and took possession thereof in the morning of
February 11, 1980 by posting its men around the premises of the Id movie houses and preventing
the lessee's employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease agreement, damages
and injunction late in the afternoon of the same day. And by virtue of a restraining order dated
February 12, 1980 followed by an order directing the issuance of a writ of preliminary injunction
issued in said case, Sy regained possession and operation of the Avenue, Broadway and Capital
theaters.
As first cause of action, Sy alleged that the amount of deposit P600,000.00 as agreed upon,
P300,000.00 of which was to be paid on June 13, 1977 and the balance on December 13, 1977 was
too big; and that OVEC had assured him that said forfeiture will not come to pass. By way of
second cause of action, Sy sought to recover from OVEC the sums of P100,000.00 which Sy

allegedly spent in making "major repairs" on Broadway Theater and the application of which to
Sy's due rentals; (2) P48,000.00 covering the cost of electrical current allegedly used by OVEC in its
alleged "illegal connection" to Capitol Theater and (3) P31,000.00 also for the cost of electrical
current allegedly used by OVEC for its alleged "illegal connection" to Broadway Theater and for
damages suffered by Sy as a result of such connection. Under the third cause of action, it is alleged
in the complaint that on February 11, 1980, OVEC had the three theaters padlocked with the use of
force, and that as a result, Sy suffered damages at the rate of P5,000.00 a day, in view of his failure
to go thru the contracts he had entered into with movie and booking companies for the showing of
movies at ABC. As fourth cause of action, Sy prayed for the issuance of a restraining
order/preliminary injunction to enjoin OVEC and all persons employed by it from entering and
taking possession of the three theaters, conditioned upon Sy's filing of a P500,000.00 bond supplied
by Country Bankers Insurance Corporation (CBISCO).
OVEC on the other hand, alleged in its answer by way of counterclaims, that by reason of Sy's
violation of the terms of the subject lease agreement, OVEC became authorized to enter and possess
the three theaters in question and to terminate said agreement and the balance of the deposits given
by Sy to OVEC had thus become forfeited; that OVEC would be losing P50,000.00 for every month
that the possession and operation of said three theaters remain with Sy and that OVEC incurred
P500,000.00 for attorney's service.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease
agreement; that the repossession of the leased premises by OVEC after the cancellation and
termination of the lease was in accordance with the stipulation of the parties in the said agreement
and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of
OVEC was clearly agreed upon by them in the lease agreement. The trial court further concluded
that Sy was not entitled to the writ of preliminary injunction issued in his favor after the
commencement of the action and that the injunction bond filed by Sy is liable for whatever
damages OVEC may have suffered by reason of the injunction.
On the counterclaim of OVEC the trial court found that the said lessor was deprived of the
possession and enjoyment of the leased premises and also suffered damages as a result of the filing
of the case by Sy and his violation of the terms and conditions of the lease agreement. Hence, it held
that OVEC is entitled to recover the said damages in addition to the arrears in rentals and
amusement tax delinquency of Sy and the accrued interest thereon. From the evidence presented, it
found that as of the end of November, 1980, when OVEC finally regained the possession of the three
(3) theaters under lease, Sy's unpaid rentals and amusement tax liability amounted to P289,534.78.
In addition, it held that Sy was under obligation to pay P10,000.00 every month from February to
November, 1980 or the total amount of P100,000.00 with interest on each amount of P10,000.00
from the time the same became due. This P10,000.00 portion of the monthly lease rental was
supposed to come from the remaining cash deposit of Sy but with the consequent forfeiture of the
remaining cash deposit of P290,000.00, there was no more cash deposit from which said amount
could be deducted. Further, it adjudged Sy to pay attorney's fees equivalent to 10% of the amounts
above-mentioned.
Finally, the trial court held Sy through the injunction bond liable to pay the sum of P10,000.00
every month from February to November, 1980. The amount represents the supposed increase in

rental from P50,000.00 to P60,000.00 in view of the offer of one RTG Productions, Inc. to lease the
three theaters involved for P60,000.00 a month.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto while OVEC
appealed insofar as the decision failed to hold the injunction bond liable for an damages awarded
by the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease agreement. It
held that the provisions are fair and reasonable and therefore, should be respected and enforced as
the law between the parties. It held that the cancellation or termination of the agreement prior to its
expiration period is justified as it was brought about by Sy's own default in his compliance with the
terms of the agreement and not "motivated by fraud or greed." It also affirmed the award to
OVEC of the amount of P100,000.00 chargeable against the injunction bond posted by CBISCO
which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the trial court did
not err in not charging and holding the injunction bond posted by Sy liable for all the awards as the
undertaking of CBISCO under the bond referred only to damages which OVEC may suffer as a
result of the injunction.
From this decision, CBISCO and Sy filed this instant petition on the following grounds:
A
PRIVATE RESPONDENT SHOULD NOT BE ALLOWED TO UNJUSTLY ENRICH OR BE
BENEFITTED AT THE EXPENSE OF THE PETITIONERS.
B
RESPONDENT COURT OF APPEALS CO D SERIOUS ERROR OF LAW AND GRAVE ABUSE
OF DISCRETION IN NOT SETTING OFF THE P100,000.00 SUPPOSED DAMAGE
RESULTING FROM THE INJUNCTION AGAINST THE P290,000.00 REMAINING CASH
DEPOSIT OF PETITIONER ENRIQUE SY.
C
RESPONDENT COURT OF APPEALS FURTHER COMMITTED SERIOUS ERROR OF LAW
AND GRAVE ABUSE OF DISCRETION IN NOT DISMISSING PRIVATE RESPONDENTS
COUNTER-CLAIM FOR FAILURE TO PAY THE NECESSARY DOCKET FEE. (p. 10, Rollo)
We find no merit in petitioners' argument that the forfeiture clause stipulated in the lease
agreement would unjustly enrich the respondent OVEC at the expense of Sy and CBISCO
contrary to law, morals, good customs, public order or public policy. A provision which calls for the
forfeiture of the remaining deposit still in the possession of the lessor, without prejudice to any other
obligation still owing, in the event of the termination or cancellation of the agreement by reason of
the lessee's violation of any of the terms and conditions of the agreement is a penal clause that may
be validly entered into. A penal clause is an accessory obligation which the parties attach to a
principal obligation for the purpose of insuring the performance thereof by imposing on the debtor

a special presentation (generally consisting in the payment of a sum of money) in case the obligation
is not fulfilled or is irregularly or inadequately fulfilled. (Eduardo P. Caguioa, Comments and Cases
on Civil Law, Vol. IV, First Edition, pp. 199-200) As a general rule, in obligations with a penal
clause, the penalty shall substitute the indemnity for damages and the payment of interests in case
of non-compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such
case, proof of actual damages suffered by the creditor is not necessary in order that the penalty may
be demanded (Article 1228, New Civil Code). However, there are exceptions to the rule that the
penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance with the principal obligation. They are first, when there is a stipulation to the contrary;
second, when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is
guilty of fraud (Article 1226, par. 1, New Civil Code). It is evident that in all said cases, the purpose
of the penalty is to punish the obligor. Therefore, the obligee can recover from the obligor not only
the penalty but also the damages resulting from the non-fulfillment or defective performance of the
principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed
forfeited, without prejudice to any other obligation still owing by the lessee to the lessor, the penalty
cannot substitute for the P100,000.00 supposed damage resulting from the issuance of the
injunction against the P290,000.00 remaining cash deposit. This supposed damage suffered by
OVEC was the alleged P10,000.00 a month increase in rental from P50,000.00 to P60,000,00), which
OVEC failed to realize for ten months from February to November, 1980 in the total sum of
P100,000.00. This opportunity cost which was duly proven before the trial court, was correctly
made chargeable by the said court against the injunction bond posted by CBISCO. The
undertaking assumed by CBISCO under subject injunction refers to "all such damages as such
party may sustain by reason of the injunction if the Court should finally decide that the Plaintiff
was/were not entitled thereto." (Rollo, p. 101) Thus, the respondent Court correctly sustained the
trial court in holding that the bond shall and may answer only for damages which OVEC may
suffer as a result of the injunction. The arrears in rental, the unmeritted amounts of the amusement
tax delinquency, the amount of P100,000.00 (P10,000.00 portions of each monthly rental which were
not deducted from plaintiffs cash deposit from February to November, 1980 after the forfeiture of
said cash deposit on February 11, 1980) and attorney's fees which were all charged against Sy were
correctly considered by the respondent Court as damages which OVEC sustained not as a result of
the injunction.
There is likewise no merit to the claim of petitioners that respondent Court committed serious error
of law and grave abuse of discretion in not dismissing private respondent's counterclaim for failure
to pay the necessary docket fee, which is an issue raised for the first time in this petition. Petitioners
rely on the rule in Manchester Development Corporation v. Court of Appeals, G.R. No. 75919, May 7,
1987, 149 SCRA 562 to the effect that all the proceedings held in connection with a case where the
correct docket fees are not paid should be peremptorily be considered null and void because, for all
legal purposes, the trial court never acquired jurisdiction over the case. It should be remembered
however, that in Davao Light and Power Co., Inc. v. Dinopol, G.R. 75195, August 19, 1988, 164
SCRA 748, this Court took note of the fact that the assailed order of the trial court was issued prior
to the resolution in the Manchester case and held that its strict application to the case at bar would
therefore be unduly harsh. Thus, We allowed the amendment of the complaint by specifying the

amount of damages within a non-extendible period of five (5) days from notice and the reassessment of the filing fees. Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38,
February 3, 1989, 170 SCRA 274, We held that where the filing of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow payment of the fee within a
reasonable time but in no case beyond the applicable prescriptive or reglemen tary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required as the following
circumstances are present: (a) they arise out of or are necessarily connected with the transaction or
occurrence that is subject matter of the opposing party's claim; (b) they do not require for their
adjudication the presence of third parties of whom the court cannot acquire jurisdiction; and (c)
the court has jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R.
75379, March 31, 1989, 171 SCRA 605). Whether the respective claims asserted by the parties arise
out of the same contract or transaction within the limitation on counterclaims imposed by the
statutes depends on a consideration of all the facts brought forth by the parties and on a
determination of whether there is some legal or equitable relationship between the ground of
recovery alleged in the counterclaim and the matters alleged as the cause of action by the plaintiff
(80 C.J.S. 48). As the counterclaims of OVEC arise from or are necessarily connected with the facts
alleged in the complaint for reformation of instrument of Sy, it is clear that said counterclaims are
compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the
same is hereby DENIED and the decision dated June 15, 1988 and the resolution dated September
21, 1988, both of the respondent Court of Appeals are AFFIRMED.
SO ORDERED.

PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioner,

vs. PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds
the parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is
deemed inexistent, and the parties are returned to their status quo ante. Hence, there is mutual
restitution of benefits received. The consequences of termination may be anticipated and provided
for by the contract. As long as the terms of the contract are not contrary to law, morals, good
customs, public order or public policy, they shall be respected by courts. The judiciary is not
authorized to make or modify contracts; neither may it rescue parties from disadvantageous
stipulations. Courts, however, are empowered to reduce iniquitous or unconscionable liquidated
damages, indemnities and penalties agreed upon by the parties.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, assailing the May 22, 2002
Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution[3] denying petitioners Motion for Reconsideration. The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil Case
No. 93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce Properties
Corporation the total amount of P687,289.50 as actual damages representing the accrued rentals
for the quarter September to November 1993 with interest and penalty at the rate of two percent
(2%) per month from date of filing of the complaint until the amount shall have been fully paid,
and the sum of P50,000.00 as attorneys fees; (2) In Civil Case No. 93-68337, the appealed decision
is REVERSED and SET ASIDE and a new judgment is rendered ordering [Petitioner] Pryce
Properties Corporation to reimburse [Respondent] Philippine Amusement and Gaming
Corporation the amount of P687,289.50 representing the advanced rental deposits, which amount
may be compensated by [Petitioner] Pryce Properties Corporation with its award in Civil Case No.
93-68266 in the equal amount of P687,289.50.[4]
The Facts
According to the CA, the facts are as follows:
Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC for
brevity) made representations with the Philippine Amusement and Gaming Corporation
(PAGCOR) on the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro City.
[A] series of negotiations followed. PAGCOR representatives went to Cagayan de Oro City to
determine the pulse of the people whether the presence of a casino would be welcomed by the
residents. Some local government officials showed keen interest in the casino operation and

expressed the view that possible problems were surmountable. Their negotiations culminated with
PPCs counter-letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom of
the Hotel for a period of three (3) years starting December 1, 1992 and until November 30, 1995.
On November 13, 1992, they executed an addendum to the contract x x x which included a lease of
an additional 1000 square meters of the hotel grounds as living quarters and playground of the
casino personnel. PAGCOR advertised the start of their casino operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No.
2295 x x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or not to allow
the establishment of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated
October 19, 1992 (or a month before the contract of lease was executed) was subsequently passed
reiterating with vigor and vehemence the policy of the City under Resolution No. 2295, series of
1990, banning casinos in Cagayan de Oro City. On December 7, 1992, the Sangguniang Panlungsod
of Cagayan de Oro City enacted Ordinance No. 3353 x x x prohibiting the issuance of business
permits and canceling existing business permits to any establishment for using, or allowing to be
used, its premises or any portion thereof for the operation of a casino.
In the afternoon of December 18, 1992 and just hours before the actual formal opening of casino
operations, a public rally in front of the hotel was staged by some local officials, residents and
religious leaders. Barricades were placed [which] prevented some casino personnel and hotel guests
from entering and exiting from the Hotel. PAGCOR was constrained to suspend casino operations
because of the rally. An agreement between PPC and PAGCOR, on one hand, and representatives
of the rallyists, on the other, eventually ended the rally on the 20 th of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod of
Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty for violation
thereof. On January 7, 1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x
against then public respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before
the Court of Appeals, docketed as CA G.R. SP No. 29851 praying inter alia, for the declaration of
unconstitutionality of Ordinance No. 3353. PAGCOR intervened in said petition and further
assailed Ordinance No. 4475-93 as being violative of the non-impairment of contracts and equal
protection clauses. On March 31, 1993, the Court of Appeals promulgated its decision x x x, the
dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are
hereby DECLARED UNCONSTITUTIONAL and VOID and the respondents and all other persons
acting under their authority and in their behalf are PERMANENTLY ENJOINED from enforcing
those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the case to
the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20, 1994 x x x, the
Supreme Court denied the petition and affirmed the decision of the Court of Appeals.

In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which, however,
another public rally was held. Casino operations continued for some time, but were later on
indefinitely suspended due to the incessant demonstrations. Per verbal advice x x x from the Office
of the President of the Philippines, PAGCOR decided to stop its casino operations in Cagayan de
Oro City. PAGCOR stopped its casino operations in the hotel prior to September, 1993. In two
Statements of Account dated September 1, 1993 x x x, PPC apprised PAGCOR of its outstanding
account for the quarter September 1 to November 30, 1993. PPC sent PAGCOR another Letter
dated September 3, 1993 x x x as a follow-up to the parties earlier conference. PPC sent PAGCOR
another Letter dated September 15, 1993 x x x stating its Board of Directors decision to collect the
full rentals in case of pre-termination of the lease.
PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable to
the payment of the full rentals citing as reasons unforeseen legal and other circumstances which
prevented it from complying with its obligations. PAGCOR further stated that it had no other
alternative but to pre-terminate the lease agreement due to the relentless and vehement opposition
to their casino operations. In a letter dated October 12, 1993 x x x, PAGCOR asked PPC to refund
the total of P1,437,582.25 representing the reimbursable rental deposits and expenses for the
permanent improvement of the Hotels parking lot. In a letter dated November 5, 1993 x x x,
PAGCOR formally demanded from PPC the payment of its claim for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of
Manila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case for
sum of money in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the contract
of lease due to PAGCORs continuing breach of the contract and further stated that it was
exercising its rights under the contract of lease pursuant to Article 20 (a) and (c) thereof.
On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266, which
the trial court admitted in an Order dated February 11, 1994. In an Order dated April 27, 1994,
Civil Case No. 93-68377 was ordered consolidated with Civil Case No. 93-68266. These cases were
jointly tried by the court a quo. On August 17, 1995, the court a quo promulgated its decision.
Both parties appealed.[5]
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award
actual and moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the
courts ruling that the 2 percent penalty was to be imposed from the date of the promulgation of the
Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the
Contract of Lease had already been terminated as early as September 21, 1993, or at the latest, on
October 14, 1993, when PPC received PAGCORs letter dated October 12, 1993. The gaming
corporation added that the trial court erred in 1) failing to consider that PPC was entitled to avail
itself of the provisions of Article XX only when PPC was the party terminating the Contract; 2) not
finding that there were valid, justifiable and good reasons for terminating the Contract; and 3)

dismissing the Complaint of PAGCOR in Civil Case No. 93-68337 for lack of merit, and not finding
PPC liable for the reimbursement of PAGCORS cash deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract
of Lease was unjustified. The appellate court explained that public demonstrations and rallies
could not be considered as fortuitous events that would exempt the gaming corporation from
complying with the latters contractual obligations. Therefore, the Contract continued to be
effective until PPC elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had
the right to ask for (1) rescission of the Contract and indemnification for damages; or (2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the Contract remained
effective, and PPC could collect the accrued rentals. However, from the time it terminated the
Contract on November 25, 1993, PPC could no longer demand payment of the remaining rentals as
part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR
had acted in gross or evident bad faith in failing to pay the rentals from September to November
1993. Such failure was shown especially by the fact that PPC still had in hand three (3) months
advance rental deposits of PAGCOR. The former could have simply applied this deposit to the
unpaid rentals, as provided in the Contract. Neither did PPC adequately show that its reputation
had been besmirched or the hotels goodwill eroded by the establishment of the casino and the
public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR
had not presented official receipts to prove the latters alleged expenses. The appellate court,
however, upheld the trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.[6]
Issues
In their Memorandum, petitioner raised the following issues:
MAIN ISSUE:
Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that
Pryce was not entitled to future rentals or lease payments for the unexpired period of the Contract
of Lease between Pryce and PAGCOR?
Sub-Issues:

1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the right of
PRYCE to terminate the Contract for cause and to moreover collect rentals from PAGCOR
corresponding to the remaining term of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract,
PRYCE having rescinded the Contract of Lease?
3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited by
PAGCOR support its position that PRYCE was not entitled to future rentals?
4.

Would the collection by PRYCE of future rentals not give rise to unjust enrichment?

5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the Contract
of Lease?
6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts, particularly
in the PRYCE-PAGCOR Contract of Lease?[7]
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it
argues that termination, as defined under the Contract, is different from the remedy
of rescission prescribed under Article 1659 of the Civil Code. On the other hand, PAGCOR
contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly no
longer entitled to future rentals, because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith. [8] In deference to
the rights of the parties, the law [9] allows them to enter into stipulations, clauses, terms and
conditions they may deem convenient; that is, as long as these are not contrary to law, morals, good
customs, public order or public policy. Likewise, it is settled that if the terms of the contract clearly
express the intention of the contracting parties, the literal meaning of the stipulations would be
controlling.[10]
In this case, Article XX of the parties Contract of Lease provides in part as follows:
XX. BREACH OR DEFAULT

a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall be
deemed essential conditions of this contract, and in the event of default or breach of any of such
terms, conditions and/or covenants, or should the LESSEE become bankrupt, or insolvent, or
compounds with his creditors, the LESSOR shall have the right to terminate and cancel this
contract by giving them fifteen (15 days) prior notice delivered at the leased premises or posted on
the main door thereof. Upon such termination or cancellation, the LESSOR may forthwith lock the
premises and exclude the LESSEE therefrom, forcefully or otherwise, without incurring any civil or
criminal liability. During the fifteen (15) days notice, the LESSEE may prevent the termination of
lease by curing the events or causes of termination or cancellation of the lease.
b)

xxx

xxx

xxx

c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to the
remaining term of the lease as well as for any and all damages, actual or consequential resulting from
such default and termination of this contract.
d)

xxx

xxx

x x x. (Italics supplied)

The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such
right to terminate. Plainly, the parties have voluntarily bound themselves to require strict
compliance with the provisions of the Contract by stipulating that a default or breach, among
others, shall give the lessee the termination option, coupled with the lessors liability for rentals for
the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public
order or public policy. Neither is there anything objectionable about the inclusion in the Contract
of mandatory provisions concerning the rights and obligations of the parties. [11] Being the primary
law between the parties, it governs the adjudication of their rights and obligations. A court has no
alternative but to enforce the contractual stipulations in the manner they have been agreed upon
and written.[12] It is well to recall that courts, be they trial or appellate, have no power to make or
modify contracts.[13] Neither can they save parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for termination plus the full
payment of future rentals under the provisions of the Contract, rather than justrescission under
Article 1659 of the Civil Code. This Court is not unmindful of the fact
that termination and rescission are terms that have been used loosely and interchangeably in the
past. But distinctions ought to be made, especially in this controversy, in which the terms mean
differently and lead to equally different consequences.
The term rescission is found in 1) Article 1191 [14] of the Civil Code, the general provision on
rescission of reciprocal obligations; 2) Article 1659, [15] which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor and the lessee in contracts of lease are
concerned; and 3) Article 1380[16] with regard to the rescission of contracts.

In his Concurring Opinion in Universal Food Corporation v. CA,[17] Justice J. B. L. Reyes

differentiated rescission under Article 1191 from that under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations to the defendant. This rescission is a principal
action retaliatory in character, it being unjust that a party be held bound to fulfill his promises
when the other violates his. As expressed in the old Latin aphorism: Non servanti fidem, non est
fides servanda. Hence, the reparation of damages for the breach is purely secondary.
On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure
of the right to rescind. x x x.[18]
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil
Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also
Article 1659).[19]
Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA[20] held that, where the action prayed for the payment of
rental arrearages, the aggrieved party actually sought the partial enforcement of a lease contract.
Thus, the remedy was not rescission, but termination or cancellation, of the contract. The Court
explained:
x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the
contract because they sought its partial enforcement in praying for rental arrearages. There is a
distinction in law between cancellation of a contract and its rescission. To rescind is to declare a
contract void in its inception and to put an end to it as though it never were. It is not merely to
terminate it and release parties from further obligations to each other but to abrogate it from the
beginning and restore the parties to relative positions which they would have occupied had no contract
ever been made.
x x x. The termination or cancellation of a contract would necessarily entail enforcement of its terms
prior to the declaration of its cancellation in the same way that before a lessee is ejected under a lease
contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However,
termination of a contract need not undergo judicial intervention. x x x. [21](Italics supplied)
Rescission has likewise been defined as the unmaking of a contract, or its undoing from the
beginning, and not merely its termination. Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of
the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the
courts.[22] On the other hand, termination refers to an end in time or existence; a close, cessation or
conclusion. With respect to a lease or contract, it means an ending, usually before the end of the

anticipated term of such lease or contract, that may be effected by mutual agreement or by one
party exercising one of its remedies as a consequence of the default of the other.[23]
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties
to their original situation prior to the inception of the contract. [24] Applying this principle to this
case, it means that PPC would re-acquire possession of the leased premises, and PAGCOR would
get back the rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is
the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply
with their contractual obligations. Only after the contract has been cancelled will they be released
from their obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
Contract from the beginning. This fact was evident when it first sought to collect the accrued
rentals from September to November 1993 because, as previously stated, it actually demanded the
enforcement of the Lease Contract prior to termination. Any intent to rescind was not shown, even
when it abrogated the Contract on November 25, 1993, because such abrogation was not
the rescission provided for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v. Jacinto[25] is inapplicable, because the remedy
resorted to by the lessors in that case was rescission, not termination. The rights and obligations of
the parties in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the
damages to which the lessor was entitled could not have extended to the lessees liability for future
rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of
anothers property after the termination of a contract. We stress that by abrogating the Contract in
the present case, PPC released PAGCOR from the latters future obligations, which included the
payment of rentals. To grant that right to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest
from a reading of the mandatory provision under subparagraph (a) in conjunction with
subparagraph (c) of the Contract. A penal clause is an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the performance thereof by imposing on
the debtor a special prestation (generally consisting in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or inadequately fulfilled. [26]
Quite common in lease contracts, this clause functions to strengthen the coercive force of the
obligation and to provide, in effect, for what could be the liquidated damages resulting from a
breach.[27] There is nothing immoral or illegal in such indemnity/penalty clause, absent any showing
that it was forced upon or fraudulently foisted on the obligor.[28]
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the
indemnity for damages and the payment of interests in case of noncompliance; that is, if there is no

stipulation to the contrary,[29] in which case proof of actual damages is not necessary for the penalty
to be demanded.[30] There are exceptions to the aforementioned rule, however, as enumerated in
paragraph 1 of Article 1226 of the Civil Code: 1) when there is a stipulation to the contrary, 2) when
the obligor is sued for refusal to pay the agreed penalty, and 3) when the obligor is guilty of fraud.
In these cases, the purpose of the penalty is obviously to punish the obligor for the breach. Hence,
the obligee can recover from the former not only the penalty, but also other damages resulting from
the nonfulfillment of the principal obligation. [31]
In the present case, the first exception applies because Article XX (c) provides that, aside from the
payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be
liable for any and all damages, actual or consequential, resulting from such default and
termination of this contract. Having entered into the Contract voluntarily and with full
knowledge of its provisions, PAGCOR must be held bound to its obligations. It cannot evade
further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts. [32] This
power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.
Art. 2227.
Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of
the courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to
-- the type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach
and its consequences; the supervening realities; the standing and relationship of the parties; and the
like.[33]
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were
in fact real and pressing. From the CAs factual findings, which are not contested by either party,
we find that PAGCOR conducted a series of negotiations and consultations before entering into the
Contract. It did so not only with the PPC, but also with local government officials, who assured it
that the problems were surmountable. Likewise, PAGCOR took pains to contest the
ordinances[34] before the courts, which consequently declared them unconstitutional. On top of
these developments, the gaming corporation was advised by the Office of the President to stop the
games in Cagayan de Oro City, prompting the former to cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be suspended
for days on end since their start in December 1992; and indefinitely from July 15, 1993, upon the
advice of the Office of President, until the formal cessation of operations in September 1993.
Needless to say, these interruptions and stoppages meant that PAGCOR suffered a tremendous loss

of expected revenues, not to mention the fact that it had fully operated under the Contract only for
a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals
to the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably
reduced. Under the circumstances, the advanced rental deposits in the sum of P687,289.50 should
be sufficient penalty for respondents breach.
WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to pay
petitioner the additional amount of P687,289.50 as penalty, which may be set off or applied against
the formers advanced rental deposits. Meanwhile, the CAs award to petitioner of actual damages
representing the accrued rentals for September to November 1993 -- with interest and penalty at
the rate of two percent (2%) per month, from the date of filing of the Complaint until the amount
shall have been fully paid -- as well as the P50,000 award for attorneys fees, is AFFIRMED. No
costs.
SO ORDERED.

ASIATRUST
DEVELOPMENT
CORPORATION, respondent.

BANK, petitioner,

vs.

CONCEPTS

TRADING

DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals and its Resolution
in CA-G.R. CV No. 44211 affirming on appeal with modification the Decision [2] of the Regional
Trial Court of Makati, Branch 68, in Civil Case No. 89-3789.
As culled from the records, the facts of the case are as follows:
In March 1996, respondent Concepts Trading Corporation obtained from petitioner Asiatrust
Development Corporation a credit accommodation in the amount of P2,000,000 covered by a loan
agreement[3] and secured by real and chattel mortgages. [4] The amount was drawn from an
Industrial Guarantee Loan Fund (IGLF) account opened by the petitioner in favor of the
respondent. On March 4, 1986, the respondent executed Promissory Note (PN) No. 3574 [5] in favor
of the petitioner. Under the promissory note, the principal amount of P2,000,000 would be charged
an interest of 23% per annum, inclusive of 1% service fee. Attached to and made part of the
promissory note was the schedule of amortization agreed upon by the parties. [6] As set forth in the
schedule, the payment of the loan was to be amortized quarterly over a period of ten years with a
two-year grace period on the principal payment. The first payment fell due on May 15, 1986 and
the subsequent installments were to be paid every three months thereafter.
In the event that the respondent defaulted in the payment of any installment or interest thereof,
paragraph 4 of the promissory note provided that:
... the entire amount outstanding under this Note shall immediately, without need for any notice,
demand, presentment, protest, or of any other act or deed, the right to all of which is hereby waived
by the undersigned: (i) become due, payable and defaulted; (ii) be subject to a penalty equivalent to
thirty-six percent (36%) per annum thereof; (iii) together with said penalty, commence to earn
interest as [sic] the rate of twenty-three percent (23%) per annum counted from the date of default
until full payment thereof.
The respondent failed to pay the amortizations due on August 15 and November 15, 1987,
prompting the petitioner to enforce the aforementioned acceleration clause. On January 25, 1988,
the petitioner sent a letter [7] to the respondent demanding payment of its outstanding loan
obligation, amounting to P3,203,049 under PN No. 3574 and PN No. 4132.[8]
In its Letter to the petitioner dated February 3, 1988, the respondent expressed its willingness to
settle its obligation and, due to its tight financial situation, negotiated for a modified payment
scheme.[9] Thereafter, on March 30, 1988, the parties entered into a Memorandum of Agreement
(MOA), the pertinent provisions of which read:
WHEREAS, CONCEPTS hereby acknowledges and affirms that it has applied and was granted by
the Bank a credit accommodation consisting of an Industrial Guarantee Loan Fund (IGLF)

Account in the amount of P2.0 Million dated 4 March 1986 (hereinafter, the LOAN
OBLIGATION) which, to date, is already overdue and demandable in its entirety including all
interests, penalties, service and other miscellaneous charges.
...
1.
CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in
the following manner, to wit:
a)
On 5 May 1988, the amount of P159,259.14, to be covered by a post-dated check for the
same amount to be issued by CONCEPTS; and
b)
On 5 June 1988 and every 5th of every succeeding month, P150,000.00 until the LOAN
OBLIGATION shall have been fully paid. CONCEPTS hereby undertakes to cover the abovementioned payments by post-dated checks, by first delivering to the BANK five (5) checks covering
the first five (5) month period, without prejudice to the BANKs right to demand the delivery of
another set of five (5) checks covering the subsequent five (5) month period, 15 days prior to the
due date of the last check in the BANKs possession, and so on and so forth, until the LOAN
OBLIGATION shall have been fully paid.
It is likewise understood that upon payment of ten (10) monthly amortizations as above-indicated
or upon updating of payments of the LOAN OBLIGATION, CONCEPTS shall have the right to renegotiate with the Bank the reinstatement of the original terms of payment under Promissory Note
No. 3574.

3.
The BANK and CONCEPTS hereby further agree that all other provisions and stipulations in
the existing Promissory Notes and other documents evidencing the LOAN OBLIGATION shall
remain in force and effect, except those which are inconsistent with the above-mentioned Mode of
Payment.
4.
CONCEPTS hereby waives notice of dishonor and/or default of its LOAN OBLIGATION:
provided, however, that the BANK reserves the right to grant a grace period of (15) days for
settlement of the obligation; provided, further, that such grant of a grace period shall not constitute
waiver of any right of the BANK. It shall also be understood that CONCEPTS default in this
mode of payment shall likewise automatically accelerate the entire LOAN OBLIGATION.
5.
It shall likewise be understood that this mode of payment arises out of the BANKs liberality
and is without prejudice and without waiver of the BANKs accrued rights under the existing
chattel and real estate mortgages as well as the Continuing Suretyship Agreement pertinent to the
LOAN OBLIGATION, all of which mortgages and Agreement are hereby expressly continued to be
in force and effect.[10]
In compliance with its undertaking under the MOA, the respondent delivered the first check dated
May 5, 1988 in the amount of P159,259.14 and four other checks in the sum of P150,000 each or for
the total amount of P759,259.14. This was followed by another batch of five checks covering the

months of October 1988 to February 1989, also in the amount of P150,000 each or for a total
amount of P750,000.
On March 30, 1989, the petitioner wrote to the respondent requesting for the delivery of the last
checks to completely rehabilitate its account in accordance with the MOA. When the respondent
failed to make the said payments, the petitioner on April 25, 1989 sent a final demand on the
respondent to pay its entire obligation under the IGLF in the amount of P2,361,970.10 within five
days from receipt thereof.[11]
The respondent thereafter filed with the Regional Trial Court of Makati City, Branch 149, a
petition for declaratory relief. The respondent alleged that it is up to date in the payment of its loan
obligation and, according to its record, the remaining balance amounted to only P316,550.48. The
respondent prayed for the trial court to determine the rights and duties of the parties under the
MOA to avoid the miscomputation of the loan obligation and any breach thereof.
In its answer, the petitioner averred that as of February 15, 1988, the outstanding obligation of the
respondent amounted to P2,833,867.04. According to the petitioner, the monthly amortizations
paid by the respondent covered only the penalties accruing on the loan. Further, declaratory relief
as a remedy sought by the respondent was allegedly improper as it already committed a breach of
its obligations. The respondent filed the action a quo merely to defer or avoid payment of its legally
contracted loan obligation with the petitioner. By way of compulsory counterclaim, the petitioner
prayed for damages and attorneys fees.
The respondent then filed an amended complaint alleging that as of August 1989, it had already
paid the petitioner the total amount of P2,259,259 and that there was an overpayment
of P100,000. The respondent prayed that the petitioner be ordered to refund the amount overpaid,
as well as to release the mortgages and to pay damages and attorneys fees.
After due trial, the trial court rendered judgment, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered:
a) ordering the subject complaint DISMISSED for lack of merit:
b) ordering the plaintiff to pay to the defendant the amount of P395,210.30 to earn interest at 22%
per annum from the date of this decision;
c) declaring the Real Estate Mortgage and the Chattel Mortgage as valid and subsisting which may
be foreclosed by the defendant in case of non-payment of the aforestated obligation after demand;
d) ordering the plaintiff to pay to the defendant the amount of P10,000.00 as attorneys fees and
litigation expenses.
So ordered.[12]
On appeal by the petitioner, the Court of Appeals (CA) affirmed with modification the decision of
the trial court. The CA found that the respondents outstanding obligation to the petitioner

amounted only to P309,298.58. The CA likewise reduced the penalty accruing thereon from 36% to
3% per annum. The dispositive portion of the assailed decision reads:
WHEREFORE, IN VIEW OF THE FOREGOING, the Decision of the lower court dated December
14, 1992 is AFFIRMED with the modification that the outstanding balance of plaintiff-appellee as
of September 5, 1989 is P309,298.58 subject to a penalty of 3% per annum, and together with said
penalty, the whole amount is subject to an interest of 23% per annum inclusive of service charges,
until the entire amount has been fully paid. No pronouncement as to costs.
SO ORDERED.[13]
Aggrieved, the petitioner now comes to this Court alleging that:
A.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A MANNER NOT IN
ACCORD WITH LAW AND SUPREME COURT DECISIONS IN RULING THAT ASIATRUST
WAIVED COLLECTION OF ACCRUED PENALTIES AND CHARGES DUE FROM
CONCEPTS UNDER PN 3574 BY EXECUTING THE MOA, BECAUSE THE MOA DID NOT
EXPRESSLY PROVIDE FOR SUCH WAIVER, AND STIPULATED THAT, UNLESS
INCONSISTENT WITH THE MOA MODE OF PAYMENT, ALL OTHER EXISTING
PROVISIONS AND STIPULATIONS IN THE EXISTING PROMISSORY NOTES X X X SHALL
REMAIN IN FORCE AND EFFECT.
B.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A MANNER NOT IN
ACCORD WITH 20 OF RULE 132 OF THE RULES OF COURT IN FINDING WITNESS
REBECCA DE LA CRUZ UNREBUTTED IDENTIFICATION OF ASIATRUSTS EXHIBIT 7
AS A STATEMENT OF ACCOUNT, AND HER UNREBUTTED IDENTIFICATION OF THE
SIGNATURE OF THE EXHIBIT, AS INSUFFICIENT AUTHENTICATION OF THAT EXHIBIT,
AND IN RELYING ON TESTIMONY READ FROM A LEDGER NEITHER IDENTIFIED NOR
OFFERED IN EVIDENCE.[14]
The petition is bereft of merit.
The petitioner maintains that the CA erred in holding that the petitioner waived collection of
accrued penalties and miscellaneous charges under PN 3574 by entering into the MOA. No such
waiver was expressed in the MOA and, in fact, paragraph 3 thereof expressly provides that all
other provisions and stipulations in the existing promissory notes and other documents evidencing
the LOAN OBLIGATION shall remain in force and effect, except those which are inconsistent with
the above-mentioned mode of payment. Further, the petitioners consistent application of the
payments respondent made to the penalties, charges and interests is a plain manifestation of its
contractual intent, and is properly cognizable as evidence of that intent under Article 1371 of the
Civil Code which provides:

Art. 1371.
In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
The petitioner likewise avers that the CA erred in not according probative value to the statement of
account which the petitioner offered in evidence. The petitioner contends that, contrary to the
holding of the CA, the statement of account was properly identified by its witness, Rebecca de la
Cruz.
The Court does not agree with the petitioner.
It is a time-honored rule of evidence that when the terms of an agreement are reduced to writing, it
is deemed to contain all the terms agreed upon and no evidence of such terms can be admitted other
than the contents of the agreement itself.[15] This rule allows exceptions, in that a party may present
parole evidence to modify, explain or add to the terms of the written agreement if he puts in issue in
his pleadings:
a)

An intrinsic ambiguity, mistake or imperfection in the written agreement;

b)
The failure of the written agreement to express the true intent and agreement of the parties
thereto;
c)

The validity of the written agreement; or

d)
The existence of other terms agreed to by the parties or their successors-in-interest after the
execution of the written agreement.[16]
A careful perusal of the MOA reveals that it fixed the respondents loan obligation to the petitioner
at P2,000,000 which was already due and demandable in its entirety, including all interests,
penalties, service and other miscellaneous charges. Further, Paragraph 1 thereof set forth the
manner by which the loan obligation was to be paid, to wit:
1. CONCEPTS hereby promises and undertakes to pay the BANK the LOAN OBLIGATION in
the following manner, to wit:
a)
On 5 May 1988, the amount of P159,259.14, to be covered by a post-dated check for the
same amount to be issued by CONCEPTS; and
b)
On 5 June 1988 and every 5th of every succeeding month, P150,000.00 until the LOAN
OBLIGATION shall have been fully paid. CONCEPTS hereby undertakes to cover the abovementioned payments by post-dated checks, by first delivering to the BANK five (5) checks covering
the first five (5) month period, without prejudice to the BANKs right to demand the delivery of
another set of five (5) checks covering the subsequent five (5) month period, 15 days prior to the
due date of the last check in the BANKs possession, and so on and so forth, until the LOAN
OBLIGATION shall have been fully paid.
It is likewise understood that upon payment of ten (10) monthly amortizations as above-indicated
or upon updating of payments of the LOAN OBLIGATION, CONCEPTS shall have the right to re-

negotiate with the Bank the reinstatement of the original terms of payment under Promissory Note
No. 3574.[17]
However, the MOA failed to state the exact amounts of interests, service charges and penalties
accruing on the loan obligation. To determine the same, the CA relied on the testimony of the
petitioners comptroller, Rebecca de la Cruz, who testified thereon as follows:
Atty. Ortiz:
Q: Now, as of the date January 25, 1988 what was the total obligation of the plaintiff to the
defendant?
COURT: (to the witness)
According to your ledger it could be any date closer to January 25, 1988?
WITNESS:
A: The date which is closer to January 25, 1988 is April 28, 1988. It says here if you still have a 2
MILLION PESO principal balance. We have here an interest of P24,000.00 and still we have
service charges.
COURT:
Service charges of how much?
WITNESS:
A:

P123,000.00 and still we have unpaid penalties of P76,000.00, Your Honor.[18]

Based on the foregoing, the CA correctly fixed the respondents outstanding balance to the
petitioner as of the execution of the MOA at P2,223,000 consisting of the principal obligation
of P2,000,000, penalties of P76,000, service charges of P123,000 and interests of P24,000:
After a thorough review of the MOA, We are convinced that plaintiff-appellees obligation consists
of its original P2 million loan under PN No. 3574 including interests and service fees but excluding
penalty and other miscellaneous charges.
Thus, the MOA itself provides:
1.
CONCEPTS
hereby
promises
and
undertakes
the LOAN OBLIGATION in the following manner, to wit:

to

pay

the

BANK

(p. 2, MOA; Exhs. B and 10, pp. 5 and 45, Folder of Exhibits)
In the MOAs first whereas clause, the term loan obligation was referred to as the amount of P2
Million, which to date, is already overdue and demandable in its entirety including all interests,
penalties, service and other miscellaneous charges. (p. 1, MOA; pp. 4 and 44, ibid.). The MOA,
therefore, acknowledged that plaintiff-appellee, having failed to pay several amortizations under

the PN, was liable for the entire amount of P2 million plus interest in arrears, penalties and other
charges in accordance with the acceleration clause of the PN.
However, due to the banks liberality, it waived the demandability of the entire loan by entering into
the MOA, allowing plaintiff-appellee to continue paying its amortization, this time on a monthly
basis. By such waiver, plaintiff-appellee has effectively not been rendered in default thereby
waiving likewise the penalty imposable on the loan in the event of default.
Accordingly, under the MOA, plaintiff-appellee continues to be liable for its obligation under the
note, i.e., principal amount of P2 million plus interests and service fees, as if it was not yet in
default. The first installment under the MOA in the amount of P159,259.14 including several of the
monthly installments of P150,000 were applicable to interest and service fees in arrears while the
remaining monthly amortizations covered the principal and interest falling due thereon. [19]
The petitioner nonetheless assails the above figures, insisting that the CA erred in holding that:
However, due to the banks liberality, it waived the demandability of the entire loan by entering into
the MOA, allowing plaintiff-appellee to continue paying its amortization, this time on a monthly
basis. By such waiver, plaintiff-appellee has effectively not been rendered in default thereby
waiving likewise the penalty imposable on the loan in event of default. [20]
The petitioner asserts that the respondent continued to be liable for penalty charges as provided
under the promissory note notwithstanding the execution of the MOA. This contention is
untenable. Under the schedule of amortization contained in the promissory note, the respondent
obliged to pay the principal obligation in quarterly amortizations over a period of ten years and
that in case of default, the entire amount shall be due and demandable in its entirety. On the other
hand, under the MOA, a new mode of payment was agreed upon, i.e., the payment by the
respondent of the initial amount of P159,259.14 and subsequent payments of P150,000 every month
until full payment of the loan obligation. The MOA, in effect, rendered the loan no longer due and
demandable in its entirety at the time of its execution, precisely because it allowed the respondent
under the new schedule of payments to pay the same by monthly installments. It bears stressing
that the MOA provided that the mode of payment arose out of the BANKs liberality. To allow
the petitioner to collect penalty charges as if the respondent were in default, notwithstanding the
existence of a new payment schedule, would be inconsistent with the aforesaid agreement.
It must be stressed, however, that the foregoing should not be construed as to mean that the
respondent could no longer be held in default and that the petitioner completely waived collection
of penalty charges in case of default. Non-payment by the respondent of any of the monthly
installments as provided under the MOA would render it in default and the petitioner could collect
the penalty charges therefor. As will be shown later, the CA did in fact determine the exact time
when the respondent defaulted on its obligation under the MOA and accordingly reckoned
therefrom the penalty charges due the petitioner.
The records show that the respondent, in accordance with the MOA, made the initial payment
of P159,259.16 on May 5, 1988. Thereafter, the respondent made payments in the amount

of P150,000 every month up to September 1989. The CA then tabulated these payments [21] as
follows:
Principal

Interest

Service Charge Penalty

4/28/88 P2,000,000.00 P24,000.00

P2,063,740.86

P123,000.00

Subtotal

P76,000.00

Payment

Total

P2,063,740.86 P159,259.14

1.
2,063,740.90
,953,295.90

37,835.25

1,719.78

2,103,295.90

150,000.00

2.
1,953,295.90
,840,734.00

35,810.42

1,627.75

1,990,734.00

150,000.00

3.
1,840,734.00
,726,014.70

33,746.79

1,533.94

1,876,014.70

150,000.00

4.
1,726,014.70
,609,096.60

31,643.60

1,438.34

1,759,096.60

150,000.00

5.
1,609,096.60
,489,937.60

29,500.10

1,340.91

1,639,937.60

150,000.00

6.
1,489,937.60
,368,494.70

27,315.52

1,241.61

1,518,494.70

150,000.00

7.
1,368,494.70
,244,724.10

25,089.07

1,140.41

1,394,724.10

150,000.00

8.
1,244,724.10
,118,581.30

22,819.94

1,037.27

1,268,581.30

150,000.00

9.
1,118,581.30
990,020.70

20,507.32

932.15

1,140,020.70

150,000.00

10.
990,020.70
858,996.00

18,150.38

825.02

1,008,996.00

150,000.00

11.
858,996.00
725,460.11

15,748.28

715.83

875,460.11

150,000.00

12.
725,460.11
589,364.76

13,300.10

604.55

739,364.76

150,000.00

13.
589,364.76
450,660.91

10,805.02

491.14

600,660.91

150,000.00

14.
450,660.91
309,298.58

8,262.12

375.55

459,298.58

150,000.00

As noted by the CA, after the last payment of P150,000 on September 1989, the respondent still
owed the petitioner the sum of P309,298.58. The respondents non-payment of the amortizations
due after the said date rendered the balance due and demandable in its entirety, in accordance with
the acceleration clause under the MOA. Further, since the respondent defaulted in its monthly
payments after September 1989, it was only then that it could be rightfully imposed the penalty
charges in accordance with the promissory note. Thus, contrary to the petitioners contention, the
CA did not rule that the MOA operated as a waiver by the petitioner of its right to collect penalty
charges.
The petitioner faults the CA for reducing the penalty charges from 36% to 3% per annum on its
finding that the former rate was too excessive, considering that the petitioner had already charged
an interest rate of 23% per annum and that the principal obligation had been partly complied with.
This Court does not agree with the petitioner. Article 1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.
Indeed, this Court had equitably reduced the penalty in not a few cases. In the recent case
of Ligutan v. Court of Appeals,[22] the Court affirmed the reduction of the penalty charges by the CA
upon its finding that the debtors therein had partially complied with their obligation. In Rizal
Commercial Banking Corp. v. Court of Appeals,[23] the Court tempered the penalty charges after
taking into account the debtors pitiful situation and its offer to settle the entire obligation with the
creditor bank. In Insular Bank of Asia and America v. Spouses Salazar,[24] the Court reduced the
penalty charge on a loan of P42,050, considering that the debtor spouses paid a total of P68,676.75
which the creditor bank applied to satisfy the penalty and interest charges.
Given the peculiar circumstances in this case, particularly that the principal obligation had been
partially complied with by the respondent, the Court sees no justifiable reason to modify the
reduction by the CA of the penalty charges made by the CA.
Anent the second issue, the petitioner insists that the CA should have relied on the petitioners
statement of account[25] to determine the amount owed by the respondent. According to the said
statement, the respondent still owed the petitioner P5,665,906 as of June 29, 1990, since previous
payments made were applied only to the penalties and service charges. The Court does not
agree. The MOA clearly provides that the loan obligation of P2,000,000 shall be paid by the
respondent by issuing the post-dated checks in the amount of P150,000 every month beginning June
5, 1998 until the same shall have been fully paid. Thus, the monthly payments made by the
respondent were for the satisfaction of the principal loan obligation, not merely as payments of the
penalties and service charges.
Further, as correctly pointed out by the CA, the petitioners statement of account could not be given
any probative value because it was belied for the most part by its key witness, comptroller Rebecca
de la Cruz. Even the trial court gave scant consideration to this statement of account, upon its
finding that certain entries therein were inconsistent with the terms of the promissory note. The

Court thus finds no cogent reason to deviate from the trial courts and the CAs assessment of the
probative value of the same. After all, it is not this Courts function under Rule 45 of the Rules of
Court, as amended, to review, examine, and evaluate or weigh the probative value of the evidence
presented.[26]
WHEREFORE, the petition is hereby DENIED for lack of merit. The assailed Decision dated July
18, 1997 and Resolution dated September 12, 1997 of the Court of Appeals in CA-G.R. CV No.
44211 are AFFIRMED in toto.
SO ORDERED.

G.R. No. L-45349 August 15, 1988

NEWTON
JISON
and
SALVACION
I.
JOSUE petitioners,
vs.
COURT OF APPEALS and ROBERT 0. PHILLIPS & SONS, INC., respondents.
Ledesma, Saludo & Associates for petitioners.
Domicador L. Reyes and Magtanggol C. Gunigundo for respondents.

CORTES, J.:
The instant petition for review of the decision of the Court of Appeals poses the issue of the validity
of the rescission of a contract to sell a subdivision lot due to the failure of the lot buyer to pay
monthly installments on their due dates and the forfeiture of the amounts already paid.
The case is not one of first impression, and neither is it exceptional. On the contrary, it
unambiguous. the common plight of countless subdivision lot buyers.
Petitioners, the spouses Newton and Salvacion Jison, entered into a Contract to Sell with private
respondent, Robert O. Phillips & Sons, Inc., whereby the latter agreed to sell to the former a lot at
the Victoria Valley Subdivision in Antipolo, Rizal for the agreed price of P55,000.00, with interest at
8,1965 per annum, payable on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of P11,000.00 on
October 20, 1961 and from October 27, 1961; to May 8, 1965 a monthly installment of P533.85.
Thereafter, due to the failure of petitioners to build a house as provided in the contract, the
stipulated penalty of P5.00 per square meter was imposed to the effect that the monthly
amortization was increased to P707.24.
On January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly
installments due on said dates although petitioners subsequently paid the amounts due and these
were accepted by private respondent.
Again on October 1, 1966, November 1, 1966, December 1, 1966 and January 1, 1967, petitioners
failed to pay. On January 11, 1967, private respondent sent a letter (Exh. "3") to petitioners calling
their attention to the fact that their account was four months overdue. This letter was followed up
by another letter dated February 27, 1967 (Exh. "3") where private respondent reminded petitioner
of the automatic rescission clause of the contract. Petitioners eventually paid on March 1, 1967.
Petitioners again failed to pay the monthly installments due on February 1, 1967, March 1, 1967
and April 1, 1967. Thus, in a letter dated April 6, 1967 (Exh. "D"), private respondent returned
petitioners' check and informed them that the contract was cancelled when on April 1, 1987
petitioners failed to pay the monthly installment due, thereby making their account delinquent for
three months.

On April 19, 1967, petitioners tendered payment for all the installments already due but the tender
was refused. Thus, petitioners countered by filing a complaint for specific performance with the
Court of First Instance of Rizal on May 4, 1967 and consigning the monthly installments due with
the court.
Following the hearing of the case, wherein the parties entered into a stipulation of facts, the trial
court on January 9, 1969 rendered judgment in favor of private respondent, dismissing the
complaint and declaring the contract cancelled and all payments already made by petitioner
franchise. ordering petitioners to pay P1,000.00 as and for attorney's fees; and declaring the
consignation and tender of payment made by petitioners as not amounting to payment of the
corresponding monthly installments.
Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals.
Agreeing with the findings and conclusions of the trial court, the Court of Appeals on November 4,
1976 affirmed the former's decision.
Thus, the instant petition for review.
In assailing the decision of the Court of Appeals, petitioners attributed the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS
HAVE SUBSTANTIALLY, COMPLIED WITH THE TERMS OF THEIR AGREEMENT WITH
PRIVATE RESPONDENTS.
II
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT TO
SELL MAY BE AUTOMATICALLY RESCINDED AND PRIVATE RESPONDENT MAY
UNILATERALLY RESCINDED SAID CONTRACT AND REJECT THE CONSIGNATION OF
PAYMENTS MADE BY PETITIONERS, WHICH ACTIONS OF PRIVATE RESPONDENT ARE
HIGHLY INIQUITOUS AND UNCONSCIONABLE.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PRIVATE
RESPONDENT'S ACT OF FORFEITING ALL PREVIOUS PAYMENTS MADE BY
PETITIONERS IS CONTRARY TO LAW, HIGHLY INIQUITOUS AND UNCONSCIONABLE.
[Petitioners' Brief, pp. 13-27.]
As stated at the outset, the principal issue in this case is the legality of the rescission of the contract
and the forfeiture of the payments already made by petitioners.
To support the rescission and forfeiture private respondent falls back on paragraph 3 of the
contract which reads:

This contract shall be considered automatically rescinded and cancelled and of no further force and
effect, upon the failure of the Vendee to pay when due Three (3) or more consecutive monthly
installments mentioned in Paragraph 2 of this Contract, or to comply with any of the terms and
conditions hereof, in which case the Vendor shall have the right to resell the said parcel of land to
any Vendee and any amount derived from the sale on account hereof shall be forfeited in favor of
the Vendor as liquidated damages for the breach of the Contract by the Vendee, the latter hereby
renouncing and reconveying absolutely and forever in favor of the Vendor all rights and claims to
and for all the amount paid by the Vendee on account of the Contract, as well as to and for all
compensation of any kind, hereby also agreeing in this connection, to forthwith vacate the said
property or properties peacefully without further advise of any kind.
Since the contract was executed and cancelled prior to the effectivity of Republic Act No. 65856,
(the Realty Installment Buyers', Protection Act) and Presidential Decree No. 957 (the Subdivision
and Condominium Buyers' Protective Decree), it becomes necessary to resort to jurisprudence and
the general provisions of law to resolve the controversy.
The decision in the recent case of Palay, Inc. v. Clave [G.R. No. L-56076, September 21, 1983, 124
SCRA 7,1969, factions the resolution of the controversy. In deciding whether the rescission of the
contract to sell a subdivision lot after the lot buyer has failed to pay several installments was valid,
the Court said:
Well settled is the rule, as held in previous k.- [Torralba v. De los Angeles, 96 SCRA 69, Luzon
Brokerage Co., Inc. v. Maritime Building Co., 43 SCRA 93 and 86 SCRA 305; Lopez v.
Commissioner of Customs, 37 SCRA 327; U.P. v. De los Angeles, 35 SCRA 102; Ponce Enrile v. CA,
29 SCRA 504; Froilan v. Pan Oriental Shipping Co., 12 SCRA 276; Taylor v. Uy Tieng Piao; 43 Phil.
896, that judicial action for the rescission of a contract is not necessary where the contract provides
that it may be cancelled for violation of any of its terms and conditions. However, even in the cited
cases, there was at least a written notice sent to the degeneration, informing him of the rescission.
As stressed in University of the Philippines v. Walfrido de los Angeles [35 SCRA 102] the act of a
party in treating a contract as cancelled should be made known to the other....
xxx xxx xxx
In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration it shall be subject to judicial
determination.
In this case, private respondent has denied that rescission is justified and has resorted to judicial
action. It is now for the Court to determine whether resolution of the contract by petitioner was
warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against
private respondent for lack of notice of resolution, as held in the U.P. v. Angeles case, supra.
xxx xxx xxx

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic
Act No. 65856, entitled "An Act to Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14-15). when it specifically provided:
Sec. 3 (b) ... the actual cataract, of the contract shall take place thirty days from receipt by the
buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the buyer.
There is no denying that in the instant case the resolution or rescission of the Contract to Sell was
valid. Neither can it be said that the cancellation of the contract was ineffective for failure of private
respondents to give petitioners notice thereof as petitioners were informed cancelled private
respondent that the contract was cancelled in the letter dated April 6, 1967 (Exh. "D"). As R.A. No.
65856, was not yet effective, the notice of cancellation need not be by notarial act, private
respondent's letter being sufficient compliance with the legal requirement.
The facts of 'fee instant case should be distinguished from those in the Palay Inc. case, as such
distinction will explain why the Court in said case invalidated the resolution of the contract. In said
case, the subdivision developer, without informing the buyer of the cancellation of the contract,
resold the lot to another person. The lot buyer in said case was only informed of the resolution of
the contract some six years later after the developer, rejected his request for authority to assign his
rights under the contract. Such a situation does not obtain illness: the instant case. In fact,
petitioners were informed of the cancellation of their contract in April 1967, when private
respondent wrote them the letter dated April 6, 1967 (Exh. "D"), and within a month they were able
to file a complaint against Private respondent.
While the resolution of the contract and the forfeiture of the amounts already paid are valid and
binding upon petitioners, the Court is convinced that the forfeiture of the amount of P5.00 although
it includes the accumulated fines for petitioners' failure to construct a house as required by the
contract, is clearly iniquitous considering that the contract price is only P6,173.15 The forfeiture of
fifty percent (50%) of the amount already paid, or P3,283.75 appears to be a fair settlement. In
arriving at this amount the Court gives weight to the fact that although petitioners have been
delinquent in paying their amortizations several times to the prejudice of private respondent, with
the cancellation of the contract the possession of the lot review.... to private respondent who is free
to resell it to another party. Also, had R.A. No. 65856, been applicable to the instant case, the same
percentage of the amount already paid would have been forfeited [Torralba 3(b).]
The Court's decision to reduce the amount forfeited finds support in the Civil Code. As stated in
paragraph 3 of the contract, in case the contract is cancelled, the amounts already paid shall be
forfeited in favor of the vendor as liquidated damages. The Code provides that liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable [Art. 2227.]
Further, in obligations with a penal clause, the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor [Art. 1229; Hodges
v. Javellana, G.R. No. L-17247, April 28, 1962, 4 SCRA 1228]. In this connection, the Court said:

It follows that, in any case wherein there has been a partial or irregular compliance with the
provisions in a contract for special indemnification in the event of failure to comply with its terms,
courts will rigidly apply the doctrine of strict construction and against the enforcement in its
entirety of the industry.' where it is clear from the terms of the contract that the amount or
character of the indemnity is fixed without regard to the probable damages which might be
anticipated as a result of a breach of the terms of the contract; or, in other words, where the
indemnity provided for is essentially a mere penalty having for its principal object the enforcement
of compliance with the corporations; (Laureano v. Kilayco, 32 Phil. 194 (1943).
This principle was reiterated in Makati Development Corp. v. Empire Insurance Co. [G.R. No. L21780, June 30, 1967, 20 SCRA 557] where the Court affirmed the judgment of the Court of First
Instance reducing the subdivision lot buyer's liability from the stipulated P12,000.00 to Plaintiffs
after finding that he had partially performed his obligation to complete at least fifty percent (50%)
of his house within two (2) years from March 31, 1961, fifty percent (50%) of the house having been
completed by the end of April 1961.
WHEREFORE, the Decision of the Court of Appeals is hereby MODIFIED as to the amount
forfeited which is reduced to fifty percent (50%) of the amount already paid or P23,656.32 and
AFFIRMED as to all other respects.
Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty (30)
days from the date of finality of this judgment.
SO ORDERED.

G.R. No. L-46658 May 13, 1991

PHILIPPINE
vs.

NATIONAL

BANK, petitioner,

HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of
Rizal, Branch XXI and TAYABAS CEMENT COMPANY, INC., respondents.
The Chief Legal Counsel for petitioner.
Ortille Law Office for private respondent.

FERNAN, C.J.:p
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set
aside the orders dated March 4, 1977 and May 31, 1977 rendered in Civil Case No. 24422 1 of the
Court of First Instance of Rizal, Branch XXI, respectively granting private respondent Tayabas
Cement Company, Inc.'s application for a writ of preliminary injunction to enjoin the foreclosure
sale of certain properties in Quezon City and Negros Occidental and denying petitioner's motion
for reconsideration thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan
of P580,000.00 from petitioner bank to purchase 60% of the subscribed capital stock, and thereby
acquire the controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). 2 As
security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land
covered by Transfer Certificate of Title No. 55323 of the Register of Deeds of Quezon City known as
the La Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of
an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha,
Ltd. of Tokyo, Japan, to cover the importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha,
Ltd. for the account of TCC, the Arroyo spouses executed the following documents to secure this
loan accommodation: Surety Agreement dated August 5, 1964 3 and Covenant dated August 6,
1964. 4
The imported cement plant machinery and equipment arrived from Japan and were released to
TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd. made the
corresponding drawings against the L/C as scheduled. TCC, however, failed to remit and/or pay the
corresponding amount covered by the drawings. Thus, on May 19, 1968, pursuant to the trust
receipt agreement, PNB notified TCC of its intention to repossess, as it later did, the imported
machinery and equipment for failure of TCC to settle its obligations under the L/C. 5
In the meantime, the personal accounts of the spouses Arroyo, which included another loan of
P160,000.00 secured by a real estate mortgage over parcels of agricultural land known as Hacienda
Bacon located in Isabela, Negros Occidental, had likewise become due. The spouses Arroyo having
failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages
executed by the spouses Arroyo in its favor.

On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial
foreclosure under Act 3138, as amended by Act 4118 and under Presidential Decree No. 385 of the
real estate mortgage over the properties known as the La Vista property covered by TCT No.
55323. 6 PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros Occidental
with respect to the mortgaged properties located at Isabela, Negros Occidental and covered by OCT
No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale,
PNB was the highest bidder with a bid price of P1,000,001.00. However, when said property was
about to be awarded to PNB, the representative of the mortgagor-spouses objected and demanded
from the PNB the difference between the bid price of P1,000,001.00 and the indebtedness of
P499,060.25 of the Arroyo spouses on their personal account. It was the contention of the spouses
Arroyo's representative that the foreclosure proceedings referred only to the personal account of
the mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the
Sheriff's Office to proceed with the sale of the subject real properties to satisfy not only the amount
of P499,060.25 owed by the spouses Arroyos on their personal account but also the amount of
P35,019,901.49 exclusive of interest, commission charges and other expenses owed by said spouses
as sureties of TCC. 7 Said petition was opposed by the spouses Arroyo and the other bidder, Jose L.
Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a
resolution finding that the questions raised by the parties required the reception and evaluation of
evidence, hence, proper for adjudication by the courts of law. Since said questions were prejudicial
to the holding of the foreclosure sale, she ruled that her "Office, therefore, cannot properly proceed
with the foreclosure sale unless and until there be a court ruling on the aforementioned issues." 8
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition
for mandamus 9against said Diana Dungca in her capacity as City Sheriff of Quezon City to compel
her to proceed with the foreclosure sale of the mortgaged properties covered by TCT No. 55323 in
order to satisfy both the personal obligation of the spouses Arroyo as well as their liabilities as
sureties of TCC. 10
On September 6, 1976, the petition was granted and Dungca was directed to proceed with the
foreclosure sale of the mortgaged properties covered by TCT No. 55323 pursuant to Act No. 3135
and to issue the corresponding Sheriff's Certificate of Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First
Instance
of
Rizal,
Pasig,
Branch
XXI
a
complaint 12 against PNB, Dungca, and the Provincial Sheriff of Negros Occidental and Ex-Officio
Sheriff of Bacolod City seeking, inter alia, the issuance of a writ of preliminary injunction to
restrain the foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well as
a declaration that its obligation with PNB had been fully paid by reason of the latter's repossession
of the imported machinery and equipment. 13

On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining
order 14 and on March 4, 1977, granted a writ of preliminary injunction. 15 PNB's motion for
reconsideration was denied, hence this petition.
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction,
namely: a) that it contravenes P.D. No. 385 which prohibits the issuance of a restraining order
against a government financial institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Section 1 thereof; b) that the writ countermands a final
decision of a co-equal and coordinate court; c) that the writ seeks to prohibit the performance of
acts beyond the court's territorial jurisdiction; and, d) private respondent TCC has not shown any
clear legal right or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at
bar, firstly because no foreclosure proceedings have been instituted against it by PNB and secondly,
because its account under the L/C has been fully satisfied with the repossession of the imported
machinery and equipment by PNB.
The resolution of the instant controversy lies primarily on the question of whether or not TCC's
liability has been extinguished by the repossession of PNB of the imported cement plant machinery
and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported
cement plant machinery and equipment pursuant to the trust receipt agreement executed by and
between PNB and TCC giving the former the unqualified right to the possession and disposal of all
property shipped under the Letter of Credit until such time as all the liabilities and obligations
under said letter had been discharged. 16 In the case of Vintola vs. Insular Bank of Asia and
America 17 wherein the same argument was advanced by the Vintolas as entrustees of imported
seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished
inasmuch as, through no fault of their own, they were unable to dispose of the seashells, and that
they have relinquished possession thereof to the IBAA, as owner of the goods, by depositing them
with the Court.
The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A
letter of credit-trust receipt arrangement is endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with the
trust receipt as a security for the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in the covering trust receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security
interest" in the goods. It secures an indebtedness and there can be no such thing as security interest
that secures no obligation. As defined in our laws:

(h) "Security interest" means a property interest in goods, documents or instruments to secure
performance of some obligations of the entrustee or of some third persons to the entruster and
includes title, whether or not expressed to be absolute, whenever such title is in substance taken or
retained for security only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It
was merely the holder of a security title for the advances it had made to the VINTOLAS. The goods
the VINTOLAS had purchased through IBAA financing remain their own property and they hold it
at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the
latter remained a lender and creditor.
xxx xxx xxx
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that
because they have surrendered the goods to IBAA and subsequently deposited them in the custody
of the court, they are absolutely relieved of their obligation to pay their loan because of their
inability to dispose of the goods. The fact that they were unable to sell the seashells in question does
not affect IBAA's right to recover the advances it had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form of security for
the advances given to TCC under the Letter of Credit, said possession by itself cannot be considered
payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed
on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere
possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the
mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself. 18
Neither can said repossession amount to dacion en pago. Dation in payment takes place when
property is alienated to the creditor in satisfaction of a debt in money and the same is governed by
sales. 19 Dation in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. 20 As aforesaid, the
repossession of the machinery and equipment in question was merely to secure the payment of
TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in
satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses
Arroyo as sureties of TCC. A surety is considered in law as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable. 21 As sureties, the Arroyo spouses are primarily liable as original
promissors and are bound immediately to pay the creditor the amount outstanding. 22
Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial
institutions like herein petitioner PNB are required to foreclose on the collaterals and/or securities
for any loan, credit or accommodation whenever the arrearages on such account amount to at least
twenty percent (20%) of the total outstanding obligations, including interests and charges, as
appearing in the books of account of the financial institution concerned. 23 It is further provided

therein that "no restraining order, temporary or permanent injunction shall be issued by the court
against any government financial institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Section 1 hereof, whether such restraining order,
temporary or permanent injunction is sought by the borrower(s) or any third party or
parties . . ." 24
It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses
were in compliance with the mandate of P.D. 385. This being the case, the respondent judge acted in
excess of his jurisdiction in issuing the injunction specifically proscribed under said decree.
Another reason for striking down the writ of preliminary injunction complained of is that it
interfered with the order of a co-equal and coordinate court. Since Branch V of the CFI of Rizal
had already acquired jurisdiction over the question of foreclosure of mortgage over the La Vista
property and rendered judgment in relation thereto, then it retained jurisdiction to the exclusion of
all other coordinate courts over its judgment, including all incidents relative to the control and
conduct of its ministerial officers, namely the sheriff thereof. 25 The foreclosure sale having been
ordered by Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with
Branch XXI of the same CFI, but instead should have first sought relief by proper motion and
application from the former court which had exclusive jurisdiction over the foreclosure
proceeding. 26
This doctrine of non-interference is premised on the principle that a judgment of a court of
competent jurisdiction may not be opened, modified or vacated by any court of concurrent
jurisdiction. 27
Furthermore, we find the issuance of the preliminary injunction directed against the Provincial
Sheriff of Negros Occidental and ex-officio Sheriff of Bacolod City a jurisdictional faux pas as the
Courts of First Instance, now Regional Trial Courts, can only enforce their writs of injunction
within their respective designated territories. 28
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside.
Costs against private respondent.

G.R. No. 157549

May 30, 2011

DONNINA
vs.
PRINTWELL, INC., Respondent.

C.

HALLEY, Petitioner,

DECISION
BERSAMIN, J:
Stockholders of a corporation are liable for the debts of the corporation up to the extent of their
unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from liability,
because the veil may be lifted to avoid defrauding corporate creditors.
Weaffirm with modification the decisionpromulgated on August 14, 2002, 1whereby the Court of
Appeals(CA) upheld thedecision of the Regional Trial Court, Branch 71, in Pasig City
(RTC),2ordering the defendants (including the petitioner)to pay to Printwell, Inc. (Printwell) the
principal sum of P291,342.76 plus interest.
Antecedents
The petitioner wasan incorporator and original director of Business Media Philippines, Inc.
(BMPI), which, at its incorporation on November 12, 1987, 3had an authorized capital stock
of P3,000,000.00 divided into 300,000 shares each with a par value of P10.00,of which 75,000 were
initially subscribed, to wit:
Subscriber

No. of shares

Total subscription

Amount paid

Donnina C. Halley

35,000

P 350,000.00

P87,500.00

Roberto V. Cabrera, Jr.

18,000

P 180,000.00

P45,000.00

Albert T. Yu

18,000

P 180,000.00

P45,000.00

Zenaida V. Yu

2,000

P 20,000.00

P5,000.00

Rizalino C. Vineza

2,000

P 20,000.00

P5,000.00

TOTAL

75,000

P750,000.00

P187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned Printwell for the

printing of the magazine Philippines, Inc. (together with wrappers and subscription cards) that
BMPI published and sold. For that purpose, Printwell extended 30-day credit accommodations to
BMPI.
In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell several orders
on credit, evidenced byinvoices and delivery receipts totalingP316,342.76.Considering that BMPI
paidonlyP25,000.00,Printwell suedBMPIon January 26, 1990 for the collection of the unpaid
balance ofP291,342.76 in the RTC.4
On February 8, 1990,Printwell amended thecomplaint in order to implead as defendants all the
original stockholders and incorporators to recover on theirunpaid subscriptions, as follows: 5

Name

Unpaid Shares

Donnina C. Halley

P 262,500.00

Roberto V. Cabrera, Jr.

P135,000.00

Albert T. Yu

P135,000.00

Zenaida V. Yu

P15,000.00

Rizalino C. Vieza

P15,000.00

TOTAL

P 562,500.00

The defendants filed a consolidated answer,6averring that they all had paid their subscriptions in
full; that BMPI had a separate personality from those of its stockholders; thatRizalino C. Vieza
had assigned his fully-paid up sharesto a certain Gerardo R. Jacinto in 1989; andthat the directors
and stockholders of BMPI had resolved to dissolve BMPI during the annual meetingheld on
February 5, 1990.
To prove payment of their subscriptions, the defendantstockholderssubmitted in evidenceBMPI
official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no. 222, OR no. 223, andOR
no. 227,to wit:
Receipt No.

Date

Name

Amount

217

November 5, 1987

Albert T. Yu

P 45,000.00

218

May 13, 1988

Albert T. Yu

P 135,000.00

220

May 13, 1988

Roberto V. Cabrera, Jr.

P 135,000.00

221

November 5, 1987

Roberto V. Cabrera, Jr.

P 45,000.00

222

November 5, 1987

Zenaida V. Yu

P 5,000.00

223

May 13, 1988

Zenaida V. Yu

P 15,000.00

227

May 13, 1988

Donnina C. Halley

P 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an audit report

dated March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the SEC and the
BIR);7(b) BMPIbalance sheet8 and income statement9as of December 31, 1988; (c) BMPI income tax

return for the year 1988 (stamped "received" by the BIR); 10(d) journal vouchers;11(e) cash deposit
slips;12 and(f)Bank of the Philippine Islands (BPI) savings account passbookin the name of BMPI. 13
Ruling of the RTC
On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting the allegation of
payment in full of the subscriptions in view of an irregularity in the issuance of the ORs and
observingthat the defendants had used BMPIs corporate personality to evade payment and create
injustice, viz:
The claim of individual defendants that they have fully paid their subscriptions to defend[a]nt
corporation, is not worthy of consideration, because:
a) in the case of defendants-spouses Albert and Zenaida Yu, it will be noted that the alleged
payment made on May 13, 1988 amounting to P135,000.00, is covered by Official Receipt No. 218
(Exh. "2"), whereas the alleged payment made earlier on November 5, 1987, amounting
to P5,000.00, is covered by Official Receipt No. 222 (Exh. "3"). This is cogent proof that said
receipts were belatedly issued just to suit their theory since in the ordinary course of business, a
receipt issued earlier must have serial numbers lower than those issued on a later date. But in the
case at bar, the receipt issued on November 5, 1987 has serial numbers (222) higher than those
issued on a later date (May 13, 1988).
b) The claim that since there was no call by the Board of Directors of defendant corporation for the
payment of unpaid subscriptions will not be a valid excuse to free individual defendants from
liability. Since the individual defendants are members of the Board of Directors of
defendantcorporation, it was within their exclusive power to prevent the fulfillment of the
condition, by simply not making a call for the payment of the unpaid subscriptions. Their inaction
should not work to their benefit and unjust enrichment at the expense of plaintiff.
Assuming arguendo that the individual defendants have paid their unpaid subscriptions, still, it is
very apparent that individual defendants merely used the corporate fiction as a cloak or cover to
create an injustice; hence, the alleged separate personality of defendant corporation should be
disregarded (Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30 June 1988). 14
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to Printwell
pro rata, thusly:
Defendant Business Media, Inc. is a registered corporation (Exhibits "A", "A-1" to "A-9"), and, as
appearing from the Articles of Incorporation, individual defendants have the following unpaid
subscriptions:
Names

Unpaid Subscription

Donnina C. Halley

P262,500.00

Roberto V. Cabrera, Jr.

135.000.00

Albert T. Yu

135,000.00

Zenaida V. Yu

15,000.00

Rizalino V. Vineza

15,000.00

-------------------------------Total

P562,500.00

and it is an established doctrine that subscriptions to the capital stock of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims (Philippine National
Bank vs. Bitulok Sawmill, Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to
release a subscriber to its capital stock from the obligation to pay for his shares, and any agreement
to this effect is invalid (Velasco vs. Poizat, 37 Phil. 802).
The liability of the individual stockholders in the instant case shall be pro-rated as follows:
Names

Amount

Donnina C. Halley

P149,955.65

Roberto V. Cabrera, Jr.

77,144.55

Albert T. Yu

77,144.55

Zenaida V. Yu

8,579.00

Rizalino V. Vineza

8,579.00

-------------------------------Total

P321,342.7515

The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering
defendants to pay to plaintiff the amount of P291,342.76, as principal, with interest thereon at 20%
per annum, from date of default, until fully paid, plus P30,000.00 as attorneys fees, plus costs of
suit.
Defendants counterclaims are ordered dismissed for lack of merit.
SO ORDERED.16

Ruling of the CA
All the defendants, except BMPI, appealed.
Spouses Donnina and Simon Halley, andRizalinoVieza defined the following errors committed by
the RTC, as follows:
I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-STOCKHOLDERS LIABLE FOR
THE LIABILITIES OF THE DEFENDANT CORPORATION.
II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE EXTENT OF
THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF ANY, THE TRIAL COURT
NONETHELESS ERRED IN NOT FINDING THAT APPELLANTS-STOCKHOLDERS HAVE,
AT THE TIME THE SUIT WAS FILED, NO SUCH UNPAID SUBSCRIPTIONS.
On their part, Spouses Albert and Zenaida Yu averred:
I.
THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO DEFENDANTSAPPELLANTS SPOUSES ALBERT AND ZENAIDA YUS EXHIBITS 2 AND 3 DESPITE THE
UNREBUTTED TESTIMONY THEREON BY APPELLANT ALBERT YU AND THE ABSENCE
OF PROOF CONTROVERTING THEM.
II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES ALBERT AND
ZENAIDA YU PERSONALLY LIABLE FOR THE CONTRACTUAL OBLIGATION OF
BUSINESS MEDIA PHILS., INC. DESPITE FULL PAYMENT BY SAID DEFENDANTSAPPELLANTS OF THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.
Roberto V. Cabrera, Jr. argued:
I.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY THE DOCTRINE
OF PIERCING THE VEIL OF CORPORATE PERSONALITY IN ABSENCE OF ANY
SHOWING OF EXTRA-ORDINARY CIRCUMSTANCES THAT WOULD JUSTIFY RESORT
THERETO.
II.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE THAT INDIVIDUAL
DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-APPELLEES CLAIM BASED ON

THEIR
RESPECTIVE
SUBSCRIPTION.
NOTWITHSTANDING
OVERWHELMING
EVIDENCE SHOWING FULL SETTLEMENT OF SUBSCRIBED CAPITAL BY THE
INDIVIDUAL DEFENDANTS.
On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to the corporate
personality would createan injustice becausePrintwell would thereby be at a loss against whom it
would assert the right to collect, viz:
Settled is the rule that when the veil of corporate fiction is used as a means of perpetrating fraud or
an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes,
the achievements or perfection of monopoly or generally the perpetration of knavery or crime, the
veil with which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals (First
Philippine International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under this doctrine,
the corporate existence may be disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligations or to justify wrong (Claparols vs. CIR, 65
SCRA 613).
In the case at bench, it is undisputed that BMPI made several orders on credit from appellee
PRINTWELL involving the printing of business magazines, wrappers and subscription cards, in
the total amount of P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by
appellants stockholders that they owe appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to appellee as well as the
interest thereon, at the rate of 20% per annum until fully paid. It was also during this time that
appellants stockholders were in charge of the operation of BMPI despite the fact that they were not
able to pay their unpaid subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability, hence appellee in order to
protect its right can collect from the appellants stockholders regarding their unpaid subscriptions.
To deny appellee from recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are appellants herein are availing
the defense of corporate fiction to evade payment of its obligations. 17
Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine, under which
corporate debtors might look to the unpaid subscriptions for the satisfaction of unpaid corporate
debts, stating thus:
It is an established doctrine that subscription to the capital stock of a corporation constitute a fund
to which creditors have a right to look up to for satisfaction of their claims, and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).
Premised on the above-doctrine, an inference could be made that the funds, which consists of the
payment of subscriptions of the stockholders, is where the creditors can claim monetary
considerations for the satisfaction of their claims. If these funds which ought to be fully subscribed
by the stockholders were not paid or remain an unpaid subscription of the corporation then the
creditors have no other recourse to collect from the corporation of its liability. Such occurrence was

evident in the case at bar wherein the appellants as stockholders failed to fully pay their unpaid
subscriptions, which left the creditors helpless in collecting their claim due to insufficiency of funds
of the corporation. Likewise, the claim of appellants that they already paid the unpaid
subscriptions could not be given weight because said payment did not reflect in the Articles of
Incorporations of BMPI that the unpaid subscriptions were fully paid by the appellants
stockholders. For it is a rule that a stockholder may be sued directly by creditors to the extent of
their unpaid subscriptions to the corporation (Keller vs. COB Marketing, 141 SCRA 86).
Moreover, a corporation has no power to release a subscription or its capital stock, without valuable
consideration for such releases, and as against creditors, a reduction of the capital stock can take
place only in the manner and under the conditions prescribed by the statute or the charter or the
Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366). 18
The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of full payment
of the subscriptions to the capital stock unworthy of consideration; andheld that the veil of
corporate fiction could be pierced when it was used as a shield to perpetrate a fraud or to confuse
legitimate issues, to wit:
Finally, appellants SPS YU, argued that the fact of full payment for the unpaid subscriptions was
incontrovertibly established by competent testimonial and documentary evidence, namely
Exhibits "1", "2", "3" & "4", which were never disputed by appellee, clearly shows that they
should not be held liable for payment of the said unpaid subscriptions of BMPI.
The reliance is misplaced.
We are hereby reproducing the contents of the above-mentioned exhibits, to wit:
Exh: "1" YU Official Receipt No. 217 dated November 5, 1987 amounting to P45,000.00
allegedly representing the initial payment of subscriptions of stockholder Albert Yu.
Exh: "2" YU Official Receipt No. 218 dated May 13, 1988 amounting to P135,000.00 allegedly
representing full payment of balance of subscriptions of stockholder Albert Yu. (Record p. 352).
Exh: "3" YU Official Receipt No. 222 dated November 5, 1987 amounting to P5,000.00 allegedly
representing the initial payment of subscriptions of stockholder Zenaida Yu.
Exh: "4" YU Official Receipt No. 223 dated May 13, 1988 amounting to P15,000.00 allegedly
representing the full payment of balance of subscriptions of stockholder Zenaida Yu. (Record p.
353).
Based on the above exhibits, we are in accord with the lower courts findings that the claim of the
individual appellants that they fully paid their subscription to the defendant BMPI is not worthy of
consideration, because, in the case of appellants SPS. YU, there is an inconsistency regarding the
issuance of the official receipt since the alleged payment made on May 13, 1988 amounting
to P135,000.00 was covered by Official Receipt No. 218 (Record, p. 352), whereas the alleged
payment made earlier on November 5, 1987 amounting to P5,000.00 is covered by Official Receipt
No. 222 (Record, p. 353). Such issuance is a clear indication that said receipts were belatedly issued

just to suit their claim that they have fully paid the unpaid subscriptions since in the ordinary
course of business, a receipt is issued earlier must have serial numbers lower than those issued on a
later date. But in the case at bar, the receipt issued on November 5, 1987 had a serial number (222)
higher than those issued on May 13, 1988 (218). And even assuming arguendo that the individual
appellants have paid their unpaid subscriptions, still, it is very apparent that the veil of corporate
fiction may be pierced when made as a shield to perpetuate fraud and/or confuse legitimate issues.
(Jacinto vs. Court of Appeals, 198 SCRA 211).19
Spouses Halley and Vieza moved for a reconsideration, but the CA denied their motion for
reconsideration.
Issues
Only Donnina Halley has come to the Court to seek a further review, positing the following for our
consideration and resolution, to wit:
I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION THAT DID
NOTSTATE THE FACTS AND THE LAW UPON WHICH THE JUDGMENT WAS BASED BUT
MERELY COPIED THE CONTENTS OF RESPONDENTS MEMORANDUM ADOPTING THE
SAME AS THE REASON FOR THE DECISION
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE REGIONAL
TRIAL COURT WHICH ESSENTIALLY ALLOWED THE PIERCING OF THE VEIL OF
CORPORATE FICTION
III.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE TRUST FUND
DOCTRINE WHEN THE GROUNDS THEREFOR HAVE NOT BEEN SATISFIED.
On the first error, the petitioner contends that the RTC lifted verbatim from the memorandum of
Printwell; and submits that the RTCthereby violatedthe requirement imposed in Section 14, Article
VIII of the Constitution20 as well as in Section 1,Rule 36 of the Rules of Court, 21to the effect that a
judgment or final order of a court should state clearly and distinctly the facts and the law on which
it is based. The petitioner claims that the RTCs violation indicated that the RTC did not analyze
the case before rendering its decision, thus denying her the opportunity to analyze the decision;
andthat a suspicion of partiality arose from the fact that the RTC decision was but a replica of
Printwells memorandum.She cites Francisco v. Permskul, 22 in which the Court has stated that the
reason underlying the constitutional requirement, that every decision should clearly and distinctly
state the facts and the law on which it is based, is to inform the reader of how the court has reached
its decision and thereby give the losing party an opportunity to study and analyze the decision and
enable such party to appropriately assign the errors committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC erroneously
pierced the veil of corporate fiction despite the absence of cogent proof showing that she, as
stockholder of BMPI, had any hand in transacting with Printwell; thatthe CA and the RTC failed to
appreciate the evidence that she had fully paid her subscriptions; and the CA and the RTCwrongly
relied on the articles of incorporation in determining the current list of unpaid subscriptions despite
the articles of incorporationbeing at best reflectiveonly of the pre-incorporation status of BMPI.
As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the propriety of
disregarding the separate personalities of BMPI and its stockholdersby piercing the thin veil that
separated them; and (b) the application of the trust fund doctrine.
Ruling
The petition for review fails.
I
The
RTC
the Constitution and the Rules of Court

did

not

violate

The contention of the petitioner, that the RTC merely copied the memorandum of Printwell in
writing its decision, and did not analyze the records on its own, thereby manifesting a bias in favor
of Printwell, is unfounded.
It is noted that the petition for review merely generally alleges that starting from its page 5, the
decision of the RTC "copied verbatim the allegations of herein Respondents in its Memorandum
before the said court," as if "the Memorandum was the draft of the Decision of the Regional Trial
Court of Pasig,"23but fails to specify either the portions allegedly lifted verbatim from the
memorandum, or why she regards the decision as copied. The omission renders thepetition for
review insufficient to support her contention, considering that the mere similarityin language or
thought between Printwells memorandum and the trial courts decisiondid not necessarily justify
the conclusion that the RTC simply lifted verbatim or copied from thememorandum.
It is to be observed in this connection that a trial or appellate judge may occasionally viewa partys
memorandum or brief as worthy of due consideration either entirely or partly. When he does so, the
judgemay adopt and incorporatein his adjudicationthe memorandum or the parts of it he deems
suitable,and yet not be guilty of the accusation of lifting or copying from the memorandum. 24 This
isbecause ofthe avowed objective of the memorandum to contribute in the proper illumination and
correct determination of the controversy.Nor is there anything untoward in the congruence of ideas
and views about the legal issues between himself and the party drafting the memorandum.The
frequency of similarities in argumentation, phraseology, expression, and citation of authorities
between the decisions of the courts and the memoranda of the parties, which may be great or small,
can be fairly attributable tothe adherence by our courts of law and the legal profession to widely
knownor universally accepted precedents set in earlier judicial actions with identical factual milieus
or posing related judicial dilemmas.
We also do not agree with the petitioner that the RTCs manner of writing the decisiondeprivedher
ofthe opportunity to analyze its decisionas to be able to assign errors on appeal. The contrary

appears, considering that she was able to impute and assignerrors to the RTCthat she extensively
discussed in her appeal in the CA, indicating her thorough analysis ofthe decision of the RTC.
Our own readingof the trial courts decision persuasively shows that the RTC did comply with the
requirements regarding the content and the manner of writing a decision prescribed in the
Constitution and the Rules of Court. The decision of the RTC contained clear and distinct findings
of facts, and stated the applicablelaw and jurisprudence, fully explaining why the defendants were
being held liable to the plaintiff. In short, the reader was at once informed of the factual and legal
reasons for the ultimate result.
II
Corporate personality not to be used to foster injustice
Printwell impleaded the petitioner and the other stockholders of BMPI for two reasons, namely: (a)
to reach the unpaid subscriptions because it appeared that such subscriptions were the remaining
visible assets of BMPI; and (b) to avoid multiplicity of suits. 25
The petitionersubmits that she had no participation in the transaction between BMPI and
Printwell;that BMPI acted on its own; and that shehad no hand in persuading BMPI to renege on
its obligation to pay. Hence, she should not be personally liable.
We rule against the petitioners submission.
Although a corporation has a personality separate and distinct from those of its stockholders,
directors, or officers,26such separate and distinct personality is merely a fiction created by law for
the sake of convenience and to promote the ends of justice. 27The corporate personality may be
disregarded, and the individuals composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or illegality;as a justification for a
wrong; as an alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.28 As a general rule, a corporation is looked upon as a legal entity, unless and until
sufficient reason to the contrary appears. Thus,the courts always presume good faith, andfor that
reason accord prime importance to the separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly and convincingly established. 29It
thus behooves the courts to be careful in assessing the milieu where the piercing of the corporate
veil shall be done.30
Although nowhere in Printwells amended complaint or in the testimonies Printwell offered can it
be read or inferred from that the petitioner was instrumental in persuading BMPI to renege onits
obligation to pay; or that sheinduced Printwell to extend the credit accommodation by
misrepresenting the solvency of BMPI toPrintwell, her personal liability, together with that of her
co-defendants, remainedbecause the CA found her and the other defendant stockholders to be in
charge of the operations of BMPI at the time the unpaid obligation was transacted and incurred, to
wit:
In the case at bench, it is undisputed that BMPI made several orders on credit from appellee
PRINTWELL involving the printing of business magazines, wrappers and subscription cards, in
the total amount of P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by

appellants stockholders that they owe(d) appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to appellee as well as the
interest thereon, at the rate of 20% per annum until fully paid. It was also during this time that
appellants stockholders were in charge of the operation of BMPI despite the fact that they were not
able to pay their unpaid subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability, hence appellee in order to
protect its right can collect from the appellants stockholders regarding their unpaid subscriptions.
To deny appellee from recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are appellants herein are availing
the defense of corporate fiction to evade payment of its obligations. 31
It follows, therefore, that whether or not the petitioner persuaded BMPI to renege on its obligations
to pay, and whether or not she induced Printwell to transact with BMPI were not gooddefensesin
the suit.1avvphi1
III
Unpaid
creditor
may
satisfy
unpaid
subscriptions;stockholders
prove full payment oftheir subscriptions

its

claim

from
must

Both the RTC and the CA applied the trust fund doctrineagainst the defendant stockholders,
including the petitioner.
The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause she had already
fully paid her subscriptions to the capital stock of BMPI. She thus insiststhat both lower courts
erred in disregarding the evidence on the complete payment of the subscription, like receipts,
income tax returns, and relevant financial statements.
The petitioners argumentis devoid of substance.
The trust fund doctrineenunciates a
xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund only by way of analogy or metaphor. As between the
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts. 32
The trust fund doctrine, first enunciated in the American case of Wood v. Dummer, 33was adopted in
our jurisdiction in Philippine Trust Co. v. Rivera,34where thisCourt declared that:
It is established doctrine that subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx35
We clarify that the trust fund doctrineis not limited to reaching the stockholders unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only the

capital stock, but also other property and assets generally regarded in equity as a trust fund for the
payment of corporate debts.36All assets and property belonging to the corporation held in trust for
the benefit of creditors thatwere distributed or in the possession of the stockholders, regardless of
full paymentof their subscriptions, may be reached by the creditor in satisfaction of its claim.
Also, under the trust fund doctrine,a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in
part,37 without a valuable consideration,38or fraudulently, to the prejudice of creditors. 39The
creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the
shoes of the corporation for the satisfaction of its debt. 40To make out a prima facie case in a suit
against stockholders of an insolvent corporation to compel them to contribute to the payment of its
debts by making good unpaid balances upon their subscriptions, it is only necessary to establish
that thestockholders have not in good faith paid the par value of the stocks of the corporation. 41
The petitionerposits that the finding of irregularity attending the issuance of the receipts (ORs)
issued to the other stockholders/subscribers should not affect her becauseher receipt did not suffer
similar irregularity.
Notwithstanding that the RTC and the CA did not find any irregularity in the OR issued in her
favor,we still cannot sustain the petitioners defense of full payment of her subscription.
In civil cases, theparty who pleads payment has the burden of proving it, that even where the
plaintiff must allege nonpayment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove nonpayment. In other words, the debtor bears
the burden of showing with legal certainty that the obligation has been discharged by payment. 42
Apparently, the petitioner failed to discharge her burden.
A receipt is the written acknowledgment of the fact of payment in money or other settlement
between the seller and the buyer of goods, thedebtor or thecreditor, or theperson rendering services,
and theclient or thecustomer.43Althougha receipt is the best evidence of the fact of payment, it isnot
conclusive, but merely presumptive;nor is it exclusive evidence,considering thatparole evidence may
also establishthe fact of payment.44
The petitioners ORNo. 227,presentedto prove the payment of the balance of her subscription,
indicated that her supposed payment had beenmade by means of a check. Thus, to discharge
theburden to prove payment of her subscription, she had to adduce evidence satisfactorily proving
that her payment by check wasregardedas payment under the law.
Paymentis defined as the delivery of money.45Yet, because a check is not money and only substitutes
for money, the delivery of a check does not operate as payment and does not discharge the
obligation under a judgment.46The delivery of a bill of exchange only produces the fact of payment
when the bill has been encashed.47The following passage fromBank of Philippine Islands v.
Royeca48is enlightening:
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a

substitute for money and not money, the delivery of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial document is
actually realized.
To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily produced
the cancelled checks as evidence to prove the same. Instead, they merely averred that they believed
in good faith that the checks were encashed because they were not notified of the dishonor of the
checks and three years had already lapsed since they issued the checks.
Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.
Ostensibly, therefore, the petitioners mere submission of the receipt issued in exchange of the check
did not satisfactorily establish her allegation of full payment of her subscription. Indeed, she could
not even inform the trial court about the identity of her drawee bank, 49and about whether the check
was cleared and its amount paid to BMPI.50In fact, she did not present the check itself.
Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit presented, had
no bearing on the issue of payment of the subscription because they did not by themselves prove
payment. ITRsestablish ataxpayers liability for taxes or a taxpayers claim for refund. In the same
manner, the deposit slips and entries in the passbook issued in the name of BMPI were hardly
relevant due to their not reflecting the alleged payments.
It is notable, too, that the petitioner and her co-stockholders did not support their allegation of
complete payment of their respective subscriptions with the stock and transfer book of BMPI.
Indeed, books and records of a corporation (including the stock and transfer book) are admissible
in evidence in favor of or against the corporation and its members to prove the corporate acts, its
financial status and other matters (like the status of the stockholders), and are ordinarily the best
evidence of corporate acts and proceedings. 51Specifically, a stock and transfer book is necessary as a
measure of precaution, expediency, and convenience because it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of showing the
ownership of stock and like matters. 52That she tendered no explanation why the stock and transfer
book was not presented warrants the inference that the book did not reflect the actual payment of
her subscription.
Nor did the petitioner present any certificate of stock issued by BMPI to her. Such a certificate
covering her subscription might have been a reliable evidence of full payment of the subscriptions,
considering that under Section 65 of the Corporation Code a certificate of stock issues only to a
subscriber who has fully paid his subscription. The lack of any explanation for the absence of a
stock certificate in her favor likewise warrants an unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on the articles of
incorporationas proof of the liabilities of the stockholders subscribing to BMPIs stocks, averring
that the articles of incorporationdid not reflect the latest subscription status of BMPI.
Although the articles of incorporation may possibly reflect only the pre-incorporation status of a
corporation, the lower courts reliance on that document to determine whether the original
subscribersalready fully paid their subscriptions or not was neither unwarranted nor erroneous. As
earlier explained, the burden of establishing the fact of full payment belonged not to Printwell even
if it was the plaintiff, but to the stockholders like the petitioner who, as the defendants, averredfull
payment of their subscriptions as a defense. Their failure to substantiate their averment of full
payment, as well as their failure to counter the reliance on the recitals found in the articles of
incorporation simply meant their failure or inability to satisfactorily prove their defense of full
payment of the subscriptions.
To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the corporate obligation
of BMPI by virtue of her subscription being still unpaid. Printwell, as BMPIs creditor,had a right
to reachher unpaid subscription in satisfaction of its claim.
IV
Liability
of
stockholders
to the extentof their unpaid subscription

for

corporate

debts

isup

The RTC declared the stockholders pro rata liable for the debt(based on the proportion to their
shares in the capital stock of BMPI); and held the petitionerpersonally liable onlyin the amount
of P149,955.65.
We do not agree. The RTC lacked the legal and factual support for its prorating the liability. Hence,
we need to modify the extent of the petitioners personal liability to Printwell. The prevailing rule is
that a stockholder is personally liable for the financial obligations of the corporation to the extent of
his unpaid subscription.53In view ofthe petitioners unpaid subscription being worth P262,500.00,
shewas liable up to that amount.
Interest is also imposable on the unpaid obligation. Absent any stipulation, interest is fixed at 12%
per annum from the date the amended complaint was filed on February 8, 1990 until the obligation
(i.e., to the extent of the petitioners personal liability of P262,500.00) is fully paid.54
Lastly, we find no basis togrant attorneys fees, the award for which must be supported by findings
of fact and of law as provided under Article 2208 of the Civil Code 55incorporated in the body of
decision of the trial court. The absence of the requisite findings from the RTC decision warrants the
deletion of the attorneys fees.
ACCORDINGLY, we deny the petition for review on certiorari;and affirm with modification the
decision promulgated on August 14, 2002by ordering the petitionerto pay to Printwell, Inc. the sum
of P262,500.00, plus interest of 12% per annum to be computed from February 8, 1990 until full
payment.
The petitioner shall paycost of suit in this appeal.

SO ORDERED.

G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA

AND
AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479

January 29, 2001

FORD
PHILIPPINES,
vs.
COURT OF APPEALS and CITIBANK,
INTERNATIONAL BANK,respondents.

INC., petitioner-plaintiff,
N.A.

and

PHILIPPINE

COMMERCIAL

G.R. No. 128604

January 29, 2001

FORD
PHILIPPINES,
INC., petitioner,
vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF
APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank,
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank
(PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to the
Commissioner of Internal Revenue, which were embezzled allegedly by an organized
syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision 1 of the
Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the
August 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International
Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision 3 of the Court
of Appeals and its March 5, 1997 Resolution 4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc.
vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment
of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check
Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the
amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently
cleared at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the
check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee
thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the
plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its
percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second payment of
plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the transactions in question,
plaintiff had been maintaining a checking account with defendant Citibank; that Citibank Check
No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner of Internal
Revenue was a crossed check in that, on its face were two parallel lines and written in between said
lines was the phrase "Payee's Account Only"; and that defendant Citibank paid the full face value
of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of
1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20,
1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl,
Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax
Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter
accepted the check and sent it to the Central Clearing House for clearing on the samd day, with the
indorsement at the back "all prior indorsements and/or lack of indorsements guaranteed."
Thereafter, defendant IBAA presented the check for payment to defendant Citibank on same date,
December 19, 1977, and the latter paid the face value of the check in the amount of P4,746,114.41.
Consequently, the amount of P4,746,114.41 was debited in plaintiff's account with the defendant
Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters
dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter that in case it
will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff
shall hold the defendants liable for reimbursement of the face value of the same. Both defendants
denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to
the plaintiff - supposed to be Exhibit "D", the latter was officially informed, among others, that its
check in the amount of P4, 746,114.41 was not paid to the government or its authorized agent and
instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen
days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11, 1982,
paid to the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of
plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the
second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original
complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International
Bank (PCI Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of
the depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of
defendant IBAA in indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking
account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the National Bureau of
Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera,
the General Ledger Accountant of Ford. He purportedly needed to hold back the check because
there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With
Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs).
Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific
Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action. The course likewise dismissed the
third-party complaint against Godofredo Rivera because he could not be served with summons as
the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the
plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No.
SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the
original complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to
reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff
in accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by
the cross-defendant against the cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their
respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with
modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is
concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when the original complaint was filed until the
amount is fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed
a "Motion for Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule
45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth
Division of the Court of Appeals contending that it merely acted on the instruction of Ford and such
casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by
respondent Ford on the said respondent's instructions, it nevertheless found the petitioner liable to
the said respondent for the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same
decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the
decision of the trial court which found both PCIBank and Citibank jointly and severally liable for
the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

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

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which
was crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of
petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a
person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack
of indorsement guaranteed"), is liable as collecting bank. 11
3. PCIBank is barred from raising issues of fact in the instant proceedings. 12
4. Petitioner Ford's cause of action had not prescribed. 13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle
Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the Commissioner of
Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable
to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was
issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between,
which were written the words "payable to the payee's account only."

The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR,
Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and
spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings
forced Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the
recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on
the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger
Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he passed on
the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres
Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a
Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in the
Meralco Branch of PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of
America Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37)
while this worthless check was coursed through PCIB's main office enroute to the Central Bank for
clearing, replaced this worthless check with FORD's Exhibit 'A' and accordingly tampered the
accompanying documents to cover the replacement. As a result, Exhibit 'A' was cleared by
defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the
PCIB Meralco Branch with the total amount of the FORD check Exhibit 'A'. The same method was
again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the
other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who
formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who
negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto
Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO
RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5)
REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the switching of checks
in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco
Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who assisted
Castro in switching the checks in the clearing process and facilitated the opening of the fictitious
Reynaldo Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the
second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who
provided the fake and spurious revenue tax receipts to make it appear that the BIR had received
FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of
the proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not

been impleaded in the present case. The manner by which the said funds were distributed among
them are traceable from the record of checks drawn against the original "Reynaldo Reyes" account
and indubitably identify the parties who illegally benefited therefrom and readily indicate in what
amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank,
liable for the value of the two checks while adsolving PCIBank from any liability, disposing as
follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse
plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest
thereon from date of first written demand until full payment, plus P300,000.00 attorney's fees and
expenses litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of
the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint
against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check
Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be
exercised by it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
supervision of its officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to
the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of
Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the
subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits
having received, and which was credited to it its Central bank account. 16
The main issue presented for our consideration by these petitions could be simplified as follows:
Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue?
Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
negotiating the same was allegedly defective because the instrument was obtained by fraud and
unlawful means, and the proceeds of the checks were not remitted to the payee. It was established
that instead of paying the checks to the CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution
among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable law
is Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or
fore and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in
breach of faith or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in
breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that there was no negligence in the
performance of his duties, he may set up the personal defense to escape liability and recover from
other parties who. Though their own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to
a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task of determining who of the
present parties before us must bear the burden of loss of these millions. It all boils down to
thequestion of liability based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory
negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees,
Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the
checks to his co-conspirators, instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in
the supervision and control of its own employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks after an unreasonable period of
time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert
the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the
subsequent run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that
the proximate cause of the damge to Ford lies in its own officers and employees who carried out the
fradulent schemes and the transactions. These circumstances were not checked by other officers of
the company including its comptroller or internal auditor. PCIBank contends that the inaction of
Ford despite the enormity of the amount involved was a sheer negligence and stated that, as
between two innocent persons, one of whom must suffer the consequences of a breach of trust, the
one who made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing
the case of Gempesaw vs. Court of Appeals, 17 Ford argues that even if there was a finding therein
that the drawer was negligent, the drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation
in its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue
of imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by
this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant
relationship is instructive. Since a master may be held for his servant's wrongful act, the law
imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately
results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable. 18 The general rule is that if the master is injured by the
negligence of a third person and by the concuring contributory negligence of his own servant or
agent, the latter's negligence is imputed to his superior and will defeat the superior's action against
the third person, asuming, of course that the contributory negligence was the proximate cause of
the injury of which complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General
Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or
damage. AS defined, proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and without the result would not
have occurred.20
It appears that although the employees of Ford initiated the transactions attributable to an
organized syndicate, in our view, their actions were not the proximate cause of encashing the checks
payable to the CIR. The degree of Ford's negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's
Manager's Check was not in theordinary course of business which could have prompted PCIBank
to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these
checks were made payable to the CIR. Both were crossed checks. These checks were apparently
turned around by Ford's emploees, who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's
confidential employee or agent, who by virtue of his position had unusual facilities for
perpertrating the fraud and imposing the forged paper upon the bank, does notentitle the bank
toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against
the drawer.21 This rule likewise applies to the checks fraudulently negotiated or diverted by the
confidential employees who hold them in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately,
the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was
coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement
at the back "all prior indorsements and/or lack of indorsements guaranteed," and was presented to
Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared
two of its Manager's checks and enabled the syndicate to encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect
of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank
Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in
behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed
to be a depository/collecting bank of BIR, it has the responsibility to make sure that the check in
question is deposited in Payee's account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from
its principal BIR and not from any other person especially so when that person is not known to the
defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged
telephone call of the one Godofredo Rivera and in his signature considering that the plaintiff is not
a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and
the bank to which it is sent for collection is, in the absence of an argreement to the contrary, that of
principal and agent.22 A bank which receives such paper for collection is the agent of the payee or
holder.23
Even considering arguendo, that the diversion of the amount of a check payable to the collecting
bank in behalf of the designated payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority
from the drawer, or that the drawer has clothed his agent with apparent authority to receive the
proceeds of such check.

Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned
checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS
GURANTEED should render PCIBank liable because it made it pass through the clearing house
and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to
pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of
PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in
questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank
PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the
collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before
it could make the clearing indorsement "all prior indorsements and/or lack of indorsement
guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee
on the validity of "all prior endorsements." Thus, stamped at the back of the checks are the
defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the
checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation."25
Lastly, banking business requires that the one who first cashes and negotiates the check must take
some percautions to learn whether or not it is genuine. And if the one cashing the check through
indifference or othe circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not
discover the forgery or the defect in the title of the person negotiating the instrument before paying
the check. For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with regard to them,
cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards
diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the
authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the fraud practiced on the drawee bank. The latter
may recover from the holder the money paid on the check.26

Having established that the collecting bank's negligence is the proximate cause of the loss, we
conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check
No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary
course of business that would attribute to it the case of the embezzlement of Citibank Check
Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford
checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious
participation in the process of the embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in their own personl, covert and private
capacity and done without the knowledge of the defendant PCIBank"27
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank
in the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or
tortuous acts and declarations of its officers or agents within the course and scope of their
employment.28 A bank will be held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable for the tortuous acts of its officers
even as regards that species of tort of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in
which its own management employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check
Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of
PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person
named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the
same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing
the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508.
The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently
performed their activities using facilities in their official capacity or authority but for their personal
and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by
the frauds these officers or agents were enabled to perpetrate in the apparent course of their
employment; nor will t be permitted to shirk its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the
fraudulent acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority.29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebetedness lodged with his bank for collection,
the bank is liable for his misappropriation of such sum. 30

Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular No. 580, Series of
1977 provides that any theft affecting items in transit for clearing, shall be for the account of
sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the
performance of its duties. Citibank failed to establish that its payment of Ford's checjs were made
in due course and legally in order. In its defense, Citibank claims the genuineness and due execution
of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of
the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the
endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it
has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and
contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing
Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the
acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that
it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with
annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford
on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing
between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and
such degree of culpability contributed to the damage caused to the latter. On this score, we agree
with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the
amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the
record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear
any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been
duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508
would have been discovered in time. For this reason, Citibank had indeed failed to perform what
was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our
view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a
business affected with public interest and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection and
supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND
16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said
checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the highest, degree of diligence. 34 A
bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of
due diligence in the selection and supervision of its employees is of no moment. 35
Banks handle daily transactions involving millions of pesos. 36 By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. 37 Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees. 38
On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its
inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior
to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment,
which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement
of his account,39 and an action upon a check is ordinarily governed by the statutory period
applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten
year from the time the right of action accrues. 41 hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the corresponding check was returned by the
bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for
the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41.
Since the original complaint for the cause of action was filed on January 20, 1984, barely six years
had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check
No. SN 04867 was seasonably filed within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure
on the part of the depositor to examine its passbook, statements of account, and cancelled checks
and to give notice within a reasonable time (or as required by statute) of any discrepancy which it
may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As
provided in Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence
in the performance of every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances. In quasi-delicts, the contributory
negligence of the plaintiff shall reduce the damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
25017 areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared
solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss,
(concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until
full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.

FRANCISCO CULABA and DEMETRIA CULABA, doing business under the name and style
Culaba
Store, petitioners,
vs.
COURT
OF
APPEALS
and
SAN
MIGUEL
CORPORATION, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review under Rule 45 of the Revised Rules of Civil Procedure of the
Decision[1] of the Court of Appeals in CA-G.R. CV No. 19836 affirming in toto the Decision[2] of the
Regional Trial Court of Makati, Branch 138, in Civil Case No. 1033 for collection of sum of money,
and the Resolution[3] denying the motion for reconsideration of the said decision.

The Undisputed Facts

The spouses Francisco and Demetria Culaba were the owners and proprietors of the Culaba Store
and were engaged in the sale and distribution of San Miguel Corporations (SMC) beer
products. SMC sold beer products on credit to the Culaba spouses in the amount of P28,650.00, as
evidenced by Temporary Credit Invoice No. 42943. [4] Thereafter, the Culaba spouses made a partial
payment of P3,740.00, leaving an unpaid balance of P24,910.00. As they failed to pay despite
repeated demands, SMC filed an action for collection of a sum of money against them before the
RTC of Makati, Branch 138.
The defendant-spouses denied any liability, claiming that they had already paid the plaintiff in full
on four separate occasions. To substantiate this claim, the defendants presented four (4) Temporary
Charge Sales (TCS) Liquidation Receipts, as follows:
April 19, 1983

Receipt No. 27331

for P8,000[5]

April 22, 1983

Receipt No. 27318

for P9,000[6]

April 27, 1983

Receipt No. 27339

for P4,500[7]

April 30, 1983

Receipt No. 27346

for P3,410[8]

Defendant Francisco Culaba testified that he made the foregoing payments to an SMC supervisor
who came in an SMC van. He was then showed a list of customers accountabilities which included
his account. The defendant, in good faith, then paid to the said supervisor, and he was, in turn,
issued genuine SMC liquidation receipts.
For its part, SMC submitted a publishers affidavit [9] to prove that the entire booklet of TCSL
Receipts bearing Nos. 27301-27350 were reported lost by it, and that it caused the publication of the
notice of loss in the July 9, 1983 issue of the Daily Express, as follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED THAT TEMPORARY CHARGE SALES
LIQUIDATION RECEIPTS WITH SERIAL NOS. 27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED INTO WITH THE USE OF THE ABOVE
RECEIPTS WILL NOT BE HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
Makati Beer Region[10]
The Trial Courts Ruling
After trial on the merits, the trial court rendered judgment in favor of SMC, and held the Culaba
spouses liable on the balance of its obligation, thus:

Wherefore, judgment is hereby rendered in favor of the plaintiff, as follows:

1.
Ordering defendants to pay the amount of P24,910.00 plus legal interest of 6% per annum
from April 12, 1983 until the whole amount is fully paid;
2.
Ordering defendants to pay 20% of the amount due to plaintiff as and for attorneys fees plus
costs.
SO ORDERED.[11]
According to the trial court, it was unusual that defendant Francisco Culaba forgot the name of the
collector to whom he made the payments and that he did not require the said collector to print his
name on the receipts. The court also noted that although they were part of a single booklet, the TCS
Liquidation Receipts submitted by the defendants did not appear to have been issued in their
natural sequence. Furthermore, they were part of the lost booklet receipts, which the public was
duly warned of through the Notice of Loss the plaintiff caused to be published in a daily newspaper.
This confirmed the plaintiffs claim that the receipts presented by the defendants were spurious
ones.
The Case on Appeal
On appeal, the appellants interposed the following assignment of errors:
I
THE TRIAL COURT ERRED IN FINDING THAT THE RECEIPTS PRESENTED BY
DEFENDANTS EVIDENCING HIS PAYMENTS TO PLAINTIFF SAN MIGUEL
CORPORATION, ARE SPURIOUS.
II
THE TRIAL COURT ERRED IN CONCLUDING THAT PLAINTIFF-APPELLEE HAS
SUFFICIENTLY PROVED ITS CAUSE OF ACTION AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING DEFENDANTS TO PAY 20% OF THE AMOUNT
DUE TO PLAINTIFF AS ATTORNEYS FEES.[12]
The appellants asserted that while the trial courts observations were true, it was the usual business
practice in previous transactions between them and SMC. The SMC previously honored receipts
not bearing the salesmans name. According to appellant Francisco Culaba, he even lost some of the
receipts, but did not encounter any problems.
According to appellant Francisco, he could not be faulted for paying the SMC collector who came
in a van and was in uniform, and that any regular customer would, without any apprehension,
transact with such an SMC employee. Furthermore, the respective receipts issued to him at the
time he paid on the four occasions mentioned had not yet then been declared lost. Thus, the
subsequent publication in a daily newspaper declaring the booklets lost did not affect the validity

and legality of the payments made. Accordingly, by its actuations, the SMC was estopped from
questioning the legality of the payments and had no cause of action against the appellants.
Anent the issue of attorneys fees, the order of the trial court for payment thereof is without basis.
According to the appellant, the provision for attorneys fees is a contingent fee, already provided for
in the SMCs contract with the law firm. To further order them to pay 20% of the amount due as
attorneys fees is double payment, tantamount to undue enrichment and therefore improper.[13]
The appellee, for its part, contended that the primary issue in the case at bar revolved around the
basic and fundamental principles of agency.[14] It was incumbent upon the defendants-appellants to
exercise ordinary prudence and reasonable diligence to verify and identify the extent of the alleged
agents authority. It was their burden to establish the true identity of the assumed agent, and this
could not be established by mere representation, rumor or general reputation. As they utterly failed
in this regard, the appellants must suffer the consequences.
The Court of Appeals affirmed the decision of the trial court, thus:
In the face of the somewhat tenuous evidence presented by the appellants, we cannot fault the lower
court for giving more weight to appellees testimonial and documentary evidence, all of which
establish with some degree of preponderance the existence of the account sued upon.
ALL CONSIDERED, we cannot find any justification to reject the factual findings of the lower
court to which we must accord respect, for which reason, the judgment appealed from is
herebyAFFIRMED in all respects.
SO ORDERED.[15]
Hence, the instant petition.
The petitioners pose the following issues for the Courts resolution:
I. WHETHER OR NOT THE RESPONDENT HAD PROVEN BY PREPONDERANT
EVIDENCE THAT IT HAD PROPERLY AND TIMELY NOTIFIED PETITIONER OF LOST
BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD PROVEN BY PREPONDERANT EVIDENCE
THAT PETITIONER WAS REMISS IN THE PAYMENT OF HIS ACCOUNTS TO ITS AGENT.[16]
According to the petitioners, receiving receipts from the private respondents agents instead of its
salesmen was a usual occurrence, as they had been operating the store since 1979. Thus, on four
occasions in April 1983, when an agent of the respondent came to the store wearing an SMC
uniform and driving an SMC van, petitioner Francisco Culaba, without question, paid his accounts.
He received the receipts without fear, as they were similar to what he used to receive before.
Furthermore, the petitioners assert that, common experience will attest that unless the attention of
the customers is called for, they would not take note of the serial number of the receipts.

The petitioners contend that the private respondent advertised its warning to the public only after
the damage was done, or on July 9, 1993. Its belated notice showed its glaring lack of interest or
concern for its customers welfare, and, in sum, its negligence.
Anent the second issue, petitioner Francisco Culaba avers that the agent to whom the accounts were
paid had all the physical and material attributes or indications of a representative of the private
respondent, leaving no doubt that he was duly authorized by the latter. Petitioner Francisco
Culabas testimony that he does not necessarily check the contents of the receipts issued to him
except for the amount indicated if [the] same accurately reflects his actual payment is a common
attitude of customers. He could, thus, not be faulted for paying the private respondents agent on
four occasions. Petitioner Francisco Culaba asserts that he made the payment in good faith, to an
agent who issued SMC receipts which appeared to be genuine. Thus, according to the petitioners,
they had duly paid their obligation in accordance with Articles 1240 and 1242 of the New Civil
Code.
The private respondent, for its part, avers that the burden of proving payment is with the debtor, in
consonance with the express provision of Article 1233 of the New Civil Code. The petitioners
miserably failed to prove the self-serving allegation that they already paid their liability to the
private respondent. Furthermore, under normal circumstances, an obligor would not just pay a
substantial amount to someone whom he saw for the first time, without even asking for the latters
name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court of Appeals as to whether the payment of the
petitioners obligation to the private respondent was properly made, thus, extinguishing the same.
This is clearly a factual issue, and beyond the purview of the Court to delve into. This is in
consonance with the well-settled rule that findings of fact of the trial court, especially when
affirmed by the Court of Appeals, are accorded the highest degree of respect, and generally will not
be disturbed on appeal. Such findings are binding and conclusive on the Court. [17] Furthermore, it is
not the Courts function under Rule 45 of the Rules of Court, as amended, to review, examine and
evaluate or weigh the probative value of the evidence presented. [18]
To reiterate, the issue being raised by the petitioners does not involve a question of law, but a
question of fact, not cognizable by this Court in a petition for review under Rule 45. The jurisdiction
of the Court in such a case is limited to reviewing only errors of law, unless the factual findings
being assailed are not supported by evidence on record or the impugned judgment is based on a
misapprehension of facts.[19]
A careful study of the records of the case reveal that the appellate court affirmed the trial courts
factual findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and 27346 were included in the private respondents lost
booklet, which loss was duly advertised in a newspaper of general circulation; thus, the private

respondent could not have officially issued them to the petitioners to cover the alleged payments on
the dates appearing thereon.
Second. There was something amiss in the way the receipts were issued to the petitioners, as one
receipt bearing a higher serial number was issued ahead of another receipt bearing a lower serial
number, supposedly covering a later payment. The petitioners failed to explain the apparent mix-up
in these receipts, and no attempt was made in this regard.
Third. The fact that the salesmans name was invariably left blank in the four receipts and that the
petitioners could not even remember the name of the supposed impostor who received the said
payments strongly argue against the veracity of the petitioners claim.
We find no cogent reason to reverse the said findings.
The dismissal of the petition is inevitable even upon close perusal of the merits of the case.
Payment is a mode of extinguishing an obligation.[20] Article 1240 of the Civil Code provides that
payment shall be made to the person in whose favor the obligation has been constituted, or his
successor-in-interest, or any person authorized to receive it. [21] In this case, the payments were
purportedly made to a supervisor of the private respondent, who was clad in an SMC uniform
and drove an SMC van. He appeared to be authorized to accept payments as he showed a list of
customers accountabilities and even issued SMC liquidation receipts which looked genuine.
Unfortunately for petitioner Francisco Culaba, he did not ascertain the identity and authority of
the said supervisor, nor did he ask to be shown any identification to prove that the latter was,
indeed, an SMC supervisor. The petitioners relied solely on the mans representation that he was
collecting payments for SMC. Thus, the payments the petitioners claimed they made were not the
payments that discharged their obligation to the private respondent.
The basis of agency is representation.[22] A person dealing with an agent is put upon inquiry and
must discover upon his peril the authority of the agent. [23] In the instant case, the petitioners loss
could have been avoided if they had simply exercised due diligence in ascertaining the identity of
the person to whom they allegedly made the payments. The fact that they were parting with
valuable consideration should have made them more circumspect in handling their business
transactions. Persons dealing with an assumed agent are bound at their peril to ascertain not only
the fact of agency but also the nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it. [24] The petitioners in this case failed to discharge this
burden, considering that the private respondent vehemently denied that the payments were
accepted by it and were made to its authorized representative.
Negligence is the omission to do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the doing of something, which
a prudent and reasonable man would not do. [25] In the case at bar, the most prudent thing the
petitioners should have done was to ascertain the identity and authority of the person who collected
their payments. Failing this, the petitioners cannot claim that they acted in good faith when they
made such payments. Their claim therefor is negated by their negligence, and they are bound by its

consequences. Being negligent in this regard, the petitioners cannot seek relief on the basis of a
supposed agency.[26]
WHEREFORE, the instant petition is hereby DENIED. The assailed Decision dated April 16, 1996,
and the Resolution dated July 19, 1996 of the Court of Appeals are AFFIRMED. Costs against the
petitioners.
SO ORDERED.
Puno, (Chairman), Quisumbing, Austria-Martinez, and Tinga, JJ., concur.