Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN
PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.
GANCAYCO, J.:
The principal issue: Whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by
respondent Court of Appeals in the present two cases between petitioner
and two private respondents.
Nature of the case: Recovery of Possession, which affirmed the Decision of
the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of
Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655
(429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic
Vicar Apostolic of the Mountain Province to return and surrender Lot 2 of
Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez, and Lot 3 of the
same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano
(Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs'
claim or damages is hereby denied. Said defendant is ordered to pay costs.
(p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision,
sustained the trial court's conclusions that the Decision of the Court of
Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases
affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in
question; that the two lots were possessed by the predecessors-in-interest
of private respondents under claim of ownership in good faith from 1906 to
1951; that petitioner had been in possession of the same lots as bailee in
commodatum up to 1951, when petitioner repudiated the trust and when it
applied for registration in 1962; that petitioner had just been in possession
as owner for eleven years, hence there is no possibility of acquisitive
prescription which requires 10 years possession with just title and 30 years
of possession without; that the principle of res judicata on these findings by
the Court of Appeals will bar a reopening of these questions of facts; and
that those facts may no longer be altered.
FACTS:

The whole controversy started when the Catholic Vicar Apostolic of the
Mountain Province (VICAR for brevity) filed with the Court of First Instance
of Baguio Benguet on September 5, 1962 an application for registration of
title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the
Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On March 22,
1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership
and title thereto. After trial on the merits, the land registration court
promulgated its Decision, dated November 17, 1965, confirming the
registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and
the Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607)
appealed the decision of the land registration court to the then Court of
Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered
its decision, dated May 9, 1977, reversing the decision of the land
registration court and dismissing the VICAR's application as to Lots 2 and 3,
the lots claimed by the two sets of oppositors in the land registration case
(and two sets of plaintiffs in the two cases now at bar), the first lot being
presently occupied by the convent and the second by the women's
dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration
praying the Court of Appeals to order the registration of Lot 3 in the names
of the Heirs of Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan
Valdez and Pacita Valdez filed their motion for reconsideration praying that
both Lots 2 and 3 be ordered registered in the names of the Heirs of Juan
Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied
the motion for reconsideration filed by the Heirs of Juan Valdez on the
ground that there was "no sufficient merit to justify reconsideration one
way or the other ...," and likewise denied that of the Heirs of Egmidio
Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on
certiorari of the decision of the Court of Appeals dismissing his (its)
application for registration of Lots 2 and 3, docketed as G.R. No. L-46832,
entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of
Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration
the Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with
the Supreme Court a petition for review, docketed as G.R. No. L-46872,
entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar,
Heirs of Egmidio Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution both
petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita
Valdez on the other) for lack of merit. Upon the finality of both Supreme
Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of
Octaviano filed with the then Court of First Instance of Baguio, Branch II, a
Motion For Execution of Judgment praying that the Heirs of Octaviano be
placed in possession of Lot 3. The Court, presided over by Hon. Salvador J.
Valdez, on December 7, 1978, denied the motion on the ground that the
Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs of
Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals
a petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R,
entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and
Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed
the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio
Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655
(429) on September 24, 1979, likewise for recovery of possession of Lot 2
(Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio
Octaviano presented one (1) witness, Fructuoso Valdez, who testified on the
alleged ownership of the land in question (Lot 3) by their predecessor-ininterest, Egmidio Octaviano (Exh. C ); his written demand (Exh. BB-4 ) to
defendant Vicar for the return of the land to them; and the reasonable
rentals for the use of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province of
Benguet, Atty. Nicanor Sison, who testified that the land in question is not
covered by any title in the name of Egmidio Octaviano or any of the
plaintiffs (Exh. 8). The defendant dispensed with the testimony of
Mons.William Brasseur when the plaintiffs admitted that the witness if
called to the witness stand, would testify that defendant Vicar has been in
possession of Lot 3, for seventy-five (75) years continuously and peacefully
and has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not
in dispute, submitted the case on the sole issue of whether or not the
decisions of the Court of Appeals and the Supreme Court touching on the
ownership of Lot 2, which in effect declared the plaintiffs the owners of the
land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred
from setting up the defense of ownership and/or long and continuous
possession of the two lots in question since this is barred by prior judgment
of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res

judicata. Plaintiffs contend that the question of possession and ownership

have already been determined by the Court of Appeals (Exh. C, Decision,
CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute
Resolution of the Supreme Court). On his part, defendant Vicar maintains
that the principle of res judicata would not prevent them from litigating the
issues of long possession and ownership because the dispositive portion of
the prior judgment in CA-G.R. No. 038830-R merely dismissed their
application for registration and titling of lots 2 and 3. Defendant Vicar
contends that only the dispositive portion of the decision, and not its body,
is the controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to
petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3
WERE ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE
PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND
3 FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE
FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE
RESPONDENTS WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST
FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT
APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN
1951 AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN
RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE
PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN
CA G.R. NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED
ON OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND
THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A
CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS
2 AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN
GOOD FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND
IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA
G.R. NO. 038830. 3
The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R.

Nos. 05148 and 05149, when it clearly held that it was in agreement with
the findings of the trial court that the Decision of the Court of Appeals
dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of
Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No.
38830-R) did not positively declare private respondents as owners of the
land, neither was it declared that they were not owners of the land, but it
held that the predecessors of private respondents were possessors of Lots
2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it
repudiated the trust by declaring the properties in its name for taxation
purposes. When petitioner applied for registration of Lots 2 and 3 in 1962, it
had been in possession in concept of owner only for eleven years. Ordinary
acquisitive prescription requires possession for ten years, but always with
just title. Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the
Court of Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no
error in respondent appellate court's ruling that said findings are res
judicata between the parties. They can no longer be altered by
presentation of evidence because those issues were resolved with finality a
long time ago. To ignore the principle of res judicata would be to open the
door to endless litigations by continuous determination of issues without
end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question
under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of
30 years possession for acquisitive prescription over Lots 2 and 3. Neither
did it satisfy the requirement of 10 years possession for ordinary acquisitive
prescription because of the absence of just title. The appellate court did not
believe the findings of the trial court that Lot 2 was acquired from Juan
Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio
Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by
Valdez and Octaviano. Both Valdez and Octaviano had Free Patent
Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned lots
since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not
in question, but not Lots 2 and 3, because the buildings standing thereon

were only constructed after liberation in 1945. Petitioner Vicar only

declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil
Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed
only in 1947, the church was constructed only in 1951 and the new convent
only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish
priest offered to buy the lot from Fructuoso Valdez. Lots 2 and 3 were
surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was
borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the
petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part
of the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The action of petitioner Vicar by
such adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private
respondents were possessors under claim of ownership in good faith from
1906; that petitioner Vicar was only a bailee in commodatum; and that the
adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals
in CA-G.R. No. 38830-R. Its findings of fact have become incontestible. This
Court declined to review said decision, thereby in effect, affirming it. It has
become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less
grave abuse of discretion, when it held that the Decision of the Court of
Appeals in CA-G.R. No. 38830-R is governing, under the principle of res
judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CAG.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED
for lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148
and 05149, by respondent Court of Appeals is AFFIRMED, with costs against
petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY
FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents.
MAKASIAR, Actg. C.J.:+.wph!1
This is a petition for prohibition and injunction with a prayer for the
immediate issuance of restraining order and/or writ of preliminary
injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on
the same date, a temporary restraining order was duly issued ordering the
respondents, their officers, agents, representatives and/or person or
persons acting upon their (respondents') orders or in their place or stead to
refrain from proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On
January 24, 1983, private respondent Clement David filed a motion to lift
restraining order which was denied in the resolution of this Court dated May
18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit
public respondents from proceeding with the preliminary investigation of
I.S. No. 81-31938, in which petitioners were charged by private respondent
Clement David, with estafa and violation of Central Bank Circular No. 364
and related regulations regarding foreign exchange transactions principally,
on the ground of lack of jurisdiction in that the allegations of the charged,
as well as the testimony of private respondent's principal witness and the
evidence through said witness, showed that petitioners' obligation is civil in
nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by
the Solicitor General in its Comment dated June 28,1982, as follows:t.
hqw
On December 23,1981, private respondent David filed I.S. No. 81-31938 in
the Office of the City Fiscal of Manila, which case was assigned to
respondent Lota for preliminary investigation (Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one Robert
Marshall and the following directors of the Nation Savings and Loan
Association, Inc., namely Homero Gonzales, Juan Merino, Flavio Macasaet,
Victor Gomez, Jr., Perfecto Manalac, Jaime V. Paz, Paulino B. Dionisio, and
one John Doe) with estafa and violation of Central Bank Circular No. 364
and related Central Bank regulations on foreign exchange transactions,
allegedly committed as follows (Petition, Annex "A"):t.hqw

"From March 20, 1979 to March, 1981, David invested with the Nation
Savings and Loan Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of payment and
US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments
by Robert Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President, petitioner Martin,
then NSLA Executive Vice-President of NSLA and petitioner Santos, then
NSLA General Manager; that on March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David filed claims therewith for
his investments and those of his sister; that on July 22, 1981 David received
a report from the Central Bank that only P305,821.92 of those investments
were entered in the records of NSLA; that, therefore, the respondents in I.S.
No. 81-31938 misappropriated the balance of the investments, at the same
time violating Central Bank Circular No. 364 and related Central Bank
regulations on foreign exchange transactions; that after demands,
petitioner Guingona Jr. paid only P200,000.00, thereby reducing the
amounts misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition,
Annex' B') in which they stated the following.t.hqw
"That Martin became President of NSLA in March 1978 (after the resignation
of Guingona, Jr.) and served as such until October 30, 1980, while Santos
was General Manager up to November 1980; that because NSLA was
urgently in need of funds and at David's insistence, his investments were
treated as special- accounts with interest above the legal rate, an recorded
in separate confidential documents only a portion of which were to be
reported because he did not want the Australian government to tax his
total earnings (nor) to know his total investments; that all transactions with
David were recorded except the sum of US$15,000.00 which was a personal
loan of Santos; that David's check for US$50,000.00 was cleared through
Guingona, Jr.'s dollar account because NSLA did not have one, that a draft
of US$30,000.00 was placed in the name of one Paz Roces because of a
pending transaction with her; that the Philippine Deposit Insurance
Corporation had already reimbursed David within the legal limits; that
majority of the stockholders of NSLA had filed Special Proceedings No. 821695 in the Court of First Instance to contest its (NSLA's) closure; that after
NSLA was placed under receivership, Martin executed a promissory note in
David's favor and caused the transfer to him of a nine and on behalf (9 1/2)
carat diamond ring with a net value of P510,000.00; and, that the liabilities
of NSLA to David were civil in nature."

Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated

the following:t.hqw
"That he had no hand whatsoever in the transactions between David and
NSLA since he (Guingona Jr.) had resigned as NSLA president in March
1978, or prior to those transactions; that he assumed a portion o; the
liabilities of NSLA to David because of the latter's insistence that he placed
his investments with NSLA because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex "D") he (Guingona,
Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00
in stated installments; that he (Guingona, Jr.) secured payment of those
amounts with second mortgages over two (2) parcels of land under a deed
of Second Real Estate Mortgage (Petition, Annex "E") in which it was
provided that the mortgage over one (1) parcel shall be cancelled upon
payment of one-half of the obligation to David; that he (Guingona, Jr.) paid
P200,000.00 and tendered another P300,000.00 which David refused to
accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865 in the Court
of First Instance of Rizal at Quezon City, to effect the release of the
mortgage over one (1) of the two parcels of land conveyed to David under
second mortgages."
At the inception of the preliminary investigation before respondent Lota,
petitioners moved to dismiss the charges against them for lack of
jurisdiction because David's claims allegedly comprised a purely civil
obligation which was itself novated. Fiscal Lota denied the motion to
dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the
instant petition because: (a) the production of the Promisory Notes,
Banker's Acceptance, Certificates of Time Deposits and Savings Account
allegedly showed that the transactions between David and NSLA were
simple loans, i.e., civil obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b) David's principal
witness allegedly testified that the duplicate originals of the aforesaid
instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative
remedies because to do so would be futile (Petition, p. 9) [pp. 153-157,
rec.].
As correctly pointed out by the Solicitor General, the sole issue for
resolution is whether public respondents acted without jurisdiction when
they investigated the charges (estafa and violation of CB Circular No. 364
and related regulations regarding foreign exchange transactions) subject
matter of I.S. No. 81-31938.

There is merit in the contention of the petitioners that their liability is civil
in nature and therefore, public respondents have no jurisdiction over the
charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the
Office of the City Fiscal of Manila by private respondent David against
petitioners Teopisto Guingona, Jr., Antonio I. Martin and Teresita G. Santos,
together with one Robert Marshall and the other directors of the Nation
Savings and Loan Association, will show that from March 20, 1979 to March,
1981, private respondent David, together with his sister, Denise Kuhne,
invested with the Nation Savings and Loan Association the sum of
P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings
account deposits covered by passbook nos. 6-632 and 29-742, or a total of
P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent
David, together with his sister, made investments in the aforesaid bank in
the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed
under receivership on March 21, 1981, petitioners Guingona and Martin,
upon the request of private respondent David, assumed the obligation of
the bank to private respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging an
indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This
promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of
indebtedness assumed appears to be bigger than the original claim
because of the added interest and the inclusion of other deposits of private
respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to
divide the said indebtedness, and petitioner Guingona executed another
promissory note antedated to June 17, 1981 whereby he personally
acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02) and
US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25,
rec.). The aforesaid promissory notes were executed as a result of deposits
made by Clement David and Denise Kuhne with the Nation Savings and
Loan Association.
Furthermore, the various pleadings and documents filed by private
respondent David, before this Court indisputably show that he has indeed
invested his money on time and savings deposits with the Nation Savings
and Loan Association.
It must be pointed out that when private respondent David invested his
money on nine. and savings deposits with the aforesaid bank, the contract
that was perfected was a contract of simple loan or mutuum and not a

contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:t.hqw
Article 1980. Fixed, savings, and current deposits of-money in banks and
similar institutions shall be governed by the provisions concerning simple
loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119
[1975], We said:t.hqw
It should be noted that fixed, savings, and current deposits of money in
banks and similar institutions are hat true deposits. are considered simple
loans and, as such, are not preferred credits (Art. 1980 Civil Code; In re
Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American
Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs. Chinese Grocers
Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong
UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65
PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of
the Philippines (96 SCRA 102 [1980]) that:t.hqw
Bank deposits are in the nature of irregular deposits. They are really 'loans
because they earn interest. All kinds of bank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered by the
law on loans (Art. 1980 Civil Code Gullas vs. Phil. National Bank, 62 Phil.
519). Current and saving deposits, are loans to a bank because it can use
the same. The petitioner here in making time deposits that earn interests
will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the time
deposit is failure to pay its obligation as a debtor and not a breach of
trust arising from a depositary's failure to return the subject matter of the
deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation
Savings and Loan Association is that of creditor and debtor; consequently,
the ownership of the amount deposited was transmitted to the Bank upon
the perfection of the contract and it can make use of the amount deposited
for its banking operations, such as to pay interests on deposits and to pay
withdrawals. While the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation
punishable under Article 315, par. l(b) of the Revised Penal Code, but it will
only give rise to civil liability over which the public respondents have nojurisdiction.
WE have already laid down the rule that:t.hqw

In order that a person can be convicted under the above-quoted provision,

it must be proven that he has the obligation to deliver or return the some
money, goods or personal property that he receivedPetitioners had no such
obligation to return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as clearly as stated
in criminal complaints, the related civil complaints and the supporting
sworn statements, the sums of money that petitioners received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil
Code.t.hqw
"Art. 1933. By the contract of loan, one of the parties delivers to another,
either something not consumable so that the latter may use the same for a
certain time- and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall he paid in which
case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned while
in simple loan, ownership passes to the borrower.
"Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality."
It can be readily noted from the above-quoted provisions that in simple
loan (mutuum), as contrasted to commodatum the borrower acquires
ownership of the money, goods or personal property borrowed Being the
owner, the borrower can dispose of the thing borrowed (Article 248, Civil
Code) and his act will not be considered misappropriation thereof' (Yam vs.
Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings
deposits of private respondent David would constitute a violation of
paragraph 1(b) of Article 315 of the Revised Penal Code, nevertheless any
incipient criminal liability was deemed avoided, because when the
aforesaid bank was placed under receivership by the Central Bank,
petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original
contractual obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and private
respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank or
petitioners Guingona and Martin to pay the deposits of private respondent
would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability,
it may however, prevent the rise of criminal liability as long as it occurs
prior to the filing of the criminal information in court. Thus, in Gonzales vs.
Serrano ( 25 SCRA 64, 69 [1968]) We held that:t.hqw
As pointed out in People vs. Nery, novation prior to the filing of the criminal
information as in the case at bar may convert the relation between
the parties into an ordinary creditor-debtor relation, and place the
complainant in estoppel to insist on the original transaction or "cast doubt
on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA
578, 580-581 [1983] ), this Court reiterated the ruling in People vs.
Nery ( 10 SCRA 244 [1964] ), declaring that:t.hqw
The novation theory may perhaps apply prior to the filling of the criminal
information in court by the state prosecutors because up to that time the
original trust relation may be converted by the parties into an ordinary
creditor-debtor situation, thereby placing the complainant in estoppel to
insist on the original trust. But after the justice authorities have taken
cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense against
the state, only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz.
2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the means
recognized by the Penal Code whereby criminal liability can be
extinguished; hence, the role of novation may only be to either prevent the
rise of criminal habihty or to cast doubt on the true nature of the original
basic transaction, whether or not it was such that its breach would not give
rise to penal responsibility, as when money loaned is made to appear as a
deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil.
581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin
executed a promissory note on June 17, 1981 assuming the obligation of
the bank to private respondent David; while the criminal complaint for
estafa was filed on December 23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long before the filing of the
criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be
avoided but there will still be a civil liability on the part of petitioners
Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of
Central Bank Circular No. 364 and other related regulations regarding
foreign exchange transactions by accepting foreign currency deposit in the
amount of US$75,000.00 without authority from the Central Bank. They

contend however, that the US dollars intended by respondent David for

deposit were all converted into Philippine currency before acceptance and
deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to
make a deposit of bank draft issued in his name in the amount of
US$50,000.00 with the Nation Savings and Loan Association, the same had
to be cleared first and converted into Philippine currency. Accordingly, the
bank draft was endorsed by respondent David to petitioner Guingona, who
in turn deposited it to his dollar account with the Security Bank and Trust
Company. Petitioner Guingona merely accommodated the request of the
Nation Savings and loan Association in order to clear the bank draft through
his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona
authorized Nation Savings and Loan Association to withdraw the same in
order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into
Philippine pesos before they were accepted and deposited in Nation
Savings and Loan Association, because the bank is presumed to have
followed the ordinary course of the business which is to accept deposits in
Philippine currency only, and that the transaction was regular and fair, in
the absence of a clear and convincing evidence to the contrary (see
paragraphs p and q,Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein
petitioners despite the fact that it was raised. in petitioners' reply filed on
May 7, 1982 to private respondent's comment and in the July 27, 1982
reply to public respondents' comment and reiterated in petitioners'
memorandum filed on October 30, 1982, thereby adding more support to
the conclusion that the US$75,000.00 were really converted into Philippine
currency before they were accepted and deposited into Nation Savings and
Loan Association. Considering that this might adversely affect his case,
respondent David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil
in nature and that there is no clear showing that they engaged in foreign
exchange transactions, We hold that the public respondents acted without
jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further
proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work
great injustice to petitioners and would render meaningless the proper
administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject
of prohibition and injunction, this court has recognized the resort to the

extraordinary writs of prohibition and injunction in extreme cases, thus:t.

hqw
On the issue of whether a writ of injunction can restrain the proceedings in
Criminal Case No. 3140, the general rule is that "ordinarily, criminal
prosecution may not be blocked by court prohibition or injunction."
Exceptions, however, are allowed in the following instances:t.hqw
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive and
vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or
was held invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93
SCRA 462, 469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557 [1968];
and Hernandez vs. Albano, 19 SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]),
We held that:t.hqw
The writs of certiorari and prohibition, as extraordinary legal remedies, are
in the ultimate analysis, intended to annul void proceedings; to prevent the
unlawful and oppressive exercise of legal authority and to provide for a fair
and orderly administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47
Phil. 385, We took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due time from the
order complained of, our action in the premises being based on the public
welfare policy the advancement of public policy. In Dimayuga vs.
Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they could have
appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong arm
of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for
certiorari challenging the trial court's action admitting an amended
information was sustained despite the availability of appeal at the proper
time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.1wph1.t
Concepcion, Jr., Guerrero, De Castro and Escolin, JJ., concur.
Abad Santos, J., concur in the result.
Aquino, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17474
October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left
by the late Jose V. Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only
questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines
through the Bureau of Animal Industry three bulls: a Red Sindhi with a book
value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46,
for a period of one year from 8 May 1948 to 7 May 1949 for breeding
purposes subject to a government charge of breeding fee of 10% of the
book value of the bulls. Upon the expiration on 7 May 1949 of the contract,
the borrower asked for a renewal for another period of one year. However,
the Secretary of Agriculture and Natural Resources approved a renewal
thereof of only one bull for another year from 8 May 1949 to 7 May 1950
and requested the return of the other two. On 25 March 1950 Jose V. Bagtas
wrote to the Director of Animal Industry that he would pay the value of the
three bulls. On 17 October 1950 he reiterated his desire to buy them at a
value with a deduction of yearly depreciation to be approved by the Auditor
General. On 19 October 1950 the Director of Animal Industry advised him
that the book value of the three bulls could not be reduced and that they
either be returned or their book value paid not later than 31 October 1950.
Jose V. Bagtas failed to pay the book value of the three bulls or to return
them. So, on 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him praying that
he be ordered to return the three bulls loaned to him or to pay their book
value in the total sum of P3,241.45 and the unpaid breeding fee in the sum
of P199.62, both with interests, and costs; and that other just and equitable
relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo,
answered that because of the bad peace and order situation in Cagayan
Valley, particularly in the barrio of Baggao, and of the pending appeal he
had taken to the Secretary of Agriculture and Natural Resources and the
President of the Philippines from the refusal by the Director of Animal

Industry to deduct from the book value of the bulls corresponding yearly
depreciation of 8% from the date of acquisition, to which depreciation the
Auditor General did not object, he could not return the animals nor pay
their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total
value of the three bulls plus the breeding fees in the amount of P626.17
with interest on both sums of (at) the legal rate from the filing of this
complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution
which the court granted on 18 October and issued on 11 November 1958.
On 2 December 1958 granted an ex-parte motion filed by the plaintiff on
November 1958 for the appointment of a special sheriff to serve the writ
outside Manila. Of this order appointing a special sheriff, on 6 December
1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose
Bagtas who died on 23 October 1951 and as administratrix of his estate,
was notified. On 7 January 1959 she file a motion alleging that on 26 June
1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal
of Industry and that sometime in November 1958 the third bull, the
Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a
writ of preliminary injunction be issued. On 31 January 1959 the plaintiff
objected to her motion. On 6 February 1959 she filed a reply thereto. On
the same day, 6 February, the Court denied her motion. Hence, this appeal
certified by the Court of Appeals to this Court as stated at the beginning of
this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by
the late defendant, returned the Sindhi and Bhagnari bulls to Roman
Remorin, Superintendent of the NVB Station, Bureau of Animal Industry,
Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection of 31 January
1959 to the appellant's motion to quash the writ of execution the appellee
prays "that another writ of execution in the sum of P859.53 be issued
against the estate of defendant deceased Jose V. Bagtas." She cannot be
held liable for the two bulls which already had been returned to and
received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed
during a raid by the Huk in November 1953 upon the surrounding barrios of
Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and
that as such death was due to force majeure she is relieved from the duty
of returning the bull or paying its value to the appellee. The contention is
without merit. The loan by the appellee to the late defendant Jose V. Bagtas
of the three bulls for breeding purposes for a period of one year from 8 May

1948 to 7 May 1949, later on renewed for another year as regards one bull,
was subject to the payment by the borrower of breeding fee of 10% of the
book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A
contract ofcommodatum is essentially gratuitous.1 If the breeding fee be
considered a compensation, then the contract would be a lease of the bull.
Under article 1671 of the Civil Code the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract. And even if the
contract be commodatum, still the appellant is liable, because article 1942
of the Civil Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous
event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exempting the bailee from responsibility in case of a
fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The
loan of one bull was renewed for another period of one year to end on 8
May 1950. But the appellant kept and used the bull until November 1953
when during a Huk raid it was killed by stray bullets. Furthermore, when
lent and delivered to the deceased husband of the appellant the bulls had
each an appraised book value, to with: the Sindhi, at P1,176.46, the
Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated
that in case of loss of the bull due to fortuitous event the late husband of
the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for
the return of the bull or the payment of its value being a money claim
should be presented or filed in the intestate proceedings of the defendant
who died on 23 October 1951, is not altogether without merit. However, the
claim that his civil personality having ceased to exist the trial court lost
jurisdiction over the case against him, is untenable, because section 17 of
Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall
order, upon proper notice, the legal representative of the deceased to
appear and to be substituted for the deceased, within a period of thirty (30)
days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to
comply with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his
attorney to inform the court promptly of such death . . . and to give the

name and residence of the executory administrator, guardian, or other legal

representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that
Felicidad M. Bagtas had been issue letters of administration of the estate of
the late Jose Bagtas and that "all persons having claims for monopoly
against the deceased Jose V. Bagtas, arising from contract express or
implied, whether the same be due, not due, or contingent, for funeral
expenses and expenses of the last sickness of the said decedent, and
judgment for monopoly against him, to file said claims with the Clerk of this
Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months
from the date of the first publication of this order, serving a copy thereof
upon the aforementioned Felicidad M. Bagtas, the appointed administratrix
of the estate of the said deceased," is not a notice to the court and the
appellee who were to be notified of the defendant's death in accordance
with the above-quoted rule, and there was no reason for such failure to
notify, because the attorney who appeared for the defendant was the same
who represented the administratrix in the special proceedings instituted for
the administration and settlement of his estate. The appellee or its attorney
or representative could not be expected to know of the death of the
defendant or of the administration proceedings of his estate instituted in
another court that if the attorney for the deceased defendant did not notify
the plaintiff or its attorney of such death as required by the rule.
As the appellant already had returned the two bulls to the appellee, the
estate of the late defendant is only liable for the sum of P859.63, the value
of the bull which has not been returned to the appellee, because it was
killed while in the custody of the administratrix of his estate. This is the
amount prayed for by the appellee in its objection on 31 January 1959 to
the motion filed on 7 January 1959 by the appellant for the quashing of the
writ of execution.
Special proceedings for the administration and settlement of the estate of
the deceased Jose V. Bagtas having been instituted in the Court of First
Instance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be
presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without
pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Paredes, Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7667
November 28, 1955
CHERIE PALILEO, plaintiff-appellee,
vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.
BAUTISTA ANGELO, J.:
Plaintiff filed a complaint against defendant in the Court of First Instance of
Manila praying that (1) the transaction entered into between them on
December 18, 1951 be declared as one of loan, and the document
executed covering the transaction as one of equitable mortgage to secure
the payment of said loan; (2) the defendant be ordered to credit to the
plaintiff with the necessary amount from the sum received by the
defendant from the Associated Insurance & Surety Co., Inc. and to apply
the same to the payment of plaintiff's obligation thus considering it as fully
paid; and (3) the defendant be ordered to pay to plaintiff the difference
between the alleged indebtedness of plaintiff and the sum received by
defendant from the aforementioned insurance company, plus the sum
allegedly paid to defendant as interest on the alleged indebtedness.
On December 19, 1952, defendant filed her answer setting up as special
defense that the transaction entered into between the plaintiff and
defendant is one of sale with option to repurchase but that the period for
repurchase had expired without plaintiff having returned the price agreed
upon as a result of which the ownership of the property had become
consolidated in the defendant. Defendant also set up certain counterclaims
which involve a total amount of P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of
several postponements asked by the parties, the same has to be set anew
for trial on January 12, 1954. On this date, neither the defendant nor her
counsel appeared, even if the latter had been notified of the postponement
almost a month earlier, and so the court received the evidence of the
plaintiff. On January 18, 1954, the court, having in view the evidence
presented, rendered judgment granting the relief prayed for in the
complaint.
On February 2, 1954, the original counsel for the defendant was substituted
and the new counsel immediately moved that the judgment be set aside on
the ground that, due to mistake or excusable negligence, defendant was
unable to present her evidence and the decision was contrary to law, and
this motion having been denied, defendant took the present appeal.

10

The important issue to be determined in this appeal is whether the lower

court committed a grave abuse of discretion in not reopening the case to
give defendant an opportunity to present her evidence considering that the
failure of her original counsel to appear was due to mistake or execusable
negligence which ordinary prudence could not have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as
February 11, 1953, said counsel showed interest in the early disposal of this
case by moving the court to have it set for trial. The first date set was April
7, 1953, but no hearing was had on that date because plaintiff had moved
to postpone it. The case was next set for hearing on April 28, 1953, but on
motion again of plaintiff, the hearing was transferred to November 6, 1953.
Then, upon petition of defendant, the trial had to be moved to December
15, 1953, and because Atty. Guerrero could not appear on said date
because of a case he had in Cebu City, the hearing was postponed to
January 18, 1954.
And on January 4, 1954, or nineteen days after receiving the notice of
hearing, Atty. Guerrero was appointed Undersecretary of Foreign Affairs. It
is now contended that the appointment was so sudden and unexpected
that Atty. Guerrero, after taking his oath, was unable to wind up his private
cases or make any preparation at all. It is averred that "The days that
followed his appointment were very busy days for defendant's former
counsel. There was an immediate need for clearing the backlog of official
business, including the reorganization of the Department of Foreign Affairs
and our Foreign Service, and more importantly, he had to assist the
Secretary of Foreign Affairs in negotiations of national importance like the
Japanese reparations, and the revision of the trade agreement with the
United States, that, Atty. Guerrero had to work as much as fourteen hours
daily . . . Because of all these unavoidable confusion that followed in the
wake of Atty. Guerrero's sudden and unexpected appointment, the trial of
this case scheduled for January 18, 1954 escaped his memory, and
consequently, Atty. Guerrero and the defendant were unable to appear
when the case was called for trial." These reasons, it is intimated,
constitute excusable negligence which ordinary prudence could not have
guarded against and should have been considered by the trial court as
sufficient justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment
or order on the ground of mistake or excusable negligence is addressed to
the sound discretion of the court (see Coombs vs. Santos, 24 Phil., 446;
Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of
such discretion is ordinarily not to be disturbed unless it is shown that the
court has gravely abused such discretion. (See Tell vs. Tell, 48 Phil., 70;
Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203;
Manzanares vs. Moreta, 38 Phil., 821; Salvavs. Palacio and Leuterio, 90

Phil., 731.) In denying the motion for reopening the trial court said: "After
going over the same arguments, this Court is of the opinion, and so holds
that the decision of this Court of January 18, 1954 should not be disturbed."
Considering the stature, ability and experience of counsel Leon Ma.
Guerrero, and the fact that he was given almost one month notice before
the date set for trial, we are persuaded to conclude that the trial court did
not abuse its discretion in refusing to reconsider its decision.
Coming now to the merits of the case, we note that the lower court made
the following findings: On December 18, 1951, plaintiff obtained from
defendant a loan in the sum of P12,000 subject to the following conditions:
(a) that plaintiff shall pay to defendant an interest in the amount of P250 a
month; (b) that defendant shall deduct from the loan certain obligations of
plaintiff to third persons amounting to P4,550, plus the sum of P250 as
interest for the first month; and (c) that after making the above deductions,
defendant shall deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the
loan a total of P2,250.00 corresponding to nine months from December 18,
1951, on the basis of P250.00 a month, which is more than the maximum
interest authorized by law. To secure the payment of the aforesaid loan,
defendant required plaintiff to sign a document known as "Conditional Sale
of Residential Building", purporting to convey to defendant, with right to
repurchase, a two-story building of strong materials belonging to plaintiff.
This document did not express the true intention of the parties which was
merely to place said property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the
building against fire with the Associated Insurance & Surety Co., Inc. for the
sum of P15,000, the insurance policy having been issued in the name of
defendant. The building was partly destroyed by fire and, after proper
demand, defendant collected from the insurance company an indemnity of
P13,107.00. Plaintiff demanded from defendant that she be credited with
the necessary amount to pay her obligation out of the insurance proceeds
but defendant refused to do so. And on the strength of these facts, the
court rendered decision the dispositive part of which reads as follows:
Wherefore, judgment is hereby rendered declaring the transaction had
between plaintiff and defendant, as shown in Exhibit A, an equitable
mortgage to secure the payment of the sum of P12,000 loaned by the
defendant to plaintiff; ordering the defendant to credit the sum of P13,107
received by the defendant from the Associated Insurance & surety Co., Inc.
to the payment of plaintiff's obligation in the sum of P12,000.00 as stated
in the complaint, thus considering the agreement of December 18, 1951
between the herein plaintiff and defendant completely paid and leaving still
a balance in the sum of P1,107 from the insurance collected by defendant;
that as plaintiff had paid to the defendant the sum of P2,250.00 for nine

11

months as interest on the sum of P12,000 loaned to plaintiff and the legal
interest allowed by law in this transaction does not exceed 12 per cent per
annum, or the sum of P1,440 for one year, so the herein plaintiff and
overpaid the sum of P810 to the defendant, which this Court hereby
likewise orders the said defendant to refund to herein plaintiff, plus the
balance of P1,107 representing the difference of the sum loan of P12,000
and the collected insurance of P13,107 from the insurance company
abovementioned to which the herein plaintiff is entitled to receive, and to
pay the costs.
The question that now arises is: Is the trial court justified in considering the
obligation of plaintiff fully compensated by the insurance amount and in
ordering defendant to refund to plaintiff the sum of P1,107 representing the
difference of the loan of P12,000 and the sum of P13,107 collected by said
defendant from the insurance company notwithstanding the fact that it was
not proven that the insurance was taken for the benefit of the mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs
counter to the rule governing an insurance taken by a mortgagee
independently of the mortgagor. The rule is that "where a mortgagee,
independently of the mortgagor, insures the mortgaged property in his own
name and for his own interest, he is entitled to the insurance proceeds in
case of loss, but in such case, he is not allowed to retain his claim against
the mortgagor,but is passed by subrogation to the insurer to the extent of
the money paid." (Vance on Insurance, 2d ed., p. 654)Or, stated in another
way, "the mortgagee may insure his interest in the property independently
of the mortgagor. In that event, upon the destruction of the property the
insurance money paid to the mortgagee will not inure to the benefit of the
mortgagor, and the amount due under the mortgage debt remains
unchanged. The mortgagee, however, is not allowed to retain his claim
against the mortgagor, but it passes by subrogation to the insurer, to the
extent of the insurance money paid." (Vance on Insurance, 3rd ed., pp. 772773) This is the same rule upheld by this Court in a case that arose in this
jurisdiction. In the case mentioned, an insurance contract was taken out by
the mortgagee upon his own interest, it being stipulated that the proceeds
would be paid to him only and when the case came up for decision, this
Court held that the mortgagee, in case of loss, may only recover upon the
policy to the extent of his credit at the time of the loss. It was declared that
the mortgaged had no right of action against the mortgagee on the policy.
(San Miguel Brewery vs. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold that "If a mortgagee procures
insurance on his separate interest at his own expense and for his own

benefit, without any agreement with the mortgagor with respect thereto,
the mortgagor has no interest in the policy, and is not entitled to have the
insurance proceeds applied in reduction of the mortgage debt" (19 R.C.L.,
p. 405), and that, furthermore, the mortgagee "has still a right to recover
his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1;
Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life &
Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg.
Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable
Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the
minority view (See case note, 3 Lawyers' Report Annotated, new series, p.
79). "The general rule and the weight of authority is, that the insurer is
thereupon subrogated to the rights of the mortgagee under the mortgage.
This is put upon the analogy of the situation of the insurer to that of a
surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred
in declaring that the proceeds of the insurance taken out by the defendant
on the property mortgaged inured to the benefit of the plaintiff and in
ordering said defendant to deliver to the plaintiff the difference between
her indebtedness and the amount of insurance received by the defendant,
for, in the light of the majority rule we have above enunciated, the correct
solution should be that the proceeds of the insurance should be delivered
to the defendant but that her claim against the plaintiff should be
considered assigned to the insurance company who is deemed subrogated
to the rights of the defendant to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the
judgment of the lower court as follows:(1) the transaction had between the
plaintiff and defendant as shown in Exhibit A is merely an equitable
mortgage intended to secure the payment of the loan of P12,000;(2) that
the proceeds of the insurance amounting to P13,107.00 was properly
collected by defendant who is not required to account for it to the plaintiff;
(3) that the collection of said insurance proceeds shall not be deemed to
have compensated the obligation of the plaintiff to the defendant, but bars
the latter from claiming its payment from the former; and (4) defendant
shall pay to the plaintiff the sum of P810.00 representing the overpayment
made by plaintiff by way of interest on the loan. No pronouncement as to
costs.
Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes,
J.B.L., JJ., concur.

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