G.R. No.

134330

March 1, 2001

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,

vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA
ESLABON, respondents.

In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the
sale at public auction of her agricultural land on June 10, 1991 as well as the
registration of the Certificate of Sheriff's Sale in its favor on July 1, 1991, and the
one-year period to redeem the land.

DE LEON, JR., J.:

Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses

Enrique and Florencia Belo under a deed of absolute sale of proprietary and
redemption rights.

Before us is a petition for review on certiorari of the Decision1 and Resolution2 in

CA-G.R. No. 53865 of the Court of Appeals3 dated May 21, 1998 and June 29,
1998, respectively, which modified the Decision4 dated April 30, 1996 of the
Regional Trial Court of Roxas City, Branch 19 in a suit5 for Declaration of Nullity of
the Contract of Mortgage.

Before the expiration of the redemption period, petitioners spouses Belo tendered
payment for the redemption of the agricultural land in the amount of Four Hundred
Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety Six Centavos
(P484,482.96), which includes the bid price of respondent PNB, plus interest and
expenses as provided under Act No. 3135.

The facts are as follows:

However, respondent PNB rejected the tender of payment of petitioners spouses

Belo. It contended that the redemption price should be the total claim of the bank
on the date of the auction sale and custody of property plus charges accrued and
interests amounting to Two Million Seven Hundred Seventy Nine Thousand Nine
Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72).6 Petitioners
spouses disagreed and refused to pay the said total claim of respondent PNB.

Eduarda Belo owned an agricultural land with an area of six hundred sixty one
thousand two hundred eighty eight (661,288) square meters located in Timpas,
Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for
brevity) No. T-7493. She leased a portion of the said tract of land to respondents
spouses Marcos and Arsenia Eslabon in connection with the said spouses' sugar
plantation business. The lease contract was effective for a period of seven (7)
years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan
from respondent Philippine National Bank (PNB for brevity) secured by a real
estate mortgage on their own four (4) residential houses located in Roxas City, as
well as on the agricultural land owned by Eduarda Belo. The assent of Eduarda
Belo to the mortgage was acquired through a special power of attorney which she
executed in favor of respondent Marcos Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation,
extrajudicial foreclosure proceedings against the mortgaged properties were
instituted by respondent PNB. At the auction sale on June 10, 1991, respondent
PNB was the highest bidder of the foreclosed properties at Four Hundred Forty
Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).

On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of
Roxas City, Civil Case No. V-6182 which is an action for declaration of nullity of
mortgage, with an alternative cause of action, in the event that the accommodation
mortgage be held to be valid, to compel respondent PNB to accept the redemption
price tendered by petitioners spouses Belo which is based on the winning bid price
of respondent PNB in the extrajudicial foreclosure in the amount of Four Hundred
Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00) plus interest
and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to
wit:
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77. In all loan contracts granted and mortgage contracts executed under
the 1975 Revised Charter (PD 694, as amended), the proper rate of
interest to be charged during the redemption period is the rate specified in
the mortgage contract based on Sec. 25 7 of PD 694 and the mortgage
contract which incorporates by reference the provisions of the PNB
Charters. Additionally, under Sec. 78 of the General Banking Act (RA No.
337, as amended) made applicable to PNB pursuant to Sec. 38 of PD No.
694, the rate of interest collectible during the redemption period is the rate
specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for
redemption of the property under the provisions of the General Banking
Act, no redemption was validly effected;8
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After trial on the merits, the trial court rendered its Decision dated April 30, 1996
granting the alternative cause of action of spouses Belo, the decretal portion of
which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered
in favor of plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and
against defendants Philippine National Bank and Spouses Marcos and
Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar
as the property of Eduarda Belo covered by Transfer Certificate
of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff
Enrique M. Belo to redeem only Eduarda Belo's property
situated in Brgy. Timpas, Panitan, Capiz, and covered by
Transfer Certificate of Title No. T-7493 by paying only its bid
price of P447,632.00, plus interest and other charges provided
for in Section 30, Rule 39 of the Rules of Court, less the loan
value, as originally appraised by said defendant Bank, of the
foreclosed four (4) residential lots of defendants Spouses
Marcos and Arsenia Eslabon; and

3. Dismissing for lack of merit the respective counterclaims of

defendants Philippine National Bank and spouses Marcos and
Arsenia Eslabon.
With costs against defendants.
SO ORDERED.9
Dissatisfied with the foregoing judgment of the trial court, respondent PNB
appealed to the Court of Appeals. In its Decision rendered on May 21, 1998, the
appellate court, while upholding the decision of the trial court on the validity of the
real estate mortgage on Eduarda Belo's property, the extrajudicial foreclosure and
the public auction sale, modified the trial court's finding on the appropriate
redemption price by ruling that the petitioners spouses Belo should pay the entire
amount due to PNB under the mortgage deed at the time of the foreclosure sale
plus interest, costs and expenses.10
Petitioners spouses Belo sought reconsideration11 of the said Decision but the
same was denied by the appellate court in its Resolution promulgated on June 29,
1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the
mortgage contract obligating Eduarda Belo as co-mortgagor, considering
that it has not been sufficiently established that Eduarda Belo's assent to
the special power of attorney and to the mortgage contract was tainted by
any vitiating cause. Moreover, in tendering an offer to redeem the
property (Exhibit "20", p. 602 Record) after its extrajudicial foreclosure,
she has thereby admitted the validity of the mortgage, as well as the
transactions leading to its inception. Eduarda Belo, and the appellees as
mere assignees of Eduarda's right to redeem the property, are therefore
estopped from questioning the efficacy of the mortgage and its
subsequent foreclosure.12
The appellate court further declared that petitioners spouses Belo are obligated to
pay the total bank's claim representing the redemption price for the foreclosed
properties, as provided by Section 25 of P.D No. 694, holding that:

On the other hand, the court's ruling that the appellees, being the
assignee of the right of repurchase of Eduarda Belo, were bound by the
redemption price as provided by Section 25 of P.D. 694, stands. The
attack on the constitutionality of Section 25 of P.D. 694 cannot be allowed,
as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA
794 [1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994])
has regarded the said provision of law with respect, using the same in
determining the proper redemption price in foreclosure of mortgages
involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for
qualification, as the appellees would have us rule. The said rule, as
amended, makes no specific distinction as to assignees or transferees of
the mortgagor of his redemptive right. In the absence of such distinction
by the law, the Court cannot make a distinction. As admitted assignees of
Eduarda Belo's right of redemption, the appellees succeed to the precise
right of Eduarda including all conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089,
Civil Code) will extend to apply in the redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned
deviation from the rule embodied in Rule 39, Section 30 of the Rules of
Court, and is a special protection given to government lending institutions,
particularly, the Philippine National Bank. (Dulay v. Carriaga, supra)13
Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo,
agreed to limit the assignment of errors to the following:
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II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL

COURT ON THE BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED
BY PETITIONERS IN THEIR BRIEF:

(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED

BY EDUARDA BELO IN FAVOR OF RESPONDENT ESLABON
WAS NULL AND VOID:
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY
RESPONDENT MARCOS ESLABON UNDER SAID INVALID
SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT PNB ACTED IN BAD FAITH AND CONNIVED WITH
RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT
OF EDUARDA BELO, PETITIONERS' PREDECESSOR, THROUGH
FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT PNB WAS NEGLIGENT IN THE PERFORMANCE OF
ITS DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA
BELO, PETITIONERS' PREDECESSOR, HAD WAIVED THE RIGHT TO
QUESTION THE LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL
COURT BY HOLDING THAT ON REDEMPTION, PETITIONERS
SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTSDEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT
SHOULD PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF
RESPONDENT PNB AGAINST THE RESPONDENTS-DEBTORS
ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS
OF RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY
RESPONDENTS-DEBTORS ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
SHOULD PETITIONERS DECIDE NOT TO EXERCISE THEIR RIGHT
OF REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE

VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR

THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.14
Petitioners challenge the appreciation of the facts of the appellate court, pointing
out the following facts which the appellate court allegedly failed to fully interpret
and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was
merely an accommodation mortgagor and that she has no personal
liability to respondent PNB.
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2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D")
used to bind Eduarda Belo as accommodation mortgagor authorized the
agent Eslabons to borrow and mortgage her agricultural land for her
(Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74 was
used by debtors Eslabons and PNB to bind Eduarda Belo as
accommodation mortgagor for the crop loan extended by PNB to the
Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo
in blank, without specifying the amount of the loan to be granted by
respondent PNB to the respondents-debtors Eslabons upon assurance by
the PNB manager that the SPA was merely a formality and that the bank
will not lend beyond the value of the four (4) [Roxas City] residential lots
located in Roxas City mortgaged by respondents-debtors Eslabons (see
Exhibit "D"; Eduarda Belo's deposition, Exhibit "V", pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan
granted to the Eslabons, did not make demands upon her for payment,
did not advise her of Eslabons' default. The pre-auction sale notice
intended for Eduarda Belo was addressed and delivered to the address of
the debtors Eslabons residence at Baybay Roxas City, not to the Belo
Family House which is the residence of Eduarda Belo located in the heart
of Roxas City. The trial court stated in its Decision that the PNB witness
Miss Ignacio "admitted that through oversight, no demand letters were

sent to Eduarda Belo, the accommodation mortgagor" (see p. 7, RTC

Decision).
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5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial

Court, the loan which was unpaid at the time of the extrajudicial
foreclosure sale was only P789,897.00.
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6. That herein petitioners Spouses Belo in making the tender to redeem

Eduarda Belo's agricultural landexpressly reserved the right to question
the legality of the accommodation mortgage in the event that said tender
to redeem was rejected by PNB (Exh. "I").15
Petitioners present basically two (2) issues before this Court. First, whether or not
the Special Power of Attorney (SPA for brevity), the real estate mortgage contract,
the foreclosure proceedings and the subsequent auction sale involving Eduarda
Belo's property are valid. Second, assuming they are valid, whether or not the
petitioners are required to pay, as redemption price, the entire claim of respondent
PNB in the amount of P2,779,978.72 as of the date of the public auction sale on
June 10, 1991.
On the first issue, the petitioners contend that the SPA is void for the reason that
the amount for which the spouses Eslabon are authorized to borrow from
respondent bank was unlimited; and that, while the SPA states that the amount
loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of the
respondents spouses Eslabon. For the said reasons petitioners contend that the
mortgage contract lacks valid consent, object and consideration; that it violates a
concept in the law of agency which provides that the contract entered into by the
agent must always be for the benefit of the principal; and, that it does not express
the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings
and the subsequent auction sale of Eduarda Belo's property are valid and legal.

First, the validity of the SPA and the mortgage contract cannot anymore be
assailed due to petitioners' failure to appeal the same after the trial court rendered
its decision affirming their validity. After the trial court rendered its decision granting
petitioners their alternative cause of action, i.e., that they can redeem the subject
property on the basis of the winning bid price of respondent PNB, petitioners did
not anymore bother to appeal that decision on their first cause of action. If they felt
aggrieved by the trial court's decision upholding the validity of the said two (2)
documents, then they should have also partially appealed therefrom but they did
not. It is an abuse of legal remedies for petitioners to belatedly pursue a claim that
was settled with finality due to their own shortcoming. As held in Caliguia v.
National Labor Relations Commission,16 where a party did not appeal from the
Labor Arbiter's decision denying claims for actual, moral and exemplary damages
and instead moved for immediate execution, the decision then became final as to
him and by asking for its execution, he was estopped from relitigating his claims for
damages.
Second, well-entrenched is the rule that the findings of trial courts which are
factual in nature, especially when affirmed by the Court of Appeals, deserve to be
respected and affirmed by the Supreme Court, provided it is supported by
substantial evidence. 17 The finding of facts of the trial court to the effect that
Eduarda Belo was not induced by the manager of respondent PNB but instead that
she freely consented to the execution of the SPA is given the highest respect as it
was affirmed by the appellate court. In the case at bar, the burden of proof was on
the petitioners to prove or show that there was alleged inducement and
misrepresentation by the manager of respondent PNB and the spouses Eslabon.
Their allegation that Eduarda Belo only agreed to sign the SPA after she was
assured that the spouses Eslabon would not borrow more than the value of their
own four (4) residential lots in Roxas City was properly objected to by respondent
PNB.18 Also their contention that Eduarda Belo signed the SPA in blank was
properly objected to by respondent PNB on the ground that the best evidence was
the SPA. There is also no proof to sustain petitioners' allegation that respondent
PNB acted in bad faith and connived with the debtors, respondents spouses
Eslabon, to obtain Eduarda Belo's consent to the mortgage through fraud. Eduarda
Belo very well knew that the respondents spouses Eslabon would use her property
as additional mortgage collateral for loans inasmuch as the mortgage contract
states that "the consideration of this mortgage is hereby initially fixed at
P229,000.00."19 The mortgage contract sufficiently apprises Eduarda Belo that the
respondents spouses Eslabon can apply for more loans with her property as
continuing additional security. If she found the said provision questionable, she

should have complained immediately. Instead, almost ten (10) years had passed
before she and the petitioners sought the annulment of the said contracts.
Third, after having gone through the records, this Court finds that the courts a
quo did not err in holding that the SPA executed by Eduarda Belo in favor of the
respondents spouses Eslabon and the Real Estate Mortgage executed by the
respondents spouses in favor of respondent PNB are valid. It is stipulated in
paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses
"to make, sign, execute and deliver any contract of mortgage or any other
documents of whatever nature or kind . . . which may be necessary or proper in
connection with the loan herein mentioned, or with any loan which my attorney-infact may contract personally in his own name . . .20 This portion of the SPA is quite
relevant to the case at bar. This was the main reason why the SPA was executed
in the first place inasmuch as Eduarda Belo consented to have her land mortgaged
for the benefit of the respondents spouses Eslabon. The SPA was not meant to
make her a co-obligor to the principal contract of loan between respondent PNB,
as lender, and the spouses Eslabon, as borrowers. The accommodation real estate
mortgage over her property, which was executed in favor of respondent PNB by
the respondents spouses Eslabon, in their capacity as her attorneys-in-fact by
virtue of her SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she
signed the SPA to authorize respondents spouses Eslabons to execute a mortgage
on her land. Petitioners themselves even acknowledged that the relation created
by the SPA and the mortgage contract was merely that of mortgagor-mortgagee
relationship. The SPA form of the PNB was utilized to authorize the spouses
Eslabon to mortgage Eduarda Belo's land as additional collateral of the Eslabon
spouses' loan from respondent PNB. Thus, the petitioners' contention that the SPA
is void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the
sense that she was able to collect the rentals on her leased property from the
Eslabons.21
An accommodation mortgage is not necessarily void simply because the
accommodation mortgagor did not benefit from the same. The validity of an
accommodation mortgage is allowed under Article 2085 of the New Civil Code
which provides that "(t)hird persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property." An
accommodation mortgagor, ordinarily, is not himself a recipient of the loan,
otherwise that would be contrary to his designation as such. It is not always

necessary that the accommodation mortgagor be appraised beforehand of the

entire amount of the loan nor should it first be determined before the execution of
the SPA for it has been held that:
"(real) mortgages given to secure future advancements are valid and
legal contracts; that the amounts named as consideration in said contract
do not limit the amount for which the mortgage may stand as security if
from the four corners of the instrument the intent to secure future and
other indebtedness can be gathered. A mortgage given to secure
advancements is a continuing security and is not discharged by
repayment of the amount named in the mortgage, until the full amount of
the advancements are paid."22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to
respondent PNB manifesting her intent to redeem the property is a waiver of her
right to question the validity of the SPA and the mortgage contract as well as the
foreclosure and the sale of her subject property. Petitioners claim that her letter
was not an offer to redeem as it was merely a declaration of her intention to
redeem. Respondent PNB's answer to her letter would have carried certain legal
effects. Had respondent PNB accepted her letter-offer, it would have surely bound
the bank into accepting the redemption price offered by Eduarda Belo. If it was her
opinion that her SPA and the mortgage contract were null and void, she would not
have manifested her intent to redeem but instead questioned their validity before a
court of justice. Her offer was a recognition on her part that the said contracts are
valid and produced legal effects. Inasmuch as Eduarda Belo is estopped from
questioning the validity of the contracts, her assignees who are the petitioners in
the instant case, are likewise estopped from disputing the validity of her SPA, the
accommodation real estate mortgage contract, the foreclosure proceedings, the
auction sale and the Sheriff's Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar.
Respondent PNB maintains that Section 25 of Presidential Decree No. 694 should
apply, thus:
SECTION 25. Right of redemption of foreclosed property Right of
possession during redemption period. Within one year from the
registration of the foreclosure sale of real estate, the mortgagor shall
have the right to redeem the property by paying all claims of the Bank

against him on the date of the sale including all the costs and other
expenses incurred by reason of the foreclosure sale and custody of the
property as well as charges and accrued interests.23
Additionally, respondent bank seeks the application to the case at bar of Section
78 of the General Banking Act, as amended by P.D. No. 1828, which states that
. . . In the event of foreclosure, whether judicially or extrajudicially, of any
mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or
debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank,
banking or credit institution, within the purview of this Act shall have the
right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage,to redeem the property by
paying the amount fixed by the court in the order of execution, or the
amount due under the mortgage deed, as the case may be, with interest
thereon at the rate specified in the mortgage, and all the costs, and
judicial and other expenses incurred by the bank or institution concerned
by reason of the execution and sale and as a result of the custody of said
property less the income received from the property.24
On the other hand, petitioners assert that only the amount of the winning bidder's
purchase together with the interest thereon and on all other related expenses
should be paid as redemption price in accordance with Section 6 of Act No. 3135
which provides that:
SECTION 6. In all cases in which an extrajudicial sale is made under the
special power hereinbefore referred to, the debtor, his successor in
interest or any judicial creditor or judgment creditor of said debtor, or any
person having a lien on the property subsequent to the mortgage or deed
of trust under which the property is sold, may redeem the same at any
time within the term of one year from and after the date of the sale; and
such redemption shall be governed by the provisions of sections four
hundred and sixty-four to four hundred and sixty six, inclusive, of the
Code of Civil Procedure25 , in so far as these are not inconsistent with the
provisions of this Act.

Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SECTION 28. Time and manner of, and amounts payable on, successive
redemptions; notice to be given and filed. The judgment obligor, or
redemptioner, may redeem the property from the purchaser, at any time
within one (1) year from the date of the registration of the certificate of
sale, by paying the purchaser the amount of his purchase, within one per
centum per month interest thereon in addition, up to the time of
redemption, together with the amount of any assessments or taxes which
the purchaser may have paid thereon after purchase, and interest on
such last named amount at the same rate; and if the purchaser be also a
creditor having a prior lien to that of the redemptioner, other than the
judgment under which such purchase was made, the amount of such
other lien, with interest. (Italic supplied)
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This Court finds the petitioners' position on that issue to be meritorious.

There is no doubt that Eduarda Belo, assignor of the petitioners, is an
accommodation mortgagor. The Pre-trial Order and respondent PNB's brief contain
a declaration of this fact. The dispute between the parties is whether Section 25 of
P.D. No. 694 applies to an accommodation mortgagor, or her assignees. The said
legal provision does not make a distinction between a debtor-mortgagor and an
accommodation mortgagor as it uses the broad term "mortgagor". The appellate
court thus ruled that the provision applies even to an accommodation mortgagor
inasmuch as the law does not make any distinction. We disagree. Where a word
used in a statute has both a restricted and a general meaning, the general must
prevail over the restricted unless the nature of the subject matter or the context in
which it is employed clearly indicates that the limited sense is intended.26 It is
presumed that the legislature intended exceptions to its language which would
avoid absurd consequences of this character.27 In the case at bar, the qualification
to the general rule applies. The same provision of Section 25 of P.D. No. 694
provides that "the mortgagor shall have the right to redeem the property by
paying all claims of the Bank against him". From said provision can be deduced
that the mortgagor referred to by that law is one from whom the bank has a claim
in the form of outstanding or unpaid loan; he is also called a borrower or debtormortgagor. On the other hand, respondent PNB has no claim against

accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her

property to accommodate the Eslabon spouses who are the loan borrowers of the
PNB. The principal contract is the contract of loan between the Eslabon spouses,
as borrowers/debtors, and the PNB as lender. The accommodation real estate
mortgage (which secures the loan) is only an accessory contract. It is our view and
we hold that the term "mortgagor" in Section 25 of P.D. No. 694 pertains only to a
debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to
absurdities. If the words of a statute are susceptible of more than one meaning, the
absurdity of the result of one construction is a strong argument against its
adoption, and in favor of such sensible interpretation.28 We test a law by its result.
A law should not be interpreted so as not to cause an injustice. There are laws
which are generally valid but may seem arbitrary when applied in a particular case
because of its peculiar circumstances. We are not bound to apply them
inslavish obedience to their language.29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is
unfair and unjust to accommodation mortgagors and their assignees. Forcing an
accommodation mortgagor like Eduarda Belo to pay for what the principal debtors
(Eslabon spouses) owe to respondent bank is to punish her for the
accommodation and generosity she accorded to the Eslabon spouses who were
then hard pressed for additional collateral needed to secure their bank loan.
Respondents PNB and spouses Eslabons very well knew that she merely
consented to be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why
petitioners cannot be made to pay the entire liability of the principal debtors,
Eslabon spouses, to respondent PNB.
The trial court found that respondent PNB's application for extrajudicial foreclosure
and public auction sale of Eduarda Belo's mortgaged property30 was filed under Act
No. 3135, as amended by P.D. No. 385. The notice of extrajudicial sale, the
Certificate of Sheriff's Sale, and the letter it sent to Eduarda Belo did not mention P.
D. No. 694 as the basis for redemption. As aptly ruled by the trial court
In fairness to these mortgagors, their successors-in-interest, or innocent
purchasers for value of their redemption rights, PNB should have at least

advised them that redemption would be governed by its Revised Charter

or PD 69, and not by Act 3135 and the Rules of Court, as commonly
practiced . . . This practice of defendant Bank is manifestly unfair and
unjust to these redemptioners who are caught by surprise and usually
taken aback by the enormous claims of the Bank not shown in the Notice
of Extrajudicial Sale or the Certificate of Sheriff's Sale as in this case.31
Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may
immediately foreclose this mortgage judicially in accordance with the Rules of
Court or extrajudicially in accordance with Act No. 3135, as amended and
Presidential Decree No. 385 . . .32 Since the mortgage contract in this case is in the
nature of a contract of adhesion as it was prepared solely by respondent, it has to
be interpreted in favor of petitioners. The respondent bank however tries to renege
on this contractual commitment by seeking refuge in the 1989 case of Sy v. Court
of Appeals33 wherein this Court ruled that the redemption price is equal to the total
amount of indebtedness to the bank's claim inasmuch as Section 78 of the General
Banking Act is an amendment to Section 6 of Act No. 3135, despite the fact that
the extrajudicial foreclosure procedure followed by the PNB was explicitly under or
in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the
parties also stipulated that Act No. 3135 is the controlling law in case of
foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must "govern the
manner in which the sale and redemptionshall be effected." Clearly, the
fundamental principle that contracts are respected as the law between the
contracting parties finds application in the present case, specially where
they are not contrary to law, morals, good customs and public policy.35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other
cases,36 that the General Banking Act and P.D. No. 694 shall prevail over Act No.
3135 with respect to the redemption price, does not apply here inasmuch as in the
said cases the redemptioners were the debtors themselves or their assignees, and
not an accommodation mortgagor or the latter's assignees such as in the case at
bar. In the said cases, the debtor-mortgagors were required to pay as redemption
price their entire liability to the bank inasmuch as they were obligated to pay their
loan which is a principal obligation in the first place. On the other hand,

accommodation mortgagors as such are not in anyway liable for the payment of
the loan or principal obligation of the debtor/borrower The liability of the
accommodation mortgagors extends only up to the loan value of their mortgaged
property and not to the entire loan itself. Hence, it is only just that they be allowed
to redeem their mortgaged property by paying only the winning bid price thereof
(plus interest thereon) at the public auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without
qualification and yet in the end appears to disregard the same when it finds its
provisions unfavorable to it. This is unfair to the other contracting party who in
good faith believes that respondent PNB would comply with the contractual
agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as
amended by P.D. No. 1828, is inapplicable to accommodation mortgagors in the
redemption of their mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the
entire claim of respondent PNB against the principal debtors, spouses Eslabon,
they can only exercise their right of redemption with respect to the parcel of land
belonging to Eduarda Belo, the accommodation mortgagor. Thus, they have to pay
the bid price less the corresponding loan value of the foreclosed four (4) residential
lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property
belonging to their assignor, Eduarda Belo, would violate the principle of indivisibility
of mortgage contracts. We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
A pledge or mortgage is indivisible, even though the debt may be divided
among the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for
the proportionate extinguishment of the pledge or mortgage as the debt is
not completely satisfied.

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

Wherefore, it is hereby held that the liability contracted by the aforesaid

defendant-appellant Paz Agudelo y Gonzaga is merely subsidiary to that
of Mauro A. Garrucho (the agent), limited to lot No. 87.

From these provisions is excepted the case in which, there being several
things given in mortgage or pledge, each one of them guarantees only a
determinate portion of the credit.

xxx

The debtor, in this case, shall have a right to the extinguishment of the
pledge or mortgage as the portion of the debt for which each thing is
specially answerable is satisfied.
There is no dispute that the mortgage on the four (4) parcels of land by the
Eslabon spouses and the other mortgage on the property of Eduarda Belo both
secure the loan obligation of respondents spouses Eslabon to respondent PNB.
However, we are not persuaded by the contention of the respondent PNB that the
indivisibility concept applies to the right of redemption of an accommodation
mortgagor and her assignees. The jurisprudence inPhilippine National Bank v.
Agudelo37 is enlightening to the case at bar, to wit:
xxx

xxx

xxx

However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to

the lien on lot No. 878 . . . . This acknowledgment, however, does not
extend to lots Nos. 207 and 61 . . . inasmuch as, although it is true that a
mortgage is indivisible as to the contracting parties and as to their
successors in interest (Article 1860, Civil code), it is not so with respect to
a third person who did not take part in the constitution thereof either
personally or through an agent x x x. Therefore, the only liability of the
defendant-appellant Paz Agudelo y Gonzaga is that which arises from the
aforesaid acknowledgment but only with respect to the lien and not to the
principal obligation secured by the mortgage acknowledged by her to
have been constituted on said lot No. 878 . . . . Such liability is not direct
but a subsidiary one.38
xxx

xxx

xxx

xxx

xxx

From the wording of the law, indivisibility arises only when there is a debt, that is,
there is a debtor-creditor relationship. But, this relationship is wanting in the case
at bar in the sense that petitioners are assignees of an accommodation mortgagor
and not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners
to redeem only the property belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon
spouses, petitioners being total strangers to said lots lack legal personality to
redeem the same. Fair play and justice demand that the respondent PNB's interest
of recovering its entire bank claim should not be at the expense of petitioners, as
assignees of Eduarda Belo, who is not indebted to it. Besides, the letter39 sent by
respondent PNB to Eduarda Belo states that "your (Belo) mortgaged property/ies
with PNB covered by TCT # T-7493 was/were sold at public auction . . . .". It further
states that "You (Belo) have, therefore, one year from July 1, 1991 within which to
redeem your mortgaged property/ies, should you desire to redeem it." Respondent
PNB never mentioned that she was bound to redeem the entire mortgaged
properties including the four (4) residential properties of the spouses Eslabon. The
letter was explicit in mentioning Eduarda Belo's property only. From the said
statement, there is then an admission on the part of respondent PNB that
redemption only extends to the subject property of Eduarda Belo for the reason
that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby
allowed to redeem only the property, covered and described in Transfer Certificate
of Title No. T-7493-Capiz registered in the name of Eduarda Belo, by paying only
the bid price less the corresponding loan value of the foreclosed four (4) residential
lots of the respondents spouses Marcos and Arsenia Eslabon, consistent with the
Decision of the Regional Trial Court of Roxas City in Civil Case No. V-6182.
SO ORDERED.

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO,
JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision 1 of the Court of
Appeals in CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee,
versus Severino Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose
Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in
toto the decision of the Court of First Instance of Manila in favor of plaintiffappellee, the herein private respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by Severino
Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was
Severino Valencia who arranged everything about the loan with the bank and who
supplied to the latter the personal data required for Castro's loan application. On
December 11, 1959, after the bank approved the loan for the amount of P3,000.00,
Castro, accompanied by the Valencia spouses, signed a promissory note
corresponding to her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the
bank an equal amount of loan for P3,000.00. They signed a promissory note
(Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed
thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's
house and lot of 150 square meters, covered by Transfer Certificate of Title No.
7419 of the Office of the Register of Deeds of Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff
Basilio Magsambol, sent a notice of sheriff's sale addressed to Castro, announcing

that her property covered by T.C.T. No. 7419 would be sold at public auction on
March 10, 1961 to satisfy the obligation covering the two promissory notes plus
interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank, the
auction sale that was scheduled for March 10, 1961 was postponed for April 10,
1961. But when April 10, 1961 was subsequently declared a special holiday, the
sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public auction
sale that was held on April 11, 1961, which was the next succeeding business day
following the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy
Sheriff on February 13, 1961, when she learned for the first time that the mortgage
contract (Exhibit "6") which was an encumbrance on her property was for
P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of
the promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against
petitioners Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and
Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of First
Instance of Manila upon the charge, amongst others, that thru mistake on her part
or fraud on the part of Valencias she was induced to sign as co-maker of a
promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to
secure the questioned note. At the time of filing her complaint, respondent Castro
deposited the amount of P3,383.00 with the court a quo in full payment of her
personal loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the annulment as far
as she is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6")
insofar as it exceeds P3,000.00; for the discharge of her personal obligation with
the bank by reason of a deposit of P3,383.00 with the court a quo upon the filing of
her complaint; for the annulment of the foreclosure sale of her property covered by
T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of
attorney's fees, damages and cost.
In their answers, petitioners interposed counterclaims and prayed for the dismissal
of said complaint, with damages, attorney's fees and costs. 2

10

The pertinent facts arrived from the stipulation of facts entered into by the parties
as stated by respondent Court of Appeals are as follows:
Spawning the present litigation are the facts contained in the
following stipulation of facts submitted by the parties themselves:
1. That the capacity and addresses of all the parties in this case
are admitted .
2. That the plaintiff was the registered owner of a residential
house and lot located at Nos. 1268-1270 Carola Street,
Sampaloc, Manila, containing an area of one hundred fifty (150)
square meters, more or less, covered by T.C.T. No. 7419 of the
Office of the Register of Deeds of Manila;
3. That the signatures of the plaintiff appearing on the following
documents are genuine:
a) Application for Industrial Loan with the Rural Bank of
Caloocan, dated December 7, 1959 in the amount of P3,000.00
attached as Annex A of this partial stipulation of facts;
b) Promissory Note dated December 11, 1959 signed by the
plaintiff in favor of the Rural Bank of Caloocan for the amount of
P3,000.00 as per Annex B of this partial stipulation of facts;
c) Application for Industrial Loan with the Rural Bank of
Caloocan, dated December 11, 1959, signed only by the
defendants, Severino Valencia and Catalina Valencia, attached
as Annex C, of this partial stipulation of facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated
December 11, 1959 for the amount of P3000.00, signed by the
spouses Severino Valencia and Catalina Valencia as borrowers,
and plaintiff Maxima Castro, as a co-maker, attached as Annex D
of this partial stipulation of facts;

e) Real estate mortgage dated December 11, 1959 executed by

plaintiff Maxima Castro, in favor of the Rural Bank of Caloocan,
to secure the obligation of P6,000.00 attached herein as Annex
E of this partial stipulation of facts;
All the parties herein expressly reserved their right to present
any evidence they may desire on the circumstances regarding
the execution of the above-mentioned documents.
4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff,
Basilio Magsambol, sent a notice of sheriff's sale, address to the
plaintiff, dated February 13, 1961, announcing that plaintiff's
property covered by TCT No. 7419 of the Register of Deeds of
the City of Manila, would be sold at public auction on March 10,
1961 to satisfy the total obligation of P5,728.50, plus interest,
attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale
and Notice of Extrajudicial Auction Sale of the Mortgaged
property, attached herewith as Annexes F and F-1, respectively,
of this stipulation of facts;
5. That upon the request of the plaintiff and defendants-spouses
Severino Valencia and Catalina Valencia, and with the
conformity of the Rural Bank of Caloocan, the Sheriff of Manila
postponed the auction sale scheduled for March 10, 1961 for
thirty (30) days and the sheriff re-set the auction sale for April 10,
1961;
6. That April 10, 1961 was declared a special public holiday;
(Note: No. 7 is omitted upon agreement of the parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at public
auction plaintiff's property covered by T.C.T. No. 7419 and
defendant, Arsenio Reyes, was the highest bidder and the
corresponding certificate of sale was issued to him as per Annex
G of this partial stipulation of facts;
9. That on April 16, 1962, the defendant Arsenio Reyes,
executed an Affidavit of Consolidation of Ownership, a copy of

11

which is hereto attached as Annex H of this partial stipulation of

facts;
10. That on May 9, 1962, the Rural Bank of Caloocan
Incorporated executed the final deed of sale in favor of the
defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of
which is attached as Annex I of this partial stipulation of facts;
11. That the Register of Deeds of the City of Manila issued the
Transfer Certificate of Title No. 67297 in favor of the defendant,
Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419
which was in the name of plaintiff, Maxima Castro, which was
cancelled;
12. That after defendant, Arsenio Reyes, had consolidated his
title to the property as per T.C.T. No. 67299, plaintiff filed a notice
of lis pendens with the Register of Deeds of Manila and the
same was annotated in the back of T.C.T. No. 67299 as per
Annex J of this partial stipulation of facts; and
13. That the parties hereby reserved their rights to present
additional evidence on matters not covered by this partial
stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing partial
stipulation of facts be approved and admitted by this Honorable
Court.
As for the evidence presented during the trial, We quote from the decision of the
Court of Appeals the statement thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims
she is a 70-year old widow who cannot read and write the
English language; that she can speak the Pampango dialect
only; that she has only finished second grade (t.s.n., p. 4,
December 11, 1964); that in December 1959, she needed
money in the amount of P3,000.00 to invest in the business of

the defendant spouses Valencia, who accompanied her to the

defendant bank for the purpose of securing a loan of P3,000.00;
that while at the defendant bank, an employee handed to her
several forms already prepared which she was asked to sign on
the places indicated, with no one explaining to her the nature
and contents of the documents; that she did not even receive a
copy thereof; that she was given a check in the amount of
P2,882.85 which she delivered to defendant spouses; that
sometime in February 1961, she received a letter from the Acting
Deputy Sheriff of Manila, regarding the extrajudicial foreclosure
sale of her property; that it was then when she learned for the
first time that the mortgage indebtedness secured by the
mortgage on her property was P6,000.00 and not P3,000.00;
that upon investigation of her lawyer, it was found that the
papers she was made to sign were:
(a) Application for a loan of P3,000.00 dated December 7, 1959
(Exh. B-1 and Exh. 1);
(b) Promissory note dated December 11, 1959 for the said loan
of P3,000.00 (Exh- B-2);
(c) Promissory note dated December 11, 1959 for P3,000.00
with the defendants Valencia spouses as borrowers and
appellee as co-maker (Exh. B-4 or Exh. 2).
The auction sale set for March 10, 1961 was postponed co April
10, 1961 upon the request of defendant spouses Valencia who
needed more time within which to pay their loan of P3,000.00
with the defendant bank; plaintiff claims that when she filed the
complaint she deposited with the Clerk of Court the sum of
P3,383.00 in full payment of her loan of P3,000.00 with the
defendant bank, plus interest at the rate of 12% per annum up to
April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager
declared that sometime in December, 1959, plaintiff was brought
to the Office of the Bank by an employee- (t.s.n., p 4, January

12

27, 1966). She wept, there to inquire if she could get a loan from
the bank. The claims he asked the amount and the purpose of
the loan and the security to he given and plaintiff said she would
need P3.000.00 to be invested in a drugstore in which she was a
partner (t.s.n., p. 811. She offered as security for the loan her lot
and house at Carola St., Sampaloc, Manila, which was promptly
investigated by the defendant bank's inspector. Then a few days
later, plaintiff came back to the bank with the wife of defendant
Valencia A date was allegedly set for plaintiff and the defendant
spouses for the processing of their application, but on the day
fixed, plaintiff came without the defendant spouses. She signed
the application and the other papers pertinent to the loan after
she was interviewed by the manager of the defendant. After the
application of plaintiff was made, defendant spouses had their
application for a loan also prepared and signed (see Exh. 13). In
his interview of plaintiff and defendant spouses, the manager of
the bank was able to gather that plaintiff was in joint venture with
the defendant spouses wherein she agreed to invest P3,000.00
as additional capital in the laboratory owned by said spouses
(t.s.n., pp. 16-17) 3
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the
decision of the Court of First Instance of Manila, the dispositive portion of which
reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court
renders judgment and:
(1) Declares that the promissory note, Exhibit '2', is invalid as
against plaintiff herein;
(2) Declares that the contract of mortgage, Exhibit '6', is null and
void, in so far as the amount thereof exceeds the sum of
P3,000.00 representing the principal obligation of plaintiff, plus
the interest thereon at 12% per annum;

process and actuations made in pursuance of or in

implementation thereto;
(4) Holds that the total unpaid obligation of plaintiff to defendant
Rural Bank of Caloocan, Inc., is only the amount of P3,000.00,
plus the interest thereon at 12% per annum, as of April 3, 1961,
and orders that plaintiff's deposit of P3,383.00 in the Office of the
Clerk of Court be applied to the payment thereof;
(5) Orders defendant Rural Bank of Caloocan, Inc. to return to
defendant Arsenio Reyes the purchase price the latter paid for
the mortgaged property at the public auction, as well as
reimburse him of all the expenses he has incurred relative to the
sale thereof;
(6) Orders defendants spouses Severino D. Valencia and
Catalina Valencia to pay defendant Rural Bank of Caloocan, Inc.
the amount of P3,000.00 plus the corresponding 12% interest
thereon per annum from December 11, 1960 until fully paid; and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio,
Jr. and spouses Severino D. Valencia and Catalina Valencia to
pay plaintiff, jointly and severally, the sum of P600.00 by way of
attorney's fees, as well as costs.
In view of the conclusion that the court has thus reached, the
counterclaims of defendant Rural Bank of Caloocan, Inc., Jose
Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a
corollary
The Court further denies the motion of defendant Arsenio Reyes
for an Order requiring Maxima Castro to deposit rentals filed on
November 16, 1963, resolution of which was held in abeyance
pending final determination of the case on the merits, also as a
consequence of the conclusion aforesaid. 4

(3) Annuls the extrajudicial foreclosure sale at public auction of

the mortgaged property held on April 11, 1961, as well as all the

13

Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent
court's decision. The motion having been denied, 6 they now come before this
Court in the instant petition, with the following Assignment of Errors, to wit:
I
THE COURT OF APPEALS ERRED IN UPHOLDING THE
PARTIAL ANNULMENT OF THE PROMISSORY NOTE,
EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS
THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS
PETITIONER BANK DESPITE THE TOTAL ABSENCE OF
EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT
PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER
UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN
BY PETITIONERS IN PROCURING THE EXECUTION OF SAID
CONTRACTS FROM RESPONDENT CASTRO.

THE COURT OF APPEALS ERRED IN NOT FINDING THAT,

BETWEEN PETITIONERS AND RESPONDENT CASTRO, THE
LATTER SHOULD SUFFER THE CONSEQUENCES OF THE
FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN AS
MUCH AS IT WAS THRU RESPONDENT CASTRO'S
NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL
CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD
WAS MADE POSSIBLE.
V
THE COURT OF APPEALS ERRED IN UPHOLDING THE
VALIDITY OF THE DEPOSIT BY RESPONDENT CASTRO OF
P3,383.00 WITH THE COURT BELOW AS A TENDER AND
CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE
SAID RESPONDENT FROM HER OBLIGATION WITH
PETITIONER BANK.

II
VI
THE COURT OF APPEALS ERRED IN IMPUTING UPON AND
CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS
BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS
AFORESAID ITS FINDING OF FRAUD PERPETRATED BY
THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN
UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.
III
THE COURT OF APPEAL ERRED IN NOT HOLDING THAT,
UNDER THE FACTS FOUND BY IT, RESPONDENT CASTRO
IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND
VALIDITY OF HER QUESTIONED TRANSACTION WITH
PETITIONER BANK.
IV

THE COURT OF APPEALS ERRED IN NOT DECLARING AS

VALID AND BINDING UPON RESPONDENT CASTRO THE
HOLDING OF THE SALE ON FORECLOSURE ON THE
BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY
SCHEDULED DATE THEREFOR WHICH WAS DECLARED A
HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE
THEREOF.
The issue raised in the first three (3) assignment of errors is whether or not
respondent court correctly affirmed the lower court in declaring the promissory note
(Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner bank,
and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory note
(Exhibit 2) where she signed as co-maker with the Valencias as principal borrowers
and her acquiescence to the mortgage contract (Exhibit 6) where she encumbered
her property to secure the amount of P6,000.00 was obtained by fraud perpetrated
on her by the Valencias who had abused her confidence, taking advantage of her

14

old age and ignorance of her financial need. Respondent court added that "the
mandate of fair play decrees that she should be relieved of her obligation under
the contract" pursuant to Articles 24 7 and 1332 8 of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit
2) and the mortgage contract (Exhibit 6) was deemed valid up to the amount of
P3,000.00 only which was equivalent to her personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to
be responsible for the fraud against Castro, in the light of the res inter alios
acta rule, a finding of fraud perpetrated by the spouses against Castro cannot be
taken to operate prejudicially against the bank. Petitioners concluded that
respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar
as they affect Castro and the bank and in declaring that the mortgage contract
(Exhibit 6) was valid only to the extent of Castro's personal loan of P3,000.00.
The records of the case reveal that respondent court's findings of fraud against the
Valencias is well supported by evidence. Moreover, the findings of fact by
respondent court in the matter is deemed final. 9 The decision declared the
Valencias solely responsible for the defraudation of Castro. Petitioners' contention
that the decision was silent regarding the participation of the bank in the fraud is,
therefore, correct.
We cannot agree with the contention of petitioners that the bank was defrauded by
the Valencias. For one, no claim was made on this in the lower court. For another,
petitioners did not submit proof to support its contention.
At any rate, We observe that while the Valencias defrauded Castro by making her
sign the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they
also misrepresented to the bank Castro's personal qualifications in order to secure
its consent to the loan. This must be the reason which prompted the bank to
contend that it was defrauded by the Valencias. But to reiterate, We cannot agree
with the contention for reasons above-mentioned. However, if the contention
deserves any consideration at all, it is in indicating the admission of petitioners that
the bank committed mistake in giving its consent to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank
inflicted by the Valencias both Castro and the bank committed mistake in giving

their consents to the contracts. In other words, substantial mistake vitiated their
consents given. For if Castro had been aware of what she signed and the bank of
the true qualifications of the loan applicants, it is evident that they would not have
given their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate
consent, unless such misrepresentation has created substantial
mistake and the same is mutual.
We cannot declare the promissory note (Exhibit 2) valid between the bank and
Castro and the mortgage contract (Exhibit 6) binding on Castro beyond the amount
of P3,000.00, for while the contracts may not be invalidated insofar as they affect
the bank and Castro on the ground of fraud because the bank was not a
participant thereto, such may however be invalidated on the ground of substantial
mistake mutually committed by them as a consequence of the fraud and
misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs.
Veloso, 10 this Court declared that a contract may be annulled on the ground of
vitiated consent if deceit by a third person, even without connivance or complicity
with one of the contracting parties, resulted in mutual error on the part of the
parties to the contract.
Petitioners argued that the amended complaint fails to contain even a general
averment of fraud or mistake, and its mention in the prayer is definitely not a
substantial compliance with the requirement of Section 5, Rule 8 of the Rules of
Court. The records of the case, however, will show that the amended complaint
contained a particular averment of fraud against the Valencias in full compliance
with the provision of the Rules of Court. Although, the amended complaint made
no mention of mistake being incurred in by the bank and Castro, such mention is
not essential in order that the promissory note (Exhibit 2) may be declared of no
binding effect between them and the mortgage (Exhibit 6) valid up to the amount of
P3,000.00 only. The reason is that the mistake they mutually suffered was a mere
consequence of the fraud perpetrated by the Valencias against them. Thus, the
fraud particularly averred in the complaint, having been proven, is deemed
sufficient basis for the declaration of the promissory note (Exhibit 2) invalid insofar
as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit 6) valid
only up to the amount of P3,000.00.

15

The second issue raised in the fourth assignment of errors is who between Castro
and the bank should suffer the consequences of the fraud perpetrated by the
Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was
her negligence or acquiescence if not her actual connivance that made the fraud
possible.
Petitioners' argument utterly disregards the findings of respondent Court of
Appeals wherein petitioners' negligence in the contracts has been aptly
demonstrated, to wit:
A witness for the defendant bank, Rodolfo Desiderio claims he
had subjected the plaintiff-appellee to several interviews. If this
were true why is it that her age was placed at 61 instead of 70;
why was she described in the application (Exh. B-1-9) as drug
manufacturer when in fact she was not; why was it placed in the
application that she has income of P20,000.00 when according
to plaintiff-appellee, she his not even given such kind of
information -the true fact being that she was being paid P1.20
per picul of the sugarcane production in her hacienda and 500
cavans on the palay production. 11
From the foregoing, it is evident that the bank was as much , guilty as Castro was,
of negligence in giving its consent to the contracts. It apparently relied on
representations made by the Valencia spouses when it should have directly
obtained the needed data from Castro who was the acknowledged owner of the
property offered as collateral. Moreover, considering Castro's personal
circumstances her lack of education, ignorance and old age she cannot be
considered utterly neglectful for having been defrauded. On the contrary, it is
demanded of petitioners to exercise the highest order of care and prudence in its
business dealings with the Valencias considering that it is engaged in a banking
business a business affected with public interest. It should have ascertained
Castro's awareness of what she was signing or made her understand what
obligations she was assuming, considering that she was giving accommodation to,
without any consideration from the Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led
the bank to believe that they were authorized to speak and bind her. She cannot
now be permitted to deny the authority of the Valencias to act as her agent for one
who clothes another with apparent authority as her agent is not permitted to deny
such authority.
The authority of the Valencias was only to follow-up Castro's loan application with
the bank. They were not authorized to borrow for her. This is apparent from the fact
that Castro went to the Bank to sign the promissory note for her loan of P3,000.00.
If her act had been understood by the Bank to be a grant of an authority to the
Valencia to borrow in her behalf, it should have required a special power of
attorney executed by Castro in their favor. Since the bank did not, We can rightly
assume that it did not entertain the notion, that the Valencia spouses were in any
manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00
evidenced by a promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's
property to secure said loan, the Valencias acted for their own behalf. Considering
however that for the loan in which the Valencias appeared as principal borrowers, it
was the property of Castro that was being mortgaged to secure said loan, the Bank
should have exercised due care and prudence by making proper inquiry if Castro's
consent to the mortgage was without any taint or defect. The possibility of her not
knowing that she signed the promissory note (Exhibit 2) as co-maker with the
Valencias and that her property was mortgaged to secure the two loans instead of
her own personal loan only, in view of her personal circumstances ignorance,
lack of education and old age should have placed the Bank on prudent inquiry to
protect its interest and that of the public it serves. With the recent occurrence of
events that have supposedly affected adversely our banking system, attributable to
laxity in the conduct of bank business by its officials, the need of extreme caution
and prudence by said officials and employees in the discharge of their functions
cannot be over-emphasized.
Question is, likewise, raised as to the propriety of respondent court's decision
which declared that Castro's consignation in court of the amount of P3,383.00 was
validly made. It is contended that the consignation was made without prior offer or
tender of payment to the Bank, and it therefore, not valid. In holding that there is a
substantial compliance with the provision of Article 1256 of the Civil Code,
respondent court considered the fact that the Bank was holding Castro liable for
the sum of P6,000.00 plus 12% interest per annum, while the amount consigned

16

was only P3,000.00 plus 12% interest; that at the time of consignation, the Bank
had long foreclosed the mortgage extrajudicially and the sale of the mortgage
property had already been scheduled for April 10, 1961 for non-payment of the
obligation, and that despite the fact that the Bank already knew of the deposit
made by Castro because the receipt of the deposit was attached to the record of
the case, said Bank had not made any claim of such deposit, and that therefore,
Castro was right in thinking that it was futile and useless for her to make previous
offer and tender of payment directly to the Bank only in the aforesaid amount of
P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation
made by Castro was valid. if not under the strict provision of the law, under the
more liberal considerations of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale
at public auction of the mortgaged property that was held on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961
which was the next business day after the scheduled date of the sale on April 10,
1961, a special public holiday, was permissible and valid pursuant to the provisions
of Section 31 of the Revised Administrative Code which ordains:

holiday. It does not apply to a day fixed by an office or officer of the government for
an act to be done, as distinguished from a period of time within which an act
should be done, which may be on any day within that specified period. For
example, if a party is required by law to file his answer to a complaint within fifteen
(15) days from receipt of the summons and the last day falls on a holiday, the last
day is deemed moved to the next succeeding business day. But, if the court fixes
the trial of a case on a certain day but the said date is subsequently declared a
public holiday, the trial thereof is not automatically transferred to the next
succeeding business day. Since April 10, 1961 was not the day or the last day set
by law for the extrajudicial foreclosure sale, nor the last day of a given period but a
date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the
next succeeding business day without the notices of the sale on that day being
posted as prescribed in Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm
the same in toto. No pronouncement as to cost.
SO ORDERED.

Pretermission of holiday. Where the day, or the last day, for

doing any act required or permitted by law falls on a holiday, the
act may be done on the next succeeding business day.
Respondent court ruled that the aforesaid sale is null and void, it not having been
carried out in accordance with Section 9 of Act No. 3135, which provides:
Section 9. Notice shall be given by posting notices of the sale
for not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the
municipality or city.
We agree with respondent court. The pretermission of a holiday applies only
"where the day, or the last day for doing any act required or permitted by law falls
on a holiday," or when the last day of a given period for doing an act falls on a

17

G.R. No. L-19227

February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels,
namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at
P63,000.00, and operated the FS-203, valued at P210,672.24, which was
purchased by him from the Philippine Shipping Commission, by installment or on
account. As of January or February, 1943, plaintiff had paid to the Philippine
Shipping Commission only the sum of P76,500 and the balance of the purchase
price was payable at P50,000 a year, due on or before the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant
Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged
the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank,
as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same
day and duly registered with the office of the Collector of Customs for the Port of
Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of
P20,000. The remaining balance was renewed by the execution of two (2)
promissory notes in the bank's favor. The first note, dated December 18, 1947, for
P20,000, was due on April 16, 1948 while the second, dated February 26, 1948,
for P10,000, was due on June 25, 1948. These two notes were never paid at all by
plaintiff on their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two
other accused for estafa thru falsification of commercial documents, because
plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to
March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000.

The drawer thereof one of the co-accused had no funds in the drawee bank.
However, in connivance with one employee of defendant bank, plaintiff was able to
withdraw the amount credited to him before the discovery of the defraudation on
April 2, 1948. Plaintiff and his co-accused were convicted by the trial court
and sentenced to indemnify the defendant bank in the sum of P184,000. On
appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950.
The corresponding writ of execution issued to implement the order for
indemnification was returned unsatisfied as plaintiff was totally insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant
bank took physical possession of three pledged vessels while they were at the Port
of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the
Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff
pursuant to the terms of the pledge contract, executed a document of sale, Exhibit
"4", transferring the two pledged vessels and plaintiff's equity in FS-203, to
defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the
Philippine Shipping Commission which rescinded the sale to plaintiff on September
8, 1948, for failure to pay the remaining installments on the purchase price
thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by
defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance of
Cebu to recover the three vessels or their value and damages from defendant
bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000
damages. After issues were joined, a pretrial was held resulting in a partial
stipulation of facts dated October 2, 1958, reciting most of the facts abovenarrated. During the course of the trial, defendant amended its answer reducing its
claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to
P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that
the bank's taking of physical possession of the vessels on April 6, 1948 was
justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the
private sale of the pledged vessels by defendant bank to itself without notice to the
plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that
the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as

18

his remaining account balance, or set-off these sums against the indemnity which
plaintiff was ordered to pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff
brought the appeal to Us, the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this
Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the
creditor defendant could not take possession of the chattels object thereof until
after there has been default. The submission is without merit. The parties
stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract
3. That a credit line of P50,000.00 was extended to the plaintiff by
the defendant Bank, and the plaintiff obtained and received from the said
Bank the sum of P50,000.00, and in order to guarantee the payment of
this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was
executed and duly registered with the Office of the Collector of Customs
for the Port of Cebu on the date appearing therein; (Emphasis
supplied)1wph1.t
Necessarily, this judicial admission binds the plaintiff. Without any showing
that this was made thru palpable mistake, no amount of rationalization can offset
it. 9
The defendant bank as pledgee was therefore entitled to the actual
possession of the vessels. While it is true that plaintiff continued operating the
vessels after the pledge contract was entered into, his possession was expressly
made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the
present Civil Code 11being new cannot apply to the pledge contract here which
was entered into on June 30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can temporarily entrust the physical
possession of the chattels pledged to the pledgor without invalidating the pledge.
In such a case, the pledgor is regarded as holding the pledged property merely as
trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is
insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87
which ruled that there has to be actual delivery of the chattels pledged. But then

there is also Banco Espaol-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic
delivery would suffice. An examination of the peculiar nature of the things pledged
in the two cases will readily dispel the apparent contradiction between the two
rulings. In Betita v. Ganzon, the objects pledged carabaos were easily
capable of actual, manual delivery unto the pledgee. In Banco Espaol-Filipino v.
Peterson, the objects pledged goods contained in a warehouse were hardly
capable of actual, manual delivery in the sense that it was impractical as a whole
for the particular transaction and would have been an unreasonable requirement.
Thus, for purposes of showing the transfer of control to the pledgee, delivery to
him of the keys to the warehouse sufficed. In other words, the type of delivery will
depend upon the nature and the peculiar circumstances of each case. The parties
here agreed that the vessels be delivered by the "pledgor to the pledgor who shall
hold said property subject to the order of the pledgee." Considering the
circumstances of this case and the nature of the objects pledged, i.e., vessels
used in maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in
full control of the vessels thru the plaintiff, the former could take actual possession
at any time during the life of the pledge to make more effective its security. Its
taking of the vessels therefore on April 6, 1948, was not unlawful. Nor was it
unjustified considering that plaintiff had just defrauded the defendant bank in the
huge sum of P184,000.
The stand We have taken is not without precedent. The Supreme Court of
Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar
las cosas a poder del acreedor o de un tercero y no quedar en la del
deudor, como ha sucedido en el caso de autos, es lo cierto que todas las
partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que
continuaran los coches en poder del deudor para no suspender el trafico,
y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la
cosa bajo su responsabilidad al acreedor, y ambos convinieron por
creerlo util para las partes contratantes, y estas no reclaman perjuicios no
se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiffappellant attacks the validity of the private sale of the pledged vessels in favor of

19

the defendant bank itself. It is contended first, that the cases holding that the
statutory requirements as to public sales with prior notice in connection with
foreclosure proceedings are waivable, are no longer authoritative in view of the
passage of Act 3135, as amended; second, that the charter of defendant bank
does not allow it to buy the property object of foreclosure in case of private sales;
and third, that the price obtained at the sale is unconscionable.

WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs

against plaintiff-appellant. So ordered.

There is no merit in the claims. The rulings in Philippine National Bank v. De

Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still
authoritative despite the passage of Act 3135. This law refers only, and is limited,
to foreclosure of real estate mortgages. 15 So, whatever formalities there are in Act
3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in
the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only
states that if the sale is public, the bank could purchase the whole or part of the
property sold " free from any right of redemption on the part of the mortgagor or
pledgor." This even argues against plaintiff's case since the import thereof is this if
the sale were private and the bank became the purchaser, the mortgagor or
pledgor could redeem the property. Hence, plaintiff could have recovered the
vessels by exercising this right of redemption. He is the only one to blame for not
doing so.
Regarding the third contention, on the assumption that the purchase price
was unconscionable, plaintiff's remedy was to have set aside the sale. He did not
avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an
obligation to return the P184,000 fraudulently taken by him from defendant bank.
The last assignment of error has to do with the damages allegedly suffered
by plaintiff-appellant by virtue of the taking of the vessels. But in view of the results
reached above, there is no more need to discuss the same.
On the whole, We cannot say the lower court erred in disposing of the case
as it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe.
He did defraud the defendant bank first. If the latter countered with the seizure and
sale of the pledged vessels pursuant to the pledge contract, it was only to protect
its interests after plaintiff had defaulted in the payment of the first promissory note.
Plaintiff-appellant did not come to court with clean hands.

20

G.R. No. 118342 January 5, 1998

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LYDIA CUBA, respondents.

2. Plaintiff Lydia P. Cuba obtained loans from the Development

Bank of the Philippines in the amounts of P109,000.00;
P109,000.00; and P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974; August 11, 1975;
and April 4, 1977;

G.R. No. 118367 January 5, 1998

3. As security for said loans, plaintiff Lydia P. Cuba executed two

Deeds of Assignment of her Leasehold Rights;

LYDIA P. CUBA, petitioner,

vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and
AGRIPINA P. CAPERAL,respondents.

4. Plaintiff failed to pay her loan on the scheduled dates thereof

in accordance with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extrajudicial, defendant DBP appropriated the Leasehold Rights of
plaintiff Lydia Cuba over the fishpond in question;

DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint 1 filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by
Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of
DBP's appropriation of CUBA's rights, title, and interests over a 44-hectares
fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the
Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her favor
by DBP; (3) the annulment of DBP's sale of the subject fishpond to Caperal; (4) the
restoration of her rights, title, and interests over the fishpond; and (5) the recovery
of damages, attorney's fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the
following facts, which were embodied in the pre-trial order: 2
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease
Agreement No. 2083 (new) dated May 13, 1974 from the
Government;

6. After defendant DBP has appropriated the Leasehold Rights

of plaintiff Lydia Cuba over the fishpond in question, defendant
DBP, in turn, executed a Deed of Conditional Sale of the
Leasehold Rights in favor of plaintiff Lydia Cuba over the same
fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba
addressed two letters to the Manager DBP, Dagupan City dated
November 6, 1979 and December 20, 1979. DBP thereafter
accepted the offer to repurchase in a letter addressed to plaintiff
dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of
plaintiff Lydia Cuba, a new Fishpond Lease Agreement No.
2083-A dated March 24, 1980 was issued by the Ministry of
Agriculture and Food in favor of plaintiff Lydia Cuba only,
excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated
in the Deed of Conditional Sale;

21

10. After plaintiff Lydia Cuba failed to pay the amortization as

stated in Deed of Conditional Sale, she entered with the DBP a
temporary arrangement whereby in consideration for the
deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as
stated in temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru
Notarial Act dated March 13, 1984, and which was received by
plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took
possession of the Leasehold Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold
Rights over the fishpond in question, DBP advertised in the
SUNDAY PUNCH the public bidding dated June 24, 1984, to
dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale
in favor of defendant Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease
Agreement No. 2083-A on December 28, 1984 by the Ministry of
Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself
CUBA's leasehold rights over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid.
CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised
its contractual right under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Defendant Caperal sided with DBP.

The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly violative
of Article 2088 of the Civil Code which provides as follows:
Art. 2088. The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void.
It disagreed with DBP's stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans, (2)
although the "fishpond land" in question is still a public land, CUBA's leasehold
rights and interest thereon are alienable rights which can be the proper subject of a
mortgage; and (3) the intention of the contracting parties to treat the Assignment of
Leasehold Rights as a mortgage was obvious and unmistakable; hence, upon
CUBA's default, DBP's only right was to foreclose the Assignment in accordance
with law.
The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case ofpactum commissorium expressly
prohibited and declared null and void by Article 2088 of the Civil Code. It then
concluded that since DBP never acquired lawful ownership of CUBA's leasehold
rights, all acts of ownership and possession by the said bank were void.
Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial rescission
of such sale, and the Deed of Conditional Sale in favor of defendant Caperal, as
well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP,
were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the
fishpond area but also from the adjoining big house; and that when CUBA's son
and caretaker went there on 15 September 1985, they found the said house
unoccupied and destroyed and CUBA's personal belongings, machineries,
equipment, tools, and other articles used in fishpond operation which were kept in
the house were missing. The missing items were valued at about P550,000. It
further found that when CUBA and her men were ejected by DBP for the first time
in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish
(milkfish), all of which died because the DBP representatives prevented CUBA's
men from feeding the fish. At the conservative price of P3.00 per fish, the gross

22

value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It
then set the aggregate of the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on
CUBA's leasehold rights. Such representation induced the said Bureau to
terminate CUBA's leasehold rights and to approve the Deed of Conditional Sale in
favor of CUBA. And considering that by reason of her unlawful ejectment by DBP,
CUBA "suffered moral shock, degradation, social humiliation, and serious anxieties
for which she became sick and had to be hospitalized" the trial court found her
entitled to moral and exemplary damages. The trial court also held that CUBA was
entitled to P100,000 attorney's fees in view of the considerable expenses she
incurred for lawyers' fees and in view of the finding that she was entitled to
exemplary damages.
In its decision of 31 January 1990, 4 the trial court disposed as follows:

Assignment of Leasehold Rights dated February 12, 1985

executed by defendant Agripina Caperal in favor of the
defendant Development Bank of the Philippines (Exh. 24)
as void ab initio;
4. ORDERING defendant Development Bank of the Philippines
and defendant Agripina Caperal, jointly and severally, to restore
to plaintiff the latter's leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice
to the right of defendant Development Bank of the Philippines to
foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines
to pay to plaintiff the following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN
THOUSAND FIVE HUNDRED PESOS
(P1,067,500.00), as and for actual damages;

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act
of defendant Development Bank of the Philippines in
appropriating for its own interest, without any judicial or extrajudicial foreclosure, plaintiff's leasehold rights and interest over
the fishpond land in question under her Fishpond Lease
Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21,
1980 by and between the defendant Development Bank of the
Philippines and plaintiff (Exh. E and Exh. 1) and the acts of
notarial rescission of the Development Bank of the Philippines
relative to said sale (Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16,
1984 by and between the Development Bank of the Philippines
and defendant Agripina Caperal (Exh. F and Exh. 21), the
Fishpond Lease Agreement No. 2083-A dated December 28,
1984 of defendant Agripina Caperal (Exh. 23) and the

b) The sum of ONE HUNDRED THOUSAND

(P100,000.00) PESOS as moral damages;
c) The sum of FIFTY THOUSAND
(P50,000.00) PESOS, as and for exemplary
damages;
d) And the sum of ONE HUNDRED
THOUSAND (P100,000.00) PESOS, as and
for attorney's fees;
6. And ORDERING defendant Development Bank of the
Philippines to reimburse and pay to defendant Agripina Caperal
the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE
CENTAVOS (P1,532,610.75) representing the amounts paid by
defendant Agripina Caperal to defendant Development Bank of
the Philippines under their Deed of Conditional Sale.

23

CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that
defendant Caperal could not validly acquire the leasehold rights from DBP; (2)
contrary to the claim of DBP, the assignment was not a cession under Article 1255
of the Civil Code because DBP appeared to be the sole creditor to CUBA
cession presupposes plurality of debts and creditors; (3) the deeds of assignment
represented the voluntary act of CUBA in assigning her property rights in payment
of her debts, which amounted to a novation of the promissory notes executed by
CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment
of the leasehold rights, since she agreed to repurchase the said rights under a
deed of conditional sale; and (5) condition no. 12 of the deed of assignment was
an express authority from CUBA for DBP to sell whatever right she had over the
fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of
evidence, but agreed with the trial court as to the actual damages of P1,067,500.
It, however, deleted the amount of exemplary damages and reduced the award of
moral damages from P100,000 to P50,000 and attorney's fees, from P100,000 to
P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease
Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of
DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed of
conditional sale between DBP and Caperal, the Fishpond Lease Agreement in
favor of Caperal, and the assignment of leasehold rights executed by Caperal in
favor of DBP. It then ordered DBP to turn over possession of the property to
Caperal as lawful holder of the leasehold rights and to pay CUBA the following
amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and
P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA filed
separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorney's fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment
was a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in
holding that the deed of assignment effected a novation of the promissory notes;
(c) in holding that CUBA was estopped from questioning the validity of the deed of
assignment when she agreed to repurchase her leasehold rights under a deed of
conditional sale; and (d) in reducing the amounts of moral damages and attorney's
fees, in deleting the award of exemplary damages, and in not increasing the
amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes,
there was a provision that: "In the event of foreclosure of the mortgagesecuring
this notes, I/We further bind myself/ourselves, jointly and severally, to pay the
deficiency, if any." 7
Simultaneous with the execution of the notes was the execution of "Assignments of
Leasehold Rights" 8 where CUBA assigned her leasehold rights and interest on a
44-hectare fishpond, together with the improvements thereon. As pointed out by
CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as
"borrower"; the assigned rights, as mortgaged properties; and the instrument itself,
as mortgage contract. Moreover, under condition no. 22 of the deed, it was
provided that "failure to comply with the terms and condition of any of the loans
shall cause all other loans to become due and demandable and all mortgages
shall be foreclosed." And, condition no. 33 provided that if "foreclosure is actually
accomplished, the usual 10% attorney's fees and 10% liquidated damages of the
total obligation shall be imposed." There is, therefore, no shred of doubt that a
mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was
by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two
Deeds of Assignment of her Leasehold Rights.

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In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that
an assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the promissory
notes) was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). As correctly pointed out by CUBA, the said assignment
merely complemented or supplemented the notes; both could stand together. The
former was only an accessory to the latter. Contrary to DBP's submission, the
obligation to pay a sum of money remained, and the assignment merely served as
security for the loans covered by the promissory notes. Significantly, both the
deeds of assignment and the promissory notes were executed on the same dates
the loans were granted. Also, the last paragraph of the assignment stated: "The
assignor further reiterates and states all terms, covenants, and conditions
stipulated in the promissory note or notes covering the proceeds of this loan,
making said promissory note or notes, to all intent and purposes, an integral
part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of
the Civil Code for the plain and simple reason that there was only one creditor, the
DBP. Article 1255 contemplates the existence of two or more creditors and involves
the assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil
Code, which reads: "Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law on sales."
It bears stressing that the assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness. 10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this
assignment, the Assignor hereby appoints the Assignee his
Attorney-in-fact with full power and authority to take actual
possession of the property above-described, together with all
improvements thereon, subject to the approval of the Secretary
of Agriculture and Natural Resources, to lease the same or any

portion thereof and collect rentals, to make repairs or

improvements thereon and pay the same, to sell or otherwise
dispose of whatever rights the Assignor has or might have over
said property and/or its improvements and perform any other act
which the Assignee may deem convenient to protect its interest.
All expenses advanced by the Assignee in connection with
purpose above indicated which shall bear the same rate of
interest aforementioned are also guaranteed by this Assignment.
Any amount received from rents, administration, sale or disposal
of said property may be supplied by the Assignee to the payment
of repairs, improvements, taxes, assessments and other
incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said
property and upon application of total amounts received there
shall remain a deficiency, said Assignor hereby binds himself to
pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall
not be revoked as long as the Assignor is indebted to the
Assignee and all acts that may be executed by the Assignee by
virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the principal obligation,
and (2) there should be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal obligation within the
stipulated period. 11
Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by
CUBA, and to apply the proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in conformity with Article 2087 of
the Civil Code, which authorizes the mortgagee to foreclose the mortgage and
alienate the mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had "[w]ithout foreclosure

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proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold

[r]ights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it
limited itself to mere administration by posting caretakers is further belied by the
deed of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of
assignment executed in its favor by the herein vendees [Cuba
spouses] the former acquired all the right and interest of the
latter over the above-described property;
xxx xxx xxx
The title to the real estate property [sic] and all improvements
thereon shall remain in the name of the Vendor until after the
purchase price, advances and interest shall have been fully paid.
(Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBA's leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its
act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBA's default would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an obligation, as in the present case,
is virtually a mortgage and not an absolute conveyance of title which confers
ownership on the assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a credit or from appropriating, or
disposing of, the thing given as security for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBP's act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases, 13estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil
Code and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no.
22 of the deed of assignment. But, as admitted by DBP, there was no such
foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of
Agriculture and Natural Resources and coursed through the Director of the Bureau
of Fisheries and Aquatic Resources, DBP declared that it "had foreclosed the
mortgage and enforced the assignment of leasehold rights on March 21, 1979 for
failure of said spouses [Cuba spouces] to pay their loan amortizations." 14 This only
goes to show that DBP was aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBA's original lease permit,
approved the deed of conditional sale, and issued a new permit in favor of CUBA.
Said acts which were predicated on such false representation, as well as the
subsequent acts emanating from DBP's appropriation of the leasehold rights,
should therefore be set aside. To validate these acts would open the floodgates to
circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended. 15With more
reason that the sale of property given as security for the payment of a debt be set
aside if there was no prior fore closure proceeding.
Hence, DBP should render an accounting of the income derived from the operation
of the fishpond in question and apply the said income in accordance with condition
no. 12 of the deed of assignment which provided: "Any amount received from
rents, administration, . . . may be applied to the payment of repairs, improvements,
taxes, assessment, and other incidental expenses and obligations and the
balance, if any, to the payment of interest and then on the capital of the
indebtedness. . ."

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We shall now take up the issue of damages.

Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an
adequate compensation only for such pecuniary loss suffered by
him as he has duly proved. Such compensation is referred to as
actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with
reasonable degree of certainty. 16A court cannot rely on speculations, conjectures,
or guesswork as to the fact and amount of damages, but must depend upon
competent proof that they have been suffered by the injured party and on the best
obtainable evidence of the actual amount thereof. 17 It must point out specific facts
which could afford a basis for measuring whatever compensatory or actual
damages are borne. 18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual
damages consisting of P550,000 which represented the value of the alleged lost
articles of CUBA and P517,500 which represented the value of the 230,000 pieces
of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the
fishpond and the adjoining house. This award was affirmed by the Court of
Appeals.
We find that the alleged loss of personal belongings and equipment was not
proved by clear evidence. Other than the testimony of CUBA and her caretaker,
there was no proof as to the existence of those items before DBP took over the
fishpond in question. As pointed out by DBP, there was not "inventory of the
alleged lost items before the loss which is normal in a project which sometimes, if
not most often, is left to the care of other persons." Neither was a single receipt or
record of acquisition presented.

Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property"
as among the damages resulting from DBP's take-over of the fishpond. Yet, it was
only in September 1985 when her son and a caretaker went to the fishpond and
the adjoining house that she came to know of the alleged loss of several articles.
Such claim for "losses of property," having been made before knowledge of the
alleged actual loss, was therefore speculative. The alleged loss could have been a
mere afterthought or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the fishpond
in March 1979, the same was not called for. Such loss was not duly proved;
besides, the claim therefor was delayed unreasonably. From 1979 until after the
filing of her complaint in court in May 1985, CUBA did not bring to the attention of
DBP the alleged loss. In fact, in her letter dated 24 October 1979, 19 she declared:
1. That from February to May 1978, I was then seriously ill in
Manila and within the same period I neglected the management
and supervision of the cultivation and harvest of the produce of
the aforesaid fishpond thereby resulting to the irreparable loss in
the produce of the same in the amount of about P500,000.00 to
my great damage and prejudice due to fraudulent acts of some
of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBP's take-over there
was a total of 230,000 pieces of bangus, but all of which died because of DBP's
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of
sufficient basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights which was
contrary to law and public policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had "foreclosed the
mortgage," an award of moral damages in the amount of P50,000 is in order
conformably with Article 2219(10), in relation to Article 21, of the Civil Code.
Exemplary or corrective damages in the amount of P25,000 should likewise be

27

awarded by way of example or correction for the public good. 20 There being an
award of exemplary damages, attorney's fees are also recoverable. 21

to render an accounting of the income derived from the operation of the fishpond in
question.

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV

No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral
damages, which is hereby sustained. The 31 January 1990 Decision of the
Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is
MODIFIED setting aside the finding that condition no. 12 of the deed of
assignment constituted pactum commissorium and the award of actual damages;
and by reducing the amounts of moral damages from P100,000 to P50,000; the
exemplary damages, from P50,000 to P25,000; and the attorney's fees, from
P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered

Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for
the determination of each party's financial obligation to one another.
SO ORDERED.

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