EDUARDO L. RAYO, Petitioner, vs.

METROPOLITAN BANK AND TRUST COMPANY

AND BRANCH 223 OF THE REGIONAL TRIAL
COURT OF QUEZON CITY, Respondents.
Before us is a petition for review assailing the
Resolutions dated June 15, 20041 and August 23,
20042 of the Court of Appeals in CA-G.R. SP No.
83895 for annulment of judgment.
The pertinent facts are undisputed.
Midas Diversified Export Corp. (Midas), thru its
president, Mr. Samuel U. Lee, obtained six (6)
loans from private respondent Metropolitan Bank
and Trust Company (Metrobank), amounting to
P588,870,000 as evidenced by promissory notes.
To secure the payment of an P8,000,000 loan,
Louisville Realty & Development Corporation
(Louisville), thru its president, Mr. Samuel U. Lee,
executed in favor of Metrobank, a real estate
mortgage over three parcels of land situated at
No. 40 Timog Ave., Brgy. Laging Handa, Quezon
City, with all the buildings and improvements
thereon. The properties are covered by Transfer
Certificates of Title (TCT) Nos. N-163455, N166349 and N-166350 issued by the Registry of
Deeds of Quezon City.
When the debtor-mortgagor failed to pay,
Metrobank extra-judicially foreclosed the real
estate mortgage in accordance with Act No.
3135,3 as amended. Thereafter, in a public
auction, Metrobank was the highest bidder. A
Certificate of Sale4 dated December 11, 2000
was duly registered with the Registry of Deeds of
Quezon City on December 13, 2000. When
Louisville refused to turn over the real properties,
on March 17, 2001, Metrobank filed before the
Regional Trial Court (RTC), Branch 223, Quezon
City, an ex parte petition5 for the issuance of a
writ of possession docketed as LRC Case No. Q13915(01). After presentation of evidence ex
parte, the RTC granted the petition in an Order6
dated July 5, 2001, the dispositive portion of
which reads as follows:
WHEREFORE, in consideration of the foregoing
premises, the instant petition is hereby GRANTED.
Upon the filing of a bond in the amount of ONE
HUNDRED THOUSAND PESOS ([P]100,000.00), let
a Writ of Possession over the properties covered
by Transfer Certificates of Title Nos. N-163455, N166349 & N-166350 issue in favor of the
petitioner METROPOLITAN BANK & TRUST
COMPANY to be implemented by the Deputy
Sheriff of Branch 223, Regional Trial Court of
Quezon City by placing the petitioner in
possession over the parcels of land with all its
improvements.
SO ORDERED.7

On September 24, 2001, Metrobank posted the

required bond. Consequently, a writ of possession
was issued on October 9, 2001. This was partially
implemented as to TCT No. N-163455, as
evidenced by the Turn-Over Receipt8 dated
December 13, 2002. The writ over the two
remaining properties, under TCT Nos. N-166349
and N-166350, were subsequently implemented
as evidenced by the Turn-Over Receipt9 dated
December 3, 2003.
Meanwhile, on April 3, 2002, petitioner Eduardo L.
Rayo filed a complaint10 docketed as Civil Case
No. Q02-46514 against Metrobank for Nullification
of Real Estate Mortgage Contract(s) and
Extrajudicial Foreclosure Sale, in the RTC, Branch
99, Quezon City.
On May 13, 2004, petitioner Rayo filed with the
Court of Appeals a Petition11 for Annulment of
Judgment on the ground of "absolute lack of due
process." Petitioner alleged that his predecessor,
Louisville, was not notified of the proceedings and
that Section 712 (ex parte motion or petition for
the issuance of a writ of possession) of Act No.
3135 is unconstitutional.
On June 15, 2004, the Court of Appeals denied
the petition for lack of merit. The Court of
Appeals ruled that petitioner is neither the
registered owner nor the successor-in-interest of
the registered owner; hence, not a real party-ininterest. It also ruled that there is no basis to
challenge the constitutionality of Section 7 of Act
No. 3135, as amended as it constitutes a
collateral attack against said provision. Further,
petitioner availed of the wrong remedy in filing
Civil Case No. Q02-46514. Petitioner sought
reconsideration, but was likewise denied.
Petitioner now comes before us raising the
following as primary issue:
WHETHER OR NOT SECTION 7 OF ACT NO. 3135
IS CONTRARY TO THE DUE PROCESS PROVISION
OF THE PHILIPPINE CONSTITUTION CONSIDERING
THAT SUCH SECTION 7 OF THE LAW PROVIDES OR
ALLOWS, ACCORDING TO THIS HONORABLE
COURT, FOR AN EX-PARTE PROCEEDING WHICH IS
A "JUDICIAL PROCEEDING BROUGHT FOR THE
BENEFIT OF ONE PARTY ONLY, AND WITHOUT
NOTICE TO, OR CONSENT BY ANY PERSON
ADVERSELY INTERESTED" "OR A PROCEEDING
WHEREIN RELIEF IS GRANTED WITHOUT AN
OPPORTUNITY FOR THE PERSON AGAINST WHOM
THE RELIEF IS SOUGHT TO BE HEARD," AS HELD
IN THE CASE OF GOVERNMENT SERVICE
INSURANCE SYSTEM VS. COURT OF APPEALS, 169
SCRA 244 @ 255, JANUARY 20, 1989.13
He also raises the following as secondary issues:

I.
WHETHER OR NOT THE PETITIONER HAS THE
LEGAL PERSONALITY TO SEEK THE ANNULMENT
OF JUDGMENT IN [THE] SUBJECT LRC CASE NO. Q13915(01).
II.
WHETHER OR NOT PRIVATE RESPONDENT
VIOLATED THE RULE AGAINST FORUM-SHOPPING
WHEN IT DID NOT INFORM THE HONORABLE
BRANCH 223 OF THE REGIONAL TRIAL COURT OF
QUEZON CITY REGARDING THE FILING OF CIVIL
CASE NO. Q-02-46514 FOR NULLIFICATION OF
REAL ESTATE MORTGAGE CONTRACT AND THE
EXTRA-JUDICIAL FORECLOSURE SALE OF THE
SAME SUBJECT REAL PROPERTIES AND THE
PENDENCY OF THE SAME BEFORE THE
HONORABLE BRANCH 99 OF THE SAME REGIONAL
TRIAL COURT.14
Stated simply, the issues raised are: (1) Does
petitioner have the legal personality in the
annulment of judgment proceedings? (2) Is
Section 7 of Act No. 3135, as amended,
unconstitutional? (3) Is respondent guilty of
forum-shopping?
Petitioner insists that contrary to the ruling of the
Court of Appeals, he has the legal personality to
institute the annulment of judgment case against
Metrobank, considering that the March 25, 2002
deed of assignment he entered into with
Louisville and Winston Linwy L. Chua makes him a
co-assignee over the subject real properties.
For its part, Metrobank claims that it was not a
party to the deed of assignment among Louisville,
Chua and petitioner, hence, it has no privity of
contract with petitioner Rayo. Moreover,
Metrobank points out that the real properties had
already been extrajudicially foreclosed when
petitioner and his assignors executed the deed of
assignment.
Under Section 2,15 Rule 3 of the Rules of Court,
every action must be prosecuted or defended in
the name of the real party-in-interest, or one
"who stands to be benefited or injured by the
judgment in the suit."16 A real party-in-interest is
one with "a present substantial interest" which
means such interest of a party in the subject
matter of the action as will entitle him, under the
substantive law, to recover if the evidence is
sufficient, or that he has the legal title to
demand.17
Now, is petitioner Rayo a real party-in-interest?
Initially, we recognized herein petitioner as the
co-assignee of the subject real properties as
shown in the March 25, 2002 deed of assignment.

However, while petitioner would be injured by the

judgment in this suit, we find that petitioner has
no present substantial interest to institute the
annulment of judgment proceedings and nullify
the order granting the writ of possession.
First, there was no violation of petitioners right to
constitutional due process. In a long line of
cases,18 we have consistently ruled that the
issuance of a writ of possession in favor of the
purchaser in a foreclosure sale of a mortgaged
property under Section 7 of Act No. 3135, as
amended is a ministerial duty of the court. The
purchaser of the foreclosed property, upon ex
parte application and the posting of the required
bond, has the right to acquire possession of the
foreclosed property during the 12-month
redemption period and with more reason, after
the expiration of the redemption period.
An ex parte petition for the issuance of a writ of
possession under Section 7 of Act No. 3135 is not,
strictly speaking, a "judicial process" as
contemplated in Article 43319 of the Civil Code. It
is a judicial proceeding for the enforcement of
ones right of possession as purchaser in a
foreclosure sale. It is not an ordinary suit filed in
court, by which one party "sues another for the
enforcement of a wrong or protection of a right,
or the prevention or redress of a wrong." It is a
non-litigious proceeding authorized in an
extrajudicial foreclosure of mortgage pursuant to
Act No. 3135, as amended, and is brought for the
benefit of one party only, and without notice to,
or consent by any person adversely interested. It
is a proceeding where the relief is granted
without requiring an opportunity for the person
against whom the relief is sought to be heard. No
notice is needed to be served upon persons
interested in the subject property.20
Second, in the deed of assignment, petitioner
also acknowledged that the subject real
properties were already sold at various
extrajudicial foreclosure sales and bought by
Metrobank. Clearly, petitioner recognized the
prior existing right of Metrobank as the
mortgagee-purchaser over the subject real
properties.21 Actual knowledge of a prior
mortgage with Metrobank is equivalent to notice
of registration22 in accordance with Article
212523 of the Civil Code. Conformably with
Articles 131224 and 212625 of the Civil Code, a
real right or lien in favor of Metrobank had
already been established, subsisting over the
properties until the discharge of the principal
obligation, whoever the possessor(s) of the land
might be.26 As petitioner is not a party whose
interest is adverse to that of Louisville, there was
no bar to the issuance of a writ of possession to
Metrobank. It does not matter that petitioner was

not specifically named in the writ of possession

nor notified of such proceedings.1avvphi1

PERALTA and PATRICIA P. GALANG,

Respondents.

Third, we also note that petitioner availed of the

wrong remedy in filing Civil Case No. Q02-46514,
for nullification of real estate mortgage and
extrajudicial foreclosure sale, more than six (6)
months after the issuance of the writ of
possession considering the mandate of Section
827 of Act No. 3135, as amended. Hence, even
petitioners action for annulment of judgment
cannot prosper as it cannot be a substitute for a
lost remedy.

This is a petition for review under Rule 45 of the

Rules of Court, assailing the Decision1 dated
September 29, 2005 and Resolution2 dated June
9, 2006 of the Court of Appeals (CA) in CA-G.R.
CV No. 59590.

Now, petitioner is challenging the

constitutionality of Section 7 of Act No. 3135, as
amended. He avers that Section 7 violates the
due process clause because, by the mere filing of
an ex parte motion in the proper cadastral court,
the purchaser in a foreclosure sale is allowed to
obtain possession of the foreclosed property
during the redemption period.
The Court of Appeals ruled that petitioners
attempt to challenge the constitutionality of
Section 7 of Act No. 3135, as amended,
constitutes a collateral attack that is not allowed.
We fully agree with the appellate courts ruling.
For reasons of public policy, the constitutionality
of a law cannot be attacked collaterally.28
With regard to forum-shopping; forum-shopping is
the filing of multiple suits involving the same
parties for the same cause of action, either
simultaneously or successively, for the purpose of
obtaining a favorable judgment. It exists where
the elements of litis pendentia are present or
where a final judgment in one case will amount to
res judicata in another.29 The issuance of the writ
of possession being a ministerial function, and
summary in nature, it cannot be said to be a
judgment on the merits. It is only an incident in
the transfer of title. Hence, a separate case for
annulment of mortgage and foreclosure sale
cannot be barred by litis pendentia or res
judicata.30 Clearly, insofar as LRC Case No. Q13915(01) and Civil Case No. Q02-46514 are
concerned, Metrobank is not guilty of forumshopping.
WHEREFORE, the petition is DENIED for lack of
merit. The assailed Resolutions dated June 15,
2004 and August 23, 2004 of the Court of
Appeals in CA-G.R. SP No. 83895 are hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED.
PHILIPPINE CHARITY SWEEPSTAKES OFFICE
(PCSO), Petitioner, vs. NEW DAGUPAN
METRO GAS CORPORATION, PURITA E.

In the assailed Decision, the CA Affirmed the

Decision3 dated January 28, 1998 of the Regional
Trial Court (RTC), Branch 42 of Dagupan City in
Civil Case No. 94-00200-D, ordering petitioner
Philippine Charity Sweepstakes Office (PCSO) to
surrender the owners duplicate of Transfer
Certificate of Title (TCT) No. 52135 to the Register
of Deeds of Dagupan City for cancellation and
issuance of a new certificate of title in the name
of respondent New Dagupan Metro Gas
Corporation (New Dagupan).
In its Resolution4 dated June 9, 2006, the CA
denied PCSOs motion for reconsideration.
The Factual Antecedents
Respondent Purita E. Peralta (Peralta) is the
registered owner of a parcel of land located at
Bonuan Blue Beach Subdivision, Dagupan City
under TCT No. 52135. On March 8, 1989, a real
estate mortgage was constituted over such
property in favor of PCSO to secure the payment
of the sweepstakes tickets purchased by one of
its provincial distributors, Patricia P. Galang
(Galang). The salient provisions of the Deed of
Undertaking with First Real Estate Mortgage,5
where Galang, PCSO and Peralta were
respectively designated as "principal",
"mortgagee" and "mortgagor", are as follows:
WHEREAS, the PRINCIPAL acknowledges that
he/she has an outstanding and unpaid account
with the MORTGAGEE in the amount of FOUR
HUNDRED FIFTY THOUSAND (P450,000.00),
representing the balance of his/her
accountabilities for all draws;
WHEREAS, the PRINCIPAL agrees to liquidate or
pay said account ten (10) days after each draw
with interest at the rate of 14% per annum.
xxxx
The PRINCIPAL shall settle or pay his/her account
of FOUR HUNDRED FIFTY THOUSAND PESOS
(P450,000.00) PESOS with the MORTGAGEE,
provided that the said balance shall bear interest
thereon at the rate of 14% per annum;
To secure the faithful compliance and as security
to the obligation of the PRINCIPAL stated in the
next preceding paragraph hereof, the

MORTGAGOR hereby convey unto and in favor of

the MORTGAGEE, its successor and assigns by
way of its first real estate mortgage, a parcel/s of
land together with all the improvements now or
hereafter existing thereon located at BOQUIG,
DAGUPAN CITY, covered by TCT No. 52135, of the
Register of Deeds of DAGUPAN CITY, and more
particularly described as follows:

On February 10, 1993, PCSO filed an application

for the extrajudicial foreclosure sale of the
subject property in view of Galangs failure to
fully pay the sweepstakes she purchased in
1992.10 A public auction took place on June 15,
1993 where PCSO was the highest bidder. A
certificate of sale was correspondingly issued to
PCSO.11

xxxx

The certified true copy of TCT No. 52135 that New

Dagupan obtained from the Register of Deeds of
Dagupan City for its use in Civil Case No. D-10160
reflected PCSOs mortgage lien. New Dagupan,
claiming that it is only then that it was informed
of the subject mortgage, sent a letter to PCSO on
October 28, 1993, notifying the latter of its
complaint against Peralta and its claim over the
subject property and suggesting that PCSO
intervene and participate in the case.

4. During the lifetime of this mortgage, the

MORTGAGOR shall not alienate, sell, or in any
manner dispose of or encumber the abovementioned property, without the prior written
consent of the MORTGAGEE;
xxxx
15. Upon payment of the principal amount
together with interest and other expenses legally
incurred by the MORTGAGEE, the above
undertaking is considered terminated.6
On July 31, 1990, Peralta sold, under a conditional
sale, the subject property to New Dagupan, the
conveyance to be absolute upon the latters full
payment of the price of P800,000.00. New
Dagupan obliged to pay Peralta P200,000.00
upon the execution of the corresponding deed
and the balance of P600,000.00 by monthly
instalments of P70,000.00, the first instalment
falling due on August 31, 1990. Peralta showed to
New Dagupan a photocopy of TCT No. 52135,
which bore no liens and encumbrances, and
undertook to deliver the owners duplicate within
three (3) months from the execution of the
contract.7
New Dagupan withheld payment of the last
instalment, which was intended to cover the
payment of the capital gains tax, in view of
Peraltas failure to deliver the owners duplicate
of TCT No. 52135 and to execute a deed of
absolute sale in its favor. Further, New Dagupan,
through its President, Julian Ong Cua (Cua),
executed an affidavit of adverse claim, which was
annotated on TCT No. 52135 on October 1, 1991
as Entry No. 14826.8
In view of Peraltas continued failure to deliver a
deed of absolute sale and the owners duplicate
of the title, New Dagupan filed a complaint for
specific performance against her with the RTC on
February 28, 1992. New Dagupans complaint
was raffled to Branch 43 and docketed as Civil
Case No. D-10160.
On May 20, 1992, during the pendency of New
Dagupans complaint against Peralta, PCSO
caused the registration of the mortgage.9

On January 21, 1994, the RTC Branch 43 rendered

a Decision, approving the compromise agreement
between Peralta and New Dagupan. Some of the
stipulations made are as follows:
3. For her failure to execute, sign and deliver a
Deed of Absolute Sale to plaintiff by way of
transferring TCT No. 52135 in the name of the
latter, defendant hereby waives and quitclaims
the remaining balance of the purchase price in
the amount of P60,000.00 in favor of the plaintiff,
it being understood that the said amount shall be
treated as a penalty for such failure;
xxxx
6. Upon the signing of this compromise
agreement, possession and ownership of the
above described property, together with all the
improvements existing thereon, are hereby
vested absolutely upon, and transferred to the
plaintiff whom the defendant hereby declares and
acknowledges to be the absolute owner thereof,
now and hereafter;
7. This compromise agreement shall be without
prejudice to whatever rights and remedies, if any,
that the Philippine Charity Sweepstakes Office
has against the herein defendant and Patricia P.
Galang under the Deed of Undertaking adverted
to under par. 2(f) hereof.12
As the RTC Branch 43 Decision dated January 21,
1994 became final and executory, New Dagupan
once again demanded Peraltas delivery of the
owners duplicate of TCT No. 52135. Also, in a
letter dated March 29, 1994, New Dagupan made
a similar demand from PCSO, who in response,
stated that it had already foreclosed the
mortgage on the subject property and it has in its
name a certificate of sale for being the highest

bidder in the public auction that took place on

June 15, 1993.
Thus, on June 1, 1994, New Dagupan filed
with the RTC a petition against PCSO for the
annulment of TCT No. 52135 or surrender of the
owners duplicate thereof.13 The petition was
docketed as Civil Case No. 94-00200-D and
raffled to Branch 43.
In an Answer14 dated March 7, 1995, PCSO
alleged that: (a) New Dagupan was a buyer in
bad faith; (b) New Dagupan and Peralta colluded
to deprive PCSO of its rights under the subject
mortgage; (c) New Dagupan is estopped from
questioning the superior right of PCSO to the
subject property when it entered into the
compromise agreement subject of the RTC Branch
43 Decision dated January 21, 1994; and (d) New
Dagupan is bound by the foreclosure proceedings
where PCSO obtained title to the subject property.
In a Motion for Leave to File Third-Party
Complaint15 dated April 17, 1995, PCSO sought
the inclusion of Peralta and Galang who are
allegedly indispensable parties. In its Third-Party
Complaint,16 PCSO reiterated its allegations in its
Answer dated March 7, 1995 and made the
further claim that the sale of the subject property
to New Dagupan is void for being expressly
prohibited under the Deed of Undertaking with
First Real Estate Mortgage.
In their Answer to Third-Party Complaint with
Counterclaims17 dated January 2, 1996, Peralta
and Galang claimed that: (a) the provision in the
Deed of Undertaking with First Real Estate
Mortgage prohibiting the sale of the subject
property is void under Article 2130 of the Civil
Code; (b) PCSOs failure to intervene in Civil Case
No. D-10160 despite notice barred it from
questioning the sale of the subject property to
New Dagupan and the compromise agreement
approved by the RTC Branch 43; (c) it was due to
PCSOs very own neglect in registering its
mortgage lien that preference is accorded to New
Dagupans rights as a buyer of the subject
property; and (d) PCSO no longer has any cause
of action against them following its decision to
foreclose the subject mortgage.
On March 6, 1996, Civil Case No. 94-00200-D was
transferred to Branch 42, after the presiding
judge of Branch 43 inhibited himself.
On January 28, 1998, the RTC Branch 42 rendered
a Decision18 in New Dagupans favor, the
dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in
favor of the petitioner and against the defendant,
ordering PCSO to deliver the owners duplicate

copy of TCT No. 52135 in its possession to the

Registry of Deeds of Dagupan City for the
purpose of having the decision in favor of the
petitioner annotated at the back thereof. Should
said defendant fail to deliver the said title within
30 days from the date this decision becomes final
and executory, the said owners duplicate
certificate of title is hereby cancelled and the
Register of Deeds can issue a new one carrying
all the encumbrances of the original owners
duplicate subject of this case. Further, the
defendant is ordered to pay to petitioner the sum
of Ten Thousand Pesos (P10,000.00) as attorneys
fees. It is also ordered to pay costs.
SO ORDERED.19
The RTC Branch 42 ruled that New Dagupan is a
buyer in good faith, ratiocinating that:
In other words, the evidence of the petitioner
would show that although the Deed of
Undertaking with First Real Estate Mortgage was
executed on March 8, 1989 its annotation was
made long after the conditional sale in favor of
the petitioner was executed and annotated at the
back of the title in question. Because of the said
exhibits, petitioner contended that it was a buyer
in good faith and for value.
Defendant, to controvert the aforementioned
evidence of the plaintiff, alleged that Exhibits C,
C-1 to C-1-C was contrary to the testimony of Mr.
Julian Ong Cua to the effect that when
defendants sold the property to petitioner only
the xerox copy of the title was shown and
petitioner should have verified the original as it
was a buyer in bad faith. Defendant also alleged
that the decision in Civil Case D-10160 dated
January 21, 1994 would show that there was a
collusion between the petitioner and the thirdparty defendants.
The Court cannot go along with the reasoning of
the defendant because what was shown to Mr.
Cua by the third-party defendants was Exhibit
"C" which did not carry any encumbrance at the
back of the subject title and the annotation made
on May 20, 1992 in favor of the PCSO. Mr. Cua
verified the title x x x but the encumbrance on
the title was not still there at [that] time. One
thing more, there was nothing indicated in the
decision in Civil Case No. D-10160 that petitioner
already knew that there was already a mortgage
in favor of the PCSO. Worst, defendant did not
even introduce any oral evidence to show that
petitioner was in bad faith except the
manifestations of counsel. Unfortunately,
manifestations could not be considered evidence.
xxxx

Defendant should not be allowed to profit from its

negligence of not registering the Deed of
Undertaking with First Real Estate Mortgage in its
favor.20
Also, the RTC Branch 42 ruled that the prohibition
on the sale of the subject property is void.
Specifically:
Suffice it to say that there is no law prohibiting a
mortgagor from encumbering or alienating the
property mortgaged. On the contrary, there is a
law prohibiting an agreement forbidding the
owner from alienating a mortgaged property. We
are referring to Article 2130 of the New Civil Code
which provides as follows:
"A stipulation forbidding the owner from
alienating the immovable mortgage shall be
void."21
Moreover, the RTC Branch 42 ruled that PCSO had
no right to foreclose the subject mortgage as the
land in question had already been disencumbered
after Galangs full payment of all the sweepstakes
tickets she purchased in 1989 and 1990.
It should be recalled that Amparo Abrigo, OIC
Chief of the Credit Accounts Division of the PCSO,
admitted not only once but twice that Patricia
Galang has no more liability with the PCSO for the
years 1989 and 1990 x x x. Another witness,
Carlos Castillo who is the OIC of the Sales
Department of the PCSO, joined Amparo Abrigo in
saying that Patricia Galang has already paid her
liability with the PCSO for the years 1989 and
1990 x x x. Thus, the undertaking was already
discharged. Both of the said witnesses of the
PCSO alleged that the undertaking has been reused by Patricia Galang for the years 1991 to
1992 yet there is no proof whatsoever showing
that Purita Peralta consented to the use of the
undertaking by Patricia Galang for 1991 to 1992.
Incidentally, it is not far-fetched to say that Purita
Peralta might have thought that the undertaking
was already discharged which was the reason she
executed the Deed of Conditional Sale x x x in
favor of petitioner in 1990. That being the case,
the foreclosure sale in favor of the PCSO has no
legal leg to stand as the Deed of Undertaking
with First Real Estate Mortgage has already been
discharged before the foreclosure sale was
conducted.22
According to the RTC Branch 42, the intent to use
the subject property as security for Galangs
purchases for the years after 1989, as PCSO
claimed, is not clear from the Deed of
Undertaking with First Real Estate Mortgage:
Was it not provided in the deed that the
undertaking would be for "all draws". That might

be true but the terms of the Contract should be

understood to mean only to cover the draws
relative to the current liabilities of Patricia Galang
at the time of the execution of the undertaking in
1989. It could have not been agreed upon that it
should also cover her liability for 1991 up to 1992
because if that was the intention of the parties,
the undertaking should have so provided
expressly. The term of the undertaking with
respect to the period was ambiguous but any
ambiguity in the Contract should be resolved
against PCSO because the form used was a
standard form of the defendant and it appeared
that it was its lawyers who prepared it, therefore,
it was the latter which caused the ambiguity.23
PCSOs appeal from the foregoing adverse
decision was dismissed. By way of its assailed
decision, the CA did not agree with PCSOs claim
that the subject mortgage is in the nature of a
continuing guaranty, holding that Peraltas
undertaking to secure Galangs liability to PCSO is
only for a period of one year and was
extinguished when Peralta completed payment
on the sweepstakes tickets she purchased in
1989.
The instant appeal must fail. There is nothing in
the Deed of Undertaking with First Real Estate
Mortgage, expressly or impliedly, that would
indicate that Peralta agreed to let her property be
burdened as long as the contract of undertaking
with real estate mortgage was not cancelled or
revoked. x x x
xxxx
A perusal of the deed of undertaking between the
PCSO and Peralta would reveal nothing but the
undertaking of Peralta to guarantee the payment
of the pre-existing obligation of Galang,
constituting the unpaid sweepstakes tickets
issued to the latter before the deed of
undertaking was executed, with the PCSO in the
amount of P450,000.00. No words were added
therein to show the intention of the parties to
regard it as a contract of continuing guaranty. In
other jurisdictions, it has been held that the use
of the particular words and expressions such as
payment of "any debt", "any indebtedness", "any
deficiency", or "any sum", or the guaranty of "any
transaction" or money to be furnished the
principal debtor "at any time", or "on such time"
that the principal debtor may require, have been
construed to indicate a continuing guaranty.
Similar phrases or words of the same import or
tenor are not extant in the deed of undertaking.
The deed of undertaking states:
"WHEREAS, the PRINCIPAL acknowledges that
he/she has an outstanding and unpaid account
with the MORTGAGEE in the amount of FOUR

HUNDRED FIFTY THOUSAND (P450,000.00),

representing the balance of his/her ticket
accountabilities for all draws."
xxxx
Upon full payment of the principal obligation,
which from the testimonies of the officers of the
PCSO had been paid as early as 1990, the
subsidiary contract of guaranty was automatically
terminated. The parties have not executed
another contract of guaranty to secure the
subsequent obligations of Galang for the tickets
issued thereafter. It must be noted that a contract
of guaranty is not presumed; it must be express
and cannot extend to more than what is
stipulated therein.
xxxx
The arguments of PCSO fail to persuade us. The
phrase "for all draws" is limited to the draws
covered by the original transaction. In its
pleadings, the PCSO asserted that the contract of
undertaking was renewed and the collateral was
re-used by Galang to obtain again tickets from
the PCSO after she had settled her account under
the original contract. From such admission, it is
thus clear that the contract is not in the nature of
a continuing guaranty. For a contract of
continuing guaranty is not renewed as it is
understood to be of a continuing nature without
the necessity of renewing the same every time a
new transaction contemplated under the original
contract is entered into. x x x 24 (Citations
omitted)
In this petition, PCSO claims that the CA erred in
holding that the subject mortgage had been
extinguished by Galangs payment of
P450,000.00, representing the amount of the
sweepstakes tickets she purchased in 1989.
According to PCSO, the said amount is actually
the credit line granted to Galang and the phrase
"all draws" refers to her ticket purchases for
subsequent years drawn against such credit line.
Consequently, PCSO posits, the subject mortgage
had not been extinguished by Peraltas payment
of her ticket purchases in 1989 and its coverage
extends to her purchases after 1989, which she
made against the credit line that was granted to
her. That when Galang failed to pay her ticket
purchases in 1992, PCSOs right to foreclose the
subject mortgage arose.
PCSO also maintains that its rights over the
subject property are superior to those of New
Dagupan. Considering that the contract between
New Dagupan is a conditional sale, there was no
conveyance of ownership at the time of the
execution thereof on July 31, 1989. It was only on
January 21, 1994, or when the RTC Branch 43

approved the compromise agreement, that a

supposed transfer of title between Peralta and
New Dagupan took place. However, since PCSO
had earlier foreclosed the subject mortgage and
obtained title to the subject property as
evidenced by the certificate of sale dated June
15, 1993, Peralta had nothing to cede or assign to
New Dagupan.
PCSO likewise attributes bad faith to New
Dagupan, claiming that Peraltas presentation of
a mere photocopy of TCT No. 52135, albeit
without any annotation of a lien or encumbrance,
sufficed to raise reasonable suspicions against
Peraltas claim of a clean title and should have
prompted it to conduct an investigation that went
beyond the face of TCT No. 52135.
PCSO even assails the validity of the subject sale
for being against the prohibition contained in the
Deed of Undertaking with First Real Estate
Mortgage.
New Dagupan, in its Comment,25 avers that it
was a purchaser in good faith and it has a
superior right to the subject property, considering
that PCSOs mortgage lien was annotated only on
May 20, 1992 or long after the execution of the
conditional sale on July 31, 1990 and the
annotation of New Dagupans adverse claim on
October 1, 1991. While the subject mortgage
antedated the subject sale, PCSO was already
aware of the latter at the time of its belated
registration of its mortgage lien. PCSOs
registration was therefore in bad faith, rendering
its claim over the subject property defeasible by
New Dagupans adverse claim.
New Dagupan also claims that the subject
property had already been discharged from the
mortgage, hence, PCSO had nothing to foreclose
when it filed its application for extra-judicial
foreclosure on February 10, 1993. The subject
mortgage was intended to secure Galangs ticket
purchases that were outstanding at the time of
the execution of the same, the amount of which
has been specified to be P450,000.00 and does
not extend to Galangs future purchases. Thus,
upon Galangs full payment of P450,000.00,
which PCSO admits, the subject mortgage had
been automatically terminated as expressly
provided under Section 15 of the Deed of
Undertaking with First Real Estate Mortgage
quoted above.
Issue
The rise and fall of this recourse is dependent on
the resolution of the issue who between New
Dagupan and PCSO has a better right to the
property in question.

Our Ruling
PCSO is undeterred by the denial of its appeal to
the CA and now seeks to convince this Court that
it has a superior right over the subject property.
However, PCSOs resolve fails to move this Court
and the ineluctability of the denial of this petition
is owing to the following:
a. At the time of PCSOs registration of its
mortgage lien on May 20, 1992, the subject
mortgage had already been discharged by
Galangs full payment of P450,000.00, the
amount specified in the Deed of Undertaking with
First Real Estate Mortgage;
b. There is nothing in the Deed of Undertaking
with First Real Estate Mortgage that would
indicate that it is a continuing security or that
there is an intent to secure Galangs future debts;
c. Assuming the contrary, New Dagupan is not
bound by PCSOs mortgage lien and was a
purchaser in good faith and for value; and
d. While the subject mortgage predated the sale
of the subject property to New Dagupan, the
absence of any evidence that the latter had
knowledge of PCSOs mortgage lien at the time of
the sale and its prior registration of an adverse
claim created a preference in its favor.
I. As a general rule, a mortgage liability is usually
limited to the amount mentioned in the contract.
However, the amounts named as consideration in
a contract of mortgage 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.26
Alternatively, while a real estate mortgage may
exceptionally secure future loans or
advancements, these future debts must be
specifically described in the mortgage contract.
An obligation is not secured by a mortgage unless
it comes fairly within the terms of the mortgage
contract.27
The stipulation extending the coverage of a
mortgage to advances or loans other than those
already obtained or specified in the contract is
valid and has been commonly referred to as a
"blanket mortgage" or "dragnet" clause. In
Prudential Bank v. Alviar,28 this Court elucidated
on the nature and purpose of such a clause as
follows:
A "blanket mortgage clause," also known as a
"dragnet clause" in American jurisprudence, is
one which is specifically phrased to subsume all
debts of past or future origins. Such clauses are
"carefully scrutinized and strictly construed."

Mortgages of this character enable the parties to

provide continuous dealings, the nature or extent
of which may not be known or anticipated at the
time, and they avoid the expense and
inconvenience of executing a new security on
each new transaction. A "dragnet clause"
operates as a convenience and accommodation
to the borrowers as it makes available additional
funds without their having to execute additional
security documents, thereby saving time, travel,
loan closing costs, costs of extra legal services,
recording fees, et cetera. x x x.29 (Citations
omitted)
A mortgage that provides for a dragnet clause is
in the nature of a continuing guaranty and
constitutes an exception to the rule than an
action to foreclose a mortgage must be limited to
the amount mentioned in the mortgage contract.
Its validity is anchored on Article 2053 of the Civil
Code and is not limited to a single transaction,
but contemplates a future course of dealing,
covering a series of transactions, generally for an
indefinite time or until revoked. It is prospective
in its operation and is generally intended to
provide security with respect to future
transactions within certain limits, and
contemplates a succession of liabilities, for which,
as they accrue, the guarantor becomes liable. In
other words, a continuing guaranty is one that
covers all transactions, including those arising in
the future, which are within the description or
contemplation of the contract of guaranty, until
the expiration or termination thereof.30
In this case, PCSO claims the subject mortgage is
a continuing guaranty. According to PCSO, the
intent was to secure Galangs ticket purchases
other than those outstanding at the time of the
execution of the Deed of Undertaking with First
Real Estate Mortgage on March 8, 1989 such that
it can foreclose the subject mortgage for Galangs
non-payment of her ticket purchases in 1992.
PCSO does not deny and even admits that Galang
had already settled the amount of P450,000.00.
However, PCSO refuses to concede that the
subject mortgage had already been discharged,
claiming that Galang had unpaid ticket purchases
in 1992 and these are likewise secured as
evidenced by the following clause in the Deed of
Undertaking with First Real Estate Mortgage:
WHEREAS, the PRINCIPAL agrees to liquidate or
pay said account ten (10) days after each draw
with interest at the rate of 14% per annum;31
This Court has to disagree with PCSO in view of
the principles quoted above. A reading of the
other pertinent clauses of the subject mortgage,
not only of the provision invoked by PCSO, does
not show that the security provided in the subject
mortgage is continuing in nature. That the

subject mortgage shall only secure Galangs

liability in the amount of P450,000.00 is evident
from the following:
WHEREAS, the PRINCIPAL acknowledges that
he/she has an outstanding and unpaid account
with the MORTGAGEE in the amount of FOUR
HUNDRED FIFTY THOUSAND (P450,000.00),
representing the balance of his/her ticket
accountabilities for all draws;
xxxx
The PRINCIPAL shall settle or pay his/her account
of FOUR HUNDRED FIFTY THOUSAND PESOS
(P450,000.00) PESOS with the MORTGAGEE,
provided that the said balance shall bear interest
thereon at the rate of 14% per annum;
To secure the faithful compliance and as security
to the obligation of the PRINCIPAL stated in the
next preceding paragraph hereof, the
MORTGAGOR hereby convey unto and in favor of
the MORTGAGEE, its successor and assigns by
way of its first real estate mortgage, a parcel/s of
land together with all the improvements now or
hereafter existing thereon, located at BOQUIG,
DAGUPAN CITY, covered by TCT No. 52135, of the
Register of Deeds of DAGUPAN CITY, and more
particularly described as follows:32
As the CA correctly observed, the use of the
terms "outstanding" and "unpaid" militates
against PCSOs claim that future ticket purchases
are likewise secured. That there is a seeming
ambiguity between the provision relied upon by
PCSO containing the phrase "after each draw"
and the other provisions, which mention with
particularity the amount of P450,000.00 as
Galangs unpaid and outstanding account and
secured by the subject mortgage, should be
construed against PCSO. The subject mortgage is
a contract of adhesion as it was prepared solely
by PCSO and the only participation of Galang and
Peralta was the act of affixing their signatures
thereto.
Considering that the debt secured had already
been fully paid, the subject mortgage had already
been discharged and there is no necessity for any
act or document to be executed for the purpose.
As provided in the Deed of Undertaking with First
Real Estate Mortgage:
15. Upon payment of the principal amount
together with interest and other expenses legally
incurred by the MORTGAGEE, the aboveundertaking is considered terminated.33
Section 6234 of Presidential Decree (P.D.) No.
1529 appears to require the execution of an
instrument in order for a mortgage to be

cancelled or discharged. However, this rule

presupposes that there has been a prior
registration of the mortgage lien prior to its
discharge. In this case, the subject mortgage had
already been cancelled or terminated upon
Galangs full payment before PCSO availed of
registration in 1992. As the subject mortgage was
not annotated on TCT No. 52135 at the time it
was terminated, there was no need for Peralta to
secure a deed of cancellation in order for such
discharge to be fully effective and duly reflected
on the face of her title.
Therefore, since the subject mortgage is not in
the nature of a continuing guaranty and given the
automatic termination thereof, PCSO cannot
claim that Galangs ticket purchases in 1992 are
also secured. From the time the amount of
P450,000.00 was fully settled, the subject
mortgage had already been cancelled such that
Galangs subsequent ticket purchases are
unsecured. Simply put, PCSO had nothing to
register, much less, foreclose.
Consequently, PCSOs registration of its nonexistent mortgage lien and subsequent
foreclosure of a mortgage that was no longer
extant cannot defeat New Dagupans title over
the subject property.
II.Sections 51 and 53 of P.D. No. 1529 provide:
Section 51. Conveyance and other dealings by
registered owner. An owner of registered land
may convey, mortgage, lease, charge or
otherwise deal with the same in accordance with
existing laws. He may use such forms of deeds,
mortgages, leases or other voluntary instrument,
except a will purporting to convey or affect
registered land, but shall operate only as a
contract between the parties and as evidence of
authority to the Register of Deeds to make
registration.
The act of registration shall be the operative act
to convey or affect the land insofar as third
persons are concerned, and in all cases under this
Decree, the registration shall be made in the
office of the Register of Deeds for the province or
city where the land lies.
Section 52. Constructive notice upon registration.
Every conveyance, mortgage, lease, lien,
attachment, order, judgment, instrument or entry
affecting registered land shall, if registered, filed
or entered in the office of the Register of Deeds
for the province or city where the land to which it
relates lies, be constructive notice to all persons
from the time of such registering, filing or
entering.

On the other hand, Article 2125 of the Civil Code

states:
Article 2125. In addition to the requisites stated
in Article 2085, it is indispensable, in order that a
mortgage may be validly constituted, that the
document in which it appears be recorded in the
Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding
between the parties.
The persons in whose favor the law establishes a
mortgage have no other right than to demand the
execution and the recording of the document in
which the mortgage is formalized.
Construing the foregoing conjunctively, as to third
persons, a property registered under the Torrens
system is, for all legal purposes, unencumbered
or remains to be the property of the person in
whose name it is registered, notwithstanding the
execution of any conveyance, mortgage, lease,
lien, order or judgment unless the corresponding
deed is registered.
The law does not require a person dealing with
the owner of registered land to go beyond the
certificate of title as he may rely on the notices of
the encumbrances on the property annotated on
the certificate of title or absence of any
annotation.35 Registration affords legal
protection such that the claim of an innocent
purchaser for value is recognized as valid despite
a defect in the title of the vendor.36
In Cruz v. Bancom Finance Corporation,37 the
foregoing principle was applied as follows:
Second, respondent was already aware that there
was an adverse claim and notice of lis pendens
annotated on the Certificate of Title when it
registered the mortgage on March 14, 1980.
Unless duly registered, a mortgage does not
affect third parties like herein petitioners, as
provided under Section 51 of PD NO. 1529, which
we reproduce hereunder:
xxxx
True, registration is not the operative act for a
mortgage to be binding between the parties. But
to third persons, it is indispensible. In the present
case, the adverse claim and the notice of lis
pendens were annotated on the title on October
30, 1979 and December 10, 1979, respectively;
the real estate mortgage over the subject
property was registered by respondent only on
March 14, 1980. Settled in this jurisdiction is the
doctrine that a prior registration of a lien creates
a preference. Even a subsequent registration of
the prior mortgage will not diminish this
preference, which retroacts to the date of the

annotation of the notice of lis pendens and the

adverse claim. Thus, respondents failure to
register the real estate mortgage prior to these
annotations, resulted in the mortgage being
binding only between it and the mortgagor, Sulit.
Petitioners, being third parties to the mortgage,
were not bound by it. Contrary to respondents
claim that petitioners were in bad faith because
they already had knowledge of the existence of
the mortgage in favor of respondent when they
caused the aforesaid annotations, petitioner
Edilberto Cruz said that they only knew of this
mortgage when respondent intervened in the RTC
proceedings.38 (Citations omitted)
It is undisputed that it was only on May 20, 1992
that PCSO registered its mortgage lien. By that
time, New Dagupan had already purchased the
subject property, albeit under a conditional sale.
In fact, PCSOs mortgage lien was yet to be
registered at the time New Dagupan filed its
adverse claim on October 1, 1991 and its
complaint against Peralta for the surrender of the
owners duplicate of TCT No. 52135 on February
28, 1992. It was only during the pendency of Civil
Case No. D-10160, or sometime in 1993, that
New Dagupan was informed of PCSOs mortgage
lien. On the other hand, PCSO was already
charged with knowledge of New Dagupans
adverse claim at the time of the annotation of the
subject mortgage. PCSOs attempt to conceal
these damning facts is palpable. However, they
are patent from the records such that there is no
gainsaying that New Dagupan is a purchaser in
good faith and for value and is not bound by
PCSOs mortgage lien.
A purchaser in good faith and for value is one
who buys property of another, without notice that
some other person has a right to, or interest in,
such property, and pays a full and fair price for
the same, at the time of such purchase, or before
he has notice of the claim or interest of some
other person in the property.39 Good faith is the
opposite of fraud and of bad faith, and its nonexistence must be established by competent
proof.40 Sans such proof, a buyer is deemed to
be in good faith and his interest in the subject
property will not be disturbed. A purchaser of a
registered property can rely on the guarantee
afforded by pertinent laws on registration that he
can take and hold it free from any and all prior
liens and claims except those set forth in or
preserved against the certificate of title.41
This Court cannot give credence to PCSOs claim
to the contrary. PCSO did not present evidence,
showing that New Dagupan had knowledge of the
mortgage despite its being unregistered at the
time the subject sale was entered into. Peralta, in
the compromise agreement, even admitted that
she did not inform New Dagupan of the subject

mortgage.42 PCSOs only basis for claiming that

New Dagupan was a buyer in bad faith was the
latters reliance on a mere photocopy of TCT No.
52135. However, apart from the fact that the
facsimile bore no annotation of a lien or
encumbrance, PCSO failed to refute the
testimony of Cua that his verification of TCT No.
52135 with the Register of Deeds of Dagupan City
confirmed Peraltas claim of a clean title.
Since PCSO had notice of New Dagupans adverse
claim prior to the registration of its mortgage lien,
it is bound thereby and thus legally compelled to
respect the proceedings on the validity of such
adverse claim. It is therefore of no moment if
PCSOs foreclosure of the subject mortgage and
purchase of the subject property at the auction
sale took place prior to New Dagupans
acquisition of title as decreed in the Decision
dated January 21, 1994 of RTC Branch 43. The
effects of a foreclosure sale retroact to the date
the mortgage was registered.43 Hence, while
PCSO may be deemed to have acquired title over
the subject property on May 20, 1992, such title
is rendered inferior by New Dagupans adverse
claim, the validity of which was confirmed per the
Decision dated January 21, 1994 of RTC Branch
43.
Otherwise, if PCSOs mortgage lien is
allowed to prevail by the mere expediency of
registration over an adverse claim that was
registered ahead of time, the object of an
adverse claim to apprise third persons that any
transaction regarding the disputed property is
subject to the outcome of the dispute would be
rendered naught. A different conclusion would
remove the primary motivation for the public to
rely on and respect the Torrens system of
registration. Such would be inconsistent with the
well-settled, even axiomatic, rule that a person
dealing with registered property need not go
beyond the title and is not required to explore
outside the four (4) corners thereof in search for
any hidden defect or inchoate right that may turn
out to be superior.
Worthy of extrapolation is the fact that
there is no conflict between the disposition of this
case and Garbin v. CA44 where this Court decided
the controversy between a buyer with an earlier
registered adverse claim and a subsequent
buyer, who is charged with notice of such adverse
claim at the time of the registration of her title, in
favor of the latter. As to why the adverse claim
cannot prevail against the rights of the later
buyer notwithstanding its prior registration was
discussed by this Court in this wise:
It is undisputed that the adverse claim of
private respondents was registered pursuant to
Sec. 110 of Act No. 496, the same having been

accomplished by the filing of a sworn statement

with the Register of Deeds of the province where
the property was located. However, what was
registered was merely the adverse claim and not
the Deed of Sale, which supposedly conveyed the
northern half portion of the subject property.
Therefore, there is still need to resolve the
validity of the adverse claim in separate
proceedings, as there is an absence of
registration of the actual conveyance of the
portion of land herein claimed by private
respondents.
From the provisions of the law, it is clear
that mere registration of an adverse claim does
not make such claim valid, nor is it permanent in
character. More importantly, such registration
does not confer instant title of ownership since
judicial determination on the issue of the
ownership is still necessary.45 (Citation omitted)
Apart from the foregoing, the more
important consideration was the improper resort
to an adverse claim.1wphi1 In L.P. Leviste & Co.
v. Noblejas,46 this Court emphasized that the
availability of the special remedy of an adverse
claim is subject to the absence of any other
statutory provision for the registration of the
claimants alleged right or interest in the
property. That if the claimants interest is based
on a perfected contract of sale or any voluntary
instrument executed by the registered owner of
the land, the procedure that should be followed is
that prescribed under Section 51 in relation to
Section 52 of P.D. No. 1529. Specifically, the
owners duplicate certificate must be presented
to the Register of Deeds for the inscription of the
corresponding memorandum thereon and in the
entry day book. It is only when the owner refuses
or fails to surrender the duplicate certificate for
annotation that a statement setting forth an
adverse claim may be filed with the Register of
Deeds. Otherwise, the adverse claim filed will not
have the effect of a conveyance of any right or
interest on the disputed property that could
prejudice the rights that have been subsequently
acquired by third persons.
What transpired in Gabin is similar to that in
Leviste. In Gabin, the basis of the claim on the
property is a deed of absolute sale. In Leviste,
what is involved is a contract to sell. Both are
voluntary instruments that should have been
registered in accordance with Sections 51 and 52
of P.D. No. 1529 as there was no showing of an
inability to present the owners duplicate of title.
It is patent that the contrary appears in this
case. Indeed, New Dagupans claim over the
subject property is based on a conditional sale,
which is likewise a voluntary instrument.
However, New Dagupans use of the adverse

claim to protect its rights is far from being

incongruent in view of the undisputed fact that
Peralta failed to surrender the owners duplicate
of TCT No. 52135 despite demands.
Moreover, while the validity of the adverse
claim in Gabin is not established as there was no
separate proceeding instituted that would
determine the existence and due execution of the
deed of sale upon which it is founded, the same
does not obtain in this case. The existence and
due execution of the conditional sale and
Peraltas absolute and complete cession of her
title over the subject property to New Dagupan
are undisputed. These are matters covered by the
Decision dated January 21, 1994 of RTC Branch
43, which had long become final and executory.
At any rate, in Sajonas v.CA,47 this Court
clarified that there is no necessity for a prior
judicial determination of the validity of an
adverse claim for it to be considered a flaw in the
vendors title as that would be repugnant to the
very purpose thereof.48
WHEREFORE, premises considered, the
petition is DISMISSED and the Decision dated
September 29, 2005 and Resolution dated June9,
2006 of the Court of Appeals in CA-G.R. CV No.
59590 are hereby AFFIRMED.
SO ORDERED.
ALBERT R. PADILLA, petitioner, vs. SPOUSES
FLORESCO PAREDES and ADELINA PAREDES,
and THE HONORABLE COURT OF APPEALS,
respondents.
For resolution is a petition for review on
certiorari, seeking reversal of the decision of the
Court of Appeals in CA G.R. CV No. 33089, which
set aside the decision of the Regional Trial Court
in Civil Case No. 4357 and confirmed the
rescission of the contract between petitioner and
private respondents.
From the records, we glean the following
antecedent facts:
On October 20, 1988, petitioner Albert R.
Padilla and private respondents Floresco and
Adelina Paredes entered into a contract to sell1
involving a parcel of land in San Juan, La Union.
At that time, the land was untitled although
private respondents were paying taxes thereon.
Under the contract, petitioner undertook to
secure title to the property in private
respondents' names. Of the P312,840.00
purchase price, petitioner was to pay a
downpayment of P50,000.00 upon signing of the
contract, and the balance was to be paid within
ten days from the issuance of a court order

directing issuance of a decree of registration for

the property.
On December 27, 1989, the court ordered
the issuance of a decree of land registration for
the subject property. The property was titled in
the name of private respondent Adelina Paredes.
Private respondents then demanded payment of
the balance of the purchase price, per the second
paragraph of the contract to sell,2 which reads as
follows:
VENDEE agrees to pay the balance of the
purchase price of subject property in the amount
of TWO HUNDRED SIXTY TWO THOUSAND EIGHT
HUNDRED FORTY (P262,840.00) PESOS, within
ten (10) days counted from issuance of the Order
of the Court for the issuance of a decree pursuant
to an application for registration and confirmation
of title of said subject property, of which the
VENDEE is under obligation to secure the title of
subject property at his own expense.
Petitioner made several payments to
private respondents, some even before the court
issued an order for the issuance of a decree of
registration.3 Still, petitioner failed to pay the full
purchase price even after the expiration of the
period set. In a letter dated February 14, 1990,4
private respondents, through counsel, demanded
payment of the remaining balance, with interest
and attorney's fees, within five days from receipt
of the letter. Otherwise, private respondents
stated they would consider the contract
rescinded.
On February 28, 1990, petitioner made a
payment of P100,000.00 to private respondents,5
still insufficient to cover the full purchase price.
Shortly thereafter, in a letter dated April 17,
1990,6 private respondents offered to sell to
petitioner one-half of the property for all the
payments the latter had made, instead of
rescinding the contract. If petitioner did not agree
with the proposal, private respondents said they
would take steps to enforce the automatic
rescission of the contract.1wphi1.nt
Petitioner did not accept private
respondents' proposal. Instead, in a letter dated
May 2, 1990,7 he offered to pay the balance in
full for the entire property, plus interest and
attorney's fees. Private respondents refused the
offer.
On May 14, 1990, petitioner instituted an
action for specific performance against private
respondents, alleging that he had already
substantially complied with his obligation under
the contract to sell. He claimed that the several
partial payments he had earlier made, upon
private respondents' request, had impliedly

modified the contract. He also averred that he

had already spent P190,000.00 in obtaining title
to the property, subdividing it, and improving its
right-of-way.8
For their part, private respondents claimed
before the lower court that petitioner maliciously
delayed payment of the balance of the purchase
price, despite repeated demand and despite his
knowledge of private respondents' need
therefor.9 According to private respondents, their
acceptance of partial payments did not at all
modify the terms of their agreement, such that
the failure of petitioner to fully pay at the time
stipulated was a violation of the contract. 10
Private respondents claimed that this violation
led to the rescission of the contract, of which
petitioner was formally informed. 11
After trial, the lower court ruled in favor of
petitioner, saying that even if petitioner indeed
breached the contract to sell, it was only a casual
and slight breach that did not warrant rescission
of the contract. The trial court pointed out that
private respondents themselves breached the
contract when they requested and accepted
installment payments from petitioner, even
before the land registration court ordered
issuance of a decree of registration for the
property. 12 According to the trial court, this
constituted modification of the contract, though
not reduced into writing as required by the
contract itself. The payments, however, were
evidenced by receipts duly signed by private
respondents. Acceptance of delayed payments
estopped private respondents from exercising
their right of rescission, if any existed. 13
The Court of Appeals, however, reversed
the ruling of the trial court and confirmed private
respondents' rescission of the contract to sell.
According to the Court of Appeals, the issue of
whether or not the breach of contract committed
is slight or casual is irrelevant in the case of a
contract to sell, where title remains in the vendor
if the vendee fails to "comply with the condition
precedent of making payment at the time
specified in the contract." 14
The Court of Appeals rejected petitioner's
claim that there had been a novation of the
contract when he tendered partial payments for
the property even before payment was due. The
Court of Appeals noted that the contract itself
provides that no terms and conditions therein
shall be modified unless such modification is in
writing and duly signed by the parties. The
modification alleged by petitioner is not in
writing, much less signed by the parties. 15
Moreover, the Court of Appeals ruled that private
respondents made a timely objection to
petitioner's partial payments when they offered

to sell to petitioner only one-half of the property

for such partial payments. 16
The Court of Appeals ruled that private
respondents are entitled to rescission under
Article 1191 of the Civil Code, but with the
obligation to return to petitioner the payments
the latter had made, including expenses incurred
in securing title to the property and in subdividing
and improving it right of way. Whatever damages
private respondents had suffered should be
deemed duly compensated by the benefits they
derived from the payments made by petitioner.
17
Hence, this petition, wherein petitioner
assigns the following errors allegedly committed
by the Court of Appeals:
1. . . . HOLDING THAT: "THE APPELLANTS
ARE ENTITLED TO RESCISSION UNDER ARTICLE
1191 OF THE CIVIL CODE.
2. . . . IN CONFIRMING THE UNILATERAL
RESCISSION OF THE CONTRACT TO SELL BY THE
PRIVATE RESPONDENTS.
3. . . . WHEN IT INTERPRETED AND APPLIED
LIBERALLY IN FAVOR OF THE PRIVATE
RESPONDENTS AND STRICTLY AGAINST THE
HEREIN PETITIONERS, THE PROVISIONS OF
ARTICLE 1191 AND OTHER PROVISIONS OF THE
CIVIL CODE. 18
Petitioner contends that private
respondents are not entitled to rescission,
because rescission cannot be availed of when the
breach of contract is only slight or casual, and not
so substantial and fundamental as to defeat the
object of the parties in making the contract.
Petitioner points out that he made partial
payments even before they were due in fact,
even before the land registration court issued an
order for the issuance of a decree of registration
for the property since private respondents
requested it. Private respondents' acceptance of
the payments amounted to a modification of the
contract, though unwritten. Petitioner believed in
good faith that private respondents would honor
an alleged verbal agreement that the latter would
not strictly enforce the period for the payment of
the remaining balance.
Petitioner additionally argues that private
respondents were also guilty of breach of
contract since they failed to deliver the threemeter wide additional lot for a right-of-way, as
agreed upon in their contract.
For their part, private respondents reiterate that,
as ruled by the Court of Appeals, the issue of
whether or not the breach is slight or casual is

irrelevant in a contract to sell. They contend that

in such a contract, the non-payment of the
purchase price is not a breach but simply an
event that prevents the vendor from complying
with his obligation to transfer title to the property
to the vendee. Moreover, they point out that the
degree of breach was never raised as an issue
during the pre-trial conference nor at trial of this
case.
Private respondents also aver that petitioner
cannot avail of an action for specific performance
since he is not an injured party as contemplated
in Article 1191 of the Civil Code.
Private respondents admit having requested cash
advances from petitioner due to dire financial
need. Such need, they point out, is the same
reason why time is of the essence in the payment
of the balance of the purchase price. They claim
that petitioner offered to pay the balance only
after more than three months had lapsed from
the date his obligation to pay became due.
Private respondents argue that their acceptance
of advance payments does not amount to a
novation of the contract since, as provided in the
contract itself, modification of the contract would
only be binding if written and signed by the
parties, which is not the case here. Acceptance of
advance payments is a mere act of tolerance,
which under the contract would not be
considered as a modification of the terms and
conditions thereof.
The core issue in this case is whether the
respondent Court of Appeals erred in reversing
and setting aside the judgment of the trial court,
by holding that private respondents are entitled
to rescind their "contract to sell" the land to
petitioner.
To begin with, petitioner is alleging that the
contract entered into between the parties is a
contract of sale, in which case rescission will not
generally be allowed where the breach is only
slight or casual. Petitioner insists that the title
"Contract to Sell" does not reflect the true
intention of the parties, which is to enter into a
contract of sale.
We note, however, that petitioner only made this
claim as to the nature of the contract in his reply
to the comment of private respondents to his
petition for review. In his complaint in the RTC
and in his petition for review, petitioner refers to
the subject contract as a contract to sell. The
nature of the contract was never in issue in the
proceedings in the courts below. Moreover,
petitioner does not deny private respondents'
allegation that it was he and his counsel who
prepared the contract. Thus, the ambiguity, if any

exists, must be resolved strictly against him as

the one who caused the same. 19
At any rate, the contract between the parties in
our view is indeed a contract to sell, as clearly
inferrable from the following provisions thereof:
xxx

xxx

xxx

That the VENDORS hereby agree and bind

themselves not to allienate (sic), encumber, or in
any manner modify the right of title to said
property.
xxx

xxx

xxx

That the VENDORS agree to pay real estate taxes

of said subject property until the same will have
been transferred to the VENDEE.
That on payment of the full purchase price of the
above-mentioned property the VENDORS will
execute and deliver a deed conveying to the
VENDEE the title in fee simple of said property
free from all lien and encumbrances . . .
(Emphasis supplied.)20
These provisions signify that title to the property
remains in the vendors until the vendee should
have fully paid the purchase price, which is a
typical characteristic of a contract to sell.
Now, admittedly, petitioner failed to comply with
his obligation to pay the full purchase pride within
the stipulated period. Under the contract,
petitioner was to pay the balance of the purchase
price within 10 days from the date of the court
order for the issuance of the decree of
registration for the property. Private respondents
claim, and petitioner admits, that there was delay
in the fulfillment of petitioner's obligation. The
order of the court was dated December 27, 1989.
By April 1990, or four months thereafter,
petitioner still had not fully paid the purchase
price, clearly in violation of the contract.
Petitioner's offer to pay is clearly not the payment
contemplated in the contract. While he might
have tendered payment through a check, this is
not considered payment until the check is
encashed.21 Besides, a mere tender of payment
is not sufficient. Consignation is essential to
extinguish petitioner's obligation to pay the
purchase price.22
We sustain the decision of the Court of Appeals,
to the effect that private respondents may validly
cancel the contract to sell their land to petitioner.
However, the reason for this is not that private
respondents have the power to rescind such
contract, but because their obligation thereunder
did not arise.

Art. 1191 of the Civil Code, on rescission, is

inapplicable in the present case. This is apparent
from the text of the article itself:
Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.
The injured party may choose between the
fulfillment and the rescission of the obligation,
with the payment of damages in either case. He
may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed,
unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the
rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
Art. 1191 speaks of obligations already existing,
which may be rescinded in case one of the
obligors fails to comply with what is incumbent
upon him. However, in the present case, there is
still no obligation to convey title of the land on
the part of private respondents. There can be no
rescission of an obligation that is non-existent,
considering that the suspensive condition
therefor has not yet happened.23
In Rillo v. Court of Appeals,24 we ruled:
The respondent court did not err when it did not
apply Articles 1191 and 1592 of the Civil Code on
rescission to the case at bar. The contract
between the parties is not an absolute
conveyance of real property but a contract to sell.
In a contract to sell real property on installments,
the full payment of the purchase price is a
positive suspensive condition, the failure of which
is not considered a breach, casual or serious, but
simply an event which prevented the obligation of
the vendor to convey title from acquiring any
obligatory force. The transfer of ownership and
title would occur after full payment of the
purchase price.25
We reiterated this rule in Odyssey Park, Inc. v.
Court of Appeals, 280 SCRA 253 (1997).
Moreover, we held in Odyssey:
The breach contemplated in Article 1191 of the
Code is the obligor's failure to comply with an
obligation already extant, not a failure of a
condition to render binding that obligation.26
Under the parties' contract, the property will be
transferred to petition only upon the latter's

"complete compliance of his obligation provided

in [the] contract." Because of petitioner's failure
to fully pay the purchase price; the obligation of
private respondents to convey title to the
property did not arise.27 Thus, private
respondents are under no obligation, and may not
be compelled, to convey title to petitioner and
receive the full purchase price.
Petitioner's reliance on Article 1592 of the Civil
Code is misplaced. It provides:
Art. 1592. In the sale of immovable property,
even though it may have been stipulated that
upon failure to pay the price at the time agreed
upon the rescission of the contract shall of right
take place, the vendee may pay, even after the
expiration of the period, as long as no demand for
rescission of the contract has been made upon
him either judicially or by a notarial act. After the
demand, the court may not grant him a new
term.
Clearly, what this provision contemplates is an
absolute sale and not a contract to sell as in the
present case.
Private respondents' acceptance of several partial
payments did not modify the parties' contract as
to exempt petitioner from complying with his
obligation to pay within the stipulated period. The
contract itself provided:
No terms and conditions shall be considered
modified, changed, altered, or waived by any
verbal agreement by and between the parties
hereto or by an act of tolerance on the parties
unless such modification, change, alteration or
waiver appears in writing duly signed by the
parties hereto.28
Acceptance of the partial payments is, at best, an
act of tolerance on the part of private
respondents that could not modify the contract,
absent any written agreement to that effect
signed by the parties.
The Court of Appeals is correct in ordering the
return to petitioner of the amounts received from
him by private respondents, on the principle that
no one may unjustly enrich himself at the
expense of another.
WHEREFORE, the petition is DENIED, for lack of
merit. Costs against petitioner.
PABLO P. GARCIA, Petitioner, vs.YOLANDA
VALDEZ VILLAR, Respondent.
This is a petition for review on certiorari1 of the
February 27, 2003 Decision2 and July 2, 2003
Resolution3 of the Court of Appeals in CA-G.R. SP
No. 72714, which reversed the May 27, 2002

Decision4 of the Regional Trial Court (RTC),

Branch 92 of Quezon City in Civil Case No. Q-9939139.
Lourdes V. Galas (Galas) was the original owner of
a piece of property (subject property) located at
Malindang St., Quezon City, covered by Transfer
Certificate of Title (TCT) No. RT-67970(253279).5
On July 6, 1993, Galas, with her daughter, Ophelia
G. Pingol (Pingol), as co-maker, mortgaged the
subject property to Yolanda Valdez Villar (Villar)
as security for a loan in the amount of Two Million
Two Hundred Thousand Pesos (P2,200,000.00).6
On October 10, 1994, Galas, again with
Pingol as her co-maker, mortgaged the same
subject property to Pablo P. Garcia (Garcia) to
secure her loan of One Million Eight Hundred
Thousand Pesos (P1,800,000.00).7
Both morgages were annotated at the back of
TCT No. RT-67970 (253279), to wit:
REAL ESTATE MORTGAGE
Entry No. 6537/T-RT-67970(253279) MORTGAGE
In favor of Yolanda Valdez Villar m/to Jaime Villar
to guarantee a principal obligation in the sum of
P2,200,000- mortgagees consent necessary in
case of subsequent encumbrance or alienation of
the property; Other conditions set forth in Doc.
No. 97, Book No. VI, Page No. 20 of the Not. Pub.
of Diana P. Magpantay
SECOND REAL ESTATE MORTGAGE
Entry No. 821/T-RT-67970(253279) MORTGAGE
In favor of Pablo Garcia m/to Isabela Garcia to
guarantee a principal obligation in the sum of
P1,800,000.00 mortgagees consent necessary in
case of subsequent encumbrance or alienation of
the property; Other conditions set forth in Doc.
No. 08, Book No. VII, Page No. 03 of the Not. Pub.
of Azucena Espejo Lozada
On November 21, 1996, Galas sold the subject
property to Villar for One Million Five Hundred
Thousand Pesos (P1,500,000.00), and declared in
the Deed of Sale9 that such property was "free
and clear of all liens and encumbrances of any
kind whatsoever."10
On December 3, 1996, the Deed of Sale was
registered and, consequently, TCT No. RT67970(253279) was cancelled and TCT No. N16836111 was issued in the name of Villar. Both
Villars and Garcias mortgages were carried over
and annotated at the back of Villars new TCT.12
On October 27, 1999, Garcia filed a Petition for
Mandamus with Damages13 against Villar before
the RTC, Branch 92 of Quezon City. Garcia

subsequently amended his petition to a

Complaint for Foreclosure of Real Estate
Mortgage with Damages.14 Garcia alleged that
when Villar purchased the subject property, she
acted in bad faith and with malice as she
knowingly and willfully disregarded the provisions
on laws on judicial and extrajudicial foreclosure of
mortgaged property. Garcia further claimed that
when Villar purchased the subject property, Galas
was relieved of her contractual obligation and the
characters of creditor and debtor were merged in
the person of Villar. Therefore, Garcia argued, he,
as the second mortgagee, was subrogated to
Villars original status as first mortgagee, which is
the creditor with the right to foreclose. Garcia
further asserted that he had demanded payment
from Villar,15 whose refusal compelled him to
incur expenses in filing an action in court.16
Villar, in her Answer,17 claimed that the
complaint stated no cause of action and that the
second mortgage was done in bad faith as it was
without her consent and knowledge. Villar alleged
that she only discovered the second mortgage
when she had the Deed of Sale registered. Villar
blamed Garcia for the controversy as he accepted
the second mortgage without prior consent from
her. She averred that there could be no
subrogation as the assignment of credit was done
with neither her knowledge nor prior consent.
Villar added that Garcia should seek recourse
against Galas and Pingol, with whom he had
privity insofar as the second mortgage of
property is concerned.
On May 23, 2000, the RTC issued a Pre-Trial
Order18 wherein the parties agreed on the
following facts and issue:
STIPULATIONS OF FACTS/ADMISSIONS
The following are admitted:
1. the defendant admits the second mortgage
annotated at the back of TCT No. RT-67970 of
Lourdes V. Galas with the qualification that the
existence of said mortgage was discovered only
in 1996 after the sale;
2. the defendant admits the existence of the
annotation of the second mortgage at the back of
the title despite the transfer of the title in the
name of the defendant;
3. the plaintiff admits that defendant Yolanda
Valdez Villar is the first mortgagee;
4. the plaintiff admits that the first mortgage was
annotated at the back of the title of the
mortgagor Lourdes V. Galas; and
5. the plaintiff admits that by virtue of the deed
of sale the title of the property was transferred

from the previous owner in favor of defendant

Yolanda Valdez Villar.
xxxx
ISSUE
Whether or not the plaintiff, at this point in time,
could judicially foreclose the property in question.
On June 8, 2000, upon Garcias manifestation, in
open court, of his intention to file a Motion for
Summary Judgment,19 the RTC issued an
Order20 directing the parties to simultaneously
file their respective memoranda within 20 days.
On June 26, 2000, Garcia filed a Motion for
Summary Judgment with Affidavit of Merit21 on
the grounds that there was no genuine issue as to
any of the material facts of the case and that he
was entitled to a judgment as a matter of law.
On June 28, 2000, Garcia filed his
Memorandum22 in support of his Motion for
Summary Judgment and in compliance with the
RTCs June 8, 2000 Order. Garcia alleged that his
equity of redemption had not yet been claimed
since Villar did not foreclose the mortgaged
property to satisfy her claim.
On August 13, 2000, Villar filed an Urgent ExParte Motion for Extension of Time to File Her
Memorandum.23 This, however, was denied24 by
the RTC in view of Garcias Opposition.25
On May 27, 2002, the RTC rendered its Decision,
the dispositive portion of which reads:
WHEREFORE, the foregoing premises considered,
judgment is hereby rendered in favor of the
plaintiff Pablo P. Garcia and against the defendant
Yolanda V. Villar, who is ordered to pay to the
former within a period of not less than ninety (90)
days nor more than one hundred twenty (120)
days from entry of judgment, the sum of
P1,800,000.00 plus legal interest from October
27, 1999 and upon failure of the defendant to pay
the said amount within the prescribed period, the
property subject matter of the 2nd Real Estate
Mortgage dated October 10, 1994 shall, upon
motion of the plaintiff, be sold at public auction in
the manner and under the provisions of Rules 39
and 68 of the 1997 Revised Rules of Civil
Procedure and other regulations governing sale of
real estate under execution in order to satisfy the
judgment in this case. The defendant is further
ordered to pay costs.26
The RTC declared that the direct sale of the
subject property to Villar, the first mortgagee,
could not operate to deprive Garcia of his right as
a second mortgagee. The RTC said that upon
Galass failure to pay her obligation, Villar should

have foreclosed the subject property pursuant to

Act No. 3135 as amended, to provide junior
mortgagees like Garcia, the opportunity to satisfy
their claims from the residue, if any, of the
foreclosure sale proceeds. This, the RTC added,
would have resulted in the extinguishment of the
mortgages.27
The RTC held that the second mortgage
constituted in Garcias favor had not been
discharged, and that Villar, as the new registered
owner of the subject property with a subsisting
mortgage, was liable for it.28
Villar appealed29 this Decision to the Court of
Appeals based on the arguments that Garcia had
no valid cause of action against her; that he was
in bad faith when he entered into a contract of
mortgage with Galas, in light of the restriction
imposed by the first mortgage; and that Garcia,
as the one who gave the occasion for the
commission of fraud, should suffer. Villar further
asseverated that the second mortgage is a void
and inexistent contract considering that its cause
or object is contrary to law, moral, good customs,
and public order or public policy, insofar as she
was concerned.30
Garcia, in his Memorandum,31 reiterated his
position that his equity of redemption remained
"unforeclosed" since Villar did not institute
foreclosure proceedings. Garcia added that "the
mortgage, until discharged, follows the property
to whomever it may be transferred no matter how
many times over it changes hands as long as the
annotation is carried over."32
The Court of Appeals reversed the RTC in a
Decision dated February 27, 2003, to wit:
WHEREFORE, the decision appealed from is
REVERSED and another one entered DISMISSING
the complaint for judicial foreclosure of real
estate mortgage with damages.33
The Court of Appeals declared that Galas was free
to mortgage the subject property even without
Villars consent as the restriction that the
mortgagees consent was necessary in case of a
subsequent encumbrance was absent in the Deed
of Real Estate Mortgage. In the same vein, the
Court of Appeals said that the sale of the subject
property to Villar was valid as it found nothing in
the records that would show that Galas violated
the Deed of Real Estate Mortgage prior to the
sale.34
In dismissing the complaint for judicial foreclosure
of real estate mortgage with damages, the Court
of Appeals held that Garcia had no cause of
action against Villar "in the absence of evidence
showing that the second mortgage executed in

his favor by Lourdes V. Galas [had] been violated

and that he [had] made a demand on the latter
for the payment of the obligation secured by said
mortgage prior to the institution of his complaint
against Villar."35
On March 20, 2003, Garcia filed a Motion for
Reconsideration36 on the ground that the Court
of Appeals failed to resolve the main issue of the
case, which was whether or not Garcia, as the
second mortgagee, could still foreclose the
mortgage after the subject property had been
sold by Galas, the mortgage debtor, to Villar, the
mortgage creditor.
This motion was denied for lack of merit by the
Court of Appeals in its July 2, 2003 Resolution.
Garcia is now before this Court, with the same
arguments he posited before the lower courts. In
his Memorandum,37 he added that the Deed of
Real Estate Mortgage contained a stipulation,
which is violative of the prohibition on pactum
commissorium.
Issues
The crux of the controversy before us boils down
to the propriety of Garcias demand upon Villar to
either pay Galass debt of P1,800,000.00, or to
judicially foreclose the subject property to satisfy
the aforesaid debt. This Court will, however,
address the following issues in seriatim:
1. Whether or not the second mortgage to Garcia
was valid;
2. Whether or not the sale of the subject property
to Villar was valid;
3. Whether or not the sale of the subject property
to Villar was in violation of the prohibition on
pactum commissorium;
4. Whether or not Garcias action for foreclosure
of mortgage on the subject property can prosper.
Discussion
Validity of second mortgage to Garcia and sale of
subject property to Villar
At the onset, this Court would like to address the
validity of the second mortgage to Garcia and the
sale of the subject property to Villar. We agree
with the Court of Appeals that both are valid
under the terms and conditions of the Deed of
Real Estate Mortgage executed by Galas and
Villar.
While it is true that the annotation of the first
mortgage to Villar on Galass TCT contained a
restriction on further encumbrances without the

mortgagees prior consent, this restriction was

nowhere to be found in the Deed of Real Estate
Mortgage. As this Deed became the basis for the
annotation on Galass title, its terms and
conditions take precedence over the standard,
stamped annotation placed on her title. If it were
the intention of the parties to impose such
restriction, they would have and should have
stipulated such in the Deed of Real Estate
Mortgage itself.
Neither did this Deed proscribe the sale or
alienation of the subject property during the life
of the mortgages. Garcias insistence that Villar
should have judicially or extrajudicially foreclosed
the mortgage to satisfy Galass debt is misplaced.
The Deed of Real Estate Mortgage merely
provided for the options Villar may undertake in
case Galas or Pingol fail to pay their loan.
Nowhere was it stated in the Deed that Galas
could not opt to sell the subject property to Villar,
or to any other person. Such stipulation would
have been void anyway, as it is not allowed under
Article 2130 of the Civil Code, to wit:
Art. 2130. A stipulation forbidding the owner from
alienating the immovable mortgaged shall be
void.
Prohibition on pactum commissorium
Garcia claims that the stipulation appointing
Villar, the mortgagee, as the mortgagors
attorney-in-fact, to sell the property in case of
default in the payment of the loan, is in violation
of the prohibition on pactum commissorium, as
stated under Article 2088 of the Civil Code, viz:
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.
The power of attorney provision in the Deed of
Real Estate Mortgage reads:
5. Power of Attorney of MORTGAGEE. Effective
upon the breach of any condition of this
Mortgage, and in addition to the remedies herein
stipulated, the MORTGAGEE is likewise appointed
attorney-in-fact of the MORTGAGOR with full
power and authority to take actual possession of
the mortgaged properties, to sell, lease any of
the mortgaged properties, to collect rents, to
execute deeds of sale, lease, or agreement that
may be deemed convenient, to make repairs or
improvements on the mortgaged properties and
to pay the same, and perform any other act
which the MORTGAGEE may deem convenient for
the proper administration of the mortgaged
properties. The payment of any expenses
advanced by the MORTGAGEE in connection with

the purpose indicated herein is also secured by

this Mortgage. Any amount received from the
sale, disposal or administration abovementioned
maybe applied by assessments and other
incidental expenses and obligations and to the
payment of original indebtedness including
interest and penalties thereon. The power herein
granted shall not be revoked during the life of this
Mortgage and all acts which may be executed by
the MORTGAGEE by virtue of said power are
hereby ratified.38

Art. 2126. The mortgage directly and immediately

subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment
of the obligation for whose security it was
constituted.

The following are the elements of pactum

commissorium:

The sale or transfer of the mortgaged property

cannot affect or release the mortgage; thus the
purchaser or transferee is necessarily bound to
acknowledge and respect the encumbrance.42 In
fact, under Article 2129 of the Civil Code, the
mortgage on the property may still be foreclosed
despite the transfer, viz:

(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.39
Villars purchase of the subject property did not
violate the prohibition on pactum commissorium.
The power of attorney provision above did not
provide that the ownership over the subject
property would automatically pass to Villar upon
Galass failure to pay the loan on time. What it
granted was the mere appointment of Villar as
attorney-in-fact, with authority to sell or
otherwise dispose of the subject property, and to
apply the proceeds to the payment of the loan.40
This provision is customary in mortgage
contracts, and is in conformity with Article 2087
of the Civil Code, which reads:
Art. 2087. It is also of the essence of these
contracts that when the principal obligation
becomes due, the things in which the pledge or
mortgage consists may be alienated for the
payment to the creditor.
Galass decision to eventually sell the subject
property to Villar for an additional P1,500,000.00
was well within the scope of her rights as the
owner of the subject property. The subject
property was transferred to Villar by virtue of
another and separate contract, which is the Deed
of Sale. Garcia never alleged that the transfer of
the subject property to Villar was automatic upon
Galass failure to discharge her debt, or that the
sale was simulated to cover up such automatic
transfer.
Propriety of Garcias action for foreclosure of
mortgage
The real nature of a mortgage is described in
Article 2126 of the Civil Code, to wit:

Simply put, a mortgage is a real right, which

follows the property, even after subsequent
transfers by the mortgagor.1wphi1 "A registered
mortgage lien is considered inseparable from the
property inasmuch as it is a right in rem."41

Art. 2129. The creditor may claim from a third

person in possession of the mortgaged property,
the payment of the part of the credit secured by
the property which said third person possesses, in
terms and with the formalities which the law
establishes.
While we agree with Garcia that since the second
mortgage, of which he is the mortgagee, has not
yet been discharged, we find that said mortgage
subsists and is still enforceable. However, Villar,
in buying the subject property with notice that it
was mortgaged, only undertook to pay such
mortgage or allow the subject property to be sold
upon failure of the mortgage creditor to obtain
payment from the principal debtor once the debt
matures. Villar did not obligate herself to replace
the debtor in the principal obligation, and could
not do so in law without the creditors consent.43
Article 1293 of the Civil Code provides:
Art. 1293. Novation which consists in substituting
a new debtor in the place of the original one, may
be made even without the knowledge or against
the will of the latter, but not without the consent
of the creditor. Payment by the new debtor gives
him the rights mentioned in articles 1236 and
1237.
Therefore, the obligation to pay the mortgage
indebtedness remains with the original debtors
Galas and Pingol.44 The case of E.C. McCullough
& Co. v. Veloso and Serna45 is square on this
point:
The effects of a transfer of a mortgaged property
to a third person are well determined by the Civil
Code.1wphi1 According to article 187946 of this
Code, the creditor may demand of the third
person in possession of the property mortgaged
payment of such part of the debt, as is secured
by the property in his possession, in the manner

and form established by the law. The Mortgage

Law in force at the promulgation of the Civil Code
and referred to in the latter, provided, among
other things, that the debtor should not pay the
debt upon its maturity after judicial or notarial
demand, for payment has been made by the
creditor upon him. (Art. 135 of the Mortgage Law
of the Philippines of 1889.) According to this, the
obligation of the new possessor to pay the debt
originated only from the right of the creditor to
demand payment of him, it being necessary that
a demand for payment should have previously
been made upon the debtor and the latter should
have failed to pay. And even if these
requirements were complied with, still the third
possessor might abandon the property
mortgaged, and in that case it is considered to be
in the possession of the debtor. (Art. 136 of the
same law.) This clearly shows that the spirit of the
Civil Code is to let the obligation of the debtor to
pay the debt stand although the property
mortgaged to secure the payment of said debt
may have been transferred to a third person.
While the Mortgage Law of 1893 eliminated these
provisions, it contained nothing indicating any
change in the spirit of the law in this respect.
Article 129 of this law, which provides the
substitution of the debtor by the third person in
possession of the property, for the purposes of
the giving of notice, does not show this change
and has reference to a case where the action is
directed only against the property burdened with
the mortgage. (Art. 168 of the Regulation.)47
This pronouncement was reiterated in Rodriguez
v. Reyes48 wherein this Court, even before
quoting the same above portion in E.C.
McCullough & Co. v. Veloso and Serna, held:
We find the stand of petitioners-appellants to be
unmeritorious and untenable. The maxim "caveat
emptor" applies only to execution sales, and this
was not one such. The mere fact that the
purchaser of an immovable has notice that the
acquired realty is encumbered with a mortgage
does not render him liable for the payment of the
debt guaranteed by the mortgage, in the absence
of stipulation or condition that he is to assume
payment of the mortgage debt. The reason is
plain: the mortgage is merely an encumbrance on
the property, entitling the mortgagee to have the
property foreclosed, i.e., sold, in case the
principal obligor does not pay the mortgage debt,
and apply the proceeds of the sale to the
satisfaction of his credit. Mortgage is merely an
accessory undertaking for the convenience and
security of the mortgage creditor, and exists
independently of the obligation to pay the debt
secured by it. The mortgagee, if he is so minded,
can waive the mortgage security and proceed to
collect the principal debt by personal action
against the original mortgagor.49

In view of the foregoing, Garcia has no cause of

action against Villar in the absence of evidence to
show that the second mortgage executed in favor
of Garcia has been violated by his debtors, Galas
and Pingol, i.e., specifically that Garcia has made
a demand on said debtors for the payment of the
obligation secured by the second mortgage and
they have failed to pay.
WHEREFORE, this Court hereby AFFIRMS the
February 27, 2003 Decision and March 8, 2003
Resolution of the Court of Appeals in CA-G.R. SP
No. 72714.
SO ORDERED.
DEVELOPMENT BANK OF THE PHILIPPINES,
petitioner, vs.THE HONORABLE COURT OF
APPEALS, ENVIRONMENTAL AQUATICS,
LAND SERVICES and MANAGEMENT
ENTERPRISES, INC., and MARIO MATUTE,
respondents.
In this petition for review on certiorari, petitioner
seeks to set aside the (1) 25 January 1999
Resolution of the Court of Appeals1 in CA - G.R.
CV No. 46207 dismissing petitioners appeal for
failure to file the appellants brief within the
extended period granted by the appellate court
and its (2) 14 June 1999 Resolution denying
petitioners motion for reconsideration. The
appeal originated from a complaint for
redemption filed by private respondents with the
Regional Trial Court of Quezon City and docketed
as Civil Case No. Q-91-10563. The factual
antecedents leading up to the filing of this
complaint are related in the trial courts decision,
as follows On November 8, 1991, Environmental Aquatics
and its corporate sister, Land & Services
Management Enterprises, Inc., as well as the
assignee of the right of redemption of the latter
corporation, Mario Matute, filed the instant action
with this Court with the following prayer:
"1. Ordering defendant Development Bank of the
Philippines to accept the plaintiff Matutes
bonafide offer to redeem the foreclosed property
covered by Transfer Certificate of Title No.
209937 of the Register of Deeds of Quezon City
pursuant to Sections 29 and 30 of Rule 39 of the
Rules of Court.
2. Ordering defendant Development Bank of the
Philippines to issue the corresponding release of
mortgage and surrender and/or release in favor of
plaintiff Matute the owners duplicate copy of
the aforesaid Transfer Certificate of Title No.
209937.

3. Ordering defendant DBP to pay the amount of

P50,000.00 in the concept of attorneys fees and
to pay the costs of suit.
Plaintiffs further pray for additional reliefs which
are just and equitable under the premises."
The Bank answered, admitting some allegations
of the complaint and denying other allegations,
and by way of special and affirmative defenses
alleged, among others, that the subject property
cannot be redeemed at only P1,507,000.00
unless the total debt of the mortgagors to the
Bank were paid, which as of September 11, 1990,
amounted to P16,384,418.90. Defendant DBP
interposed a counterclaim for what it alleged is a
deficiency outstanding obligation in the amount
of P14,877,419.90 plus exemplary damages and
litigation expenses.1wphi1.nt
Briefly stated, the undisputed material facts of
this case are as follows:
On September 10, 1976 plaintiffs Environmental
Aquatics Incorporated and Land & Services
Management Enterprises, Inc., executed a
MORTGAGE in favor of defendant Development
Bank of the Philippines, over two (2) fishing boats
(with engines, equipment and accessories) and a
parcel of land (its building & improvements)
covered by Transfer Certificate of Title No.
209937 of the Registry of Deeds of Quezon City,
situated in New Manila, the lot being in the name
of Land & Services Management Enterprises, Inc.,
Exhibits "2", "2-A", and "A". The mortgage was
given to secure the payment of P1,792,600.00 or
for whatever amount the plaintiffs corporations
might be indebted to the DBP. One of the clauses
of the mortgage provides that in case of a
violation by mortgagors-plaintiffs of any of the
conditions of the contract, the mortgageedefendant Bank "may immediately foreclose this
mortgage judicially or extrajudicially under Act
No. 3135 as amended, or under Republic Act No.
85, as amended, and or under Act No. 1508 as
amended". The encumbrance was annotated on
said torrens title, Exh. "9", "9-A" and "9-A-1".
The above initial loan granted under DBP Board
Resolution No. 3103 dated August 11, 1976,
Exhibits "8" to "8-B", was subsequently
restructured thru a liquidation loan of
P2,163,800.00 granted under DBP Board
Resolution No. 813 dated March 14, 1979,
Exhibits "8-C" to "8-F", which was also annotated
on TCT No. T-209937, Exh. "9-B-1".
On August 31, 1981, plaintiffs corporations were
again granted an opportunity to restructure their
loan account as evidenced by three (3)
Promissory Notes marked during the trial as
Exhibits "1", "1-A" and "1-B". Exhibits "1" is for

the amount of P1,973,100.00 while Exhibit "1-A"

is for P190,700.00 both of which mature on
March 14, 1986. On the other hand, Exhibit "1-B",
taken for interest in the amount of P684,788.00,
matures on March 14, 1982.
On October 25, 1990, plaintiffs sisters
corporations being unable to pay their debt which
amounted to P16,384,419.90 as of September 11,
1990, the defendant Development Bank of the
Philippines applied and asked the Quezon City ExOfficio RTC Sheriff to foreclose and sell the
mortgage property at public auction in
accordance with the provisions of Act No. 3135,
as amended by Act No. 4118, Exhibit "3".
So, on November 16, 1990, in accordance with
the terms of the promissory notes and the
mortgage contract itself, Ex-Officio Sheriff
notified plaintiffs corporations of the scheduled
public auction and had the Notice of Sheriffs Sale
published as required by law, Exhs. "4" and "B".
The Sheriff accordingly extrajudicially foreclosed
and sold the subject lot at auction on December
19, 1990, with defendant Bank itself as the
highest bidder for P1,507,000.00 Exh. "C".
Thereupon, a Sheriffs Certificate of Sale dated
December 19, 1990, was issued by the Ex-Officio
Sheriff covering TCT No. 209937, Exhs. "5" and
"D". Upon the certificate of sale issued in favor of
the defendant DBP, a condition was made to the
effect that the period of redemption will expire
one year from and after the date of registration of
the sale in the Registry of Deeds for Quezon City.
Plaintiff Mario Matute, thru counsel Atty. Julian R.
Vitug, Jr., to whom plaintiffs-corporations
assigned or transferred its rights of redemption,
wrote defendant DBP on July 27, 1991, Exhibits
"G" and "10", made known his desire to redeem
the New Manila property. The letter of plaintiff
Matute in this regard reads in part thus:
"In furtherance to the purpose of this
representation, we shall appreciate it very much
if your office can officially advise us of the
principal obligation inclusive of interest for the
period covering December 19, 1990 up to and
including August 19, 1991 as well as other
reasonable assessments that may have been
incurred in connection with the aforesaid auction
sale.
We shall immediately remit our clients payment
by way of Managers Check in redeeming the
auctioned property as soon as we get the
accurate figures in writing.
Thank you very much in anticipation for your kind
indulgence and look forward to receiving your
reply soonest time possible.

Very truly yours,

(Sgd./T) JULIAN R. VITUG, JR."
Under date of August 16, 1991, defendant Bank
Bacolod Branch objected to "piecemeal
redemption" but adding that should redemption
be effected, the entire amount owed to the Bank
as per updated Statement of Total Claim as of
August 31, 1991", Exh. "7-A", be paid. The
following was the reply of defendant DBP, Exhibit
"7":
"This refers to your letter dated July 27, 1991, in
behalf of Mr. Mario Matute, Director of Land &
Services Management Enterprises, Inc., informing
us of his intention to redeem the property,
particularly TCT-T-No. 209937 of the Register of
Deeds of Quezon City.
We understand from your letter that Mr. Matute is
only interested in redeeming the land subjected
to Sheriffs Auction Sale dated December 19,
1990, at its acquisition cost of P1,507,000.00.
Please be informed that existing bank policies do
not allow piecemeal redemption of foreclosed
properties, hence, we cannot give due course to
your request.
However, if your client is amenable to redeem the
foreclosed properties of subject corporation,
please submit your concrete offer by way of a
Board Resolution authorizing Mr. Mario Matute to
negotiate for redemption of said properties.
In this connection, we are sending herewith an
updated Statement of Total Claim as of August
31, 1991 re subject matter, for your information
and guidance."
The point of contention between the parties
relates to the amount of the redemption price.
Petitioner insisted that, pursuant to Section 16 of
Executive Order No. 81,2 redemption may only be
made if private respondent Mario Matute, the
assignee of the right of redemption, paid it the
amount of the loan outstanding as of 12
December 1990 - the date of the foreclosure sale
- in the amount of P18,301,653.11. Private
respondents, on the other hand, contended that
redemption may be effected by paying petitioner
P1,507,000.00 - the amount which petitioner had
paid for the property at the auction sale, pursuant
to Section 5 of Act No. 3135 and Sections 26 to
30 of Rule 39 of the Rules of Court.
On 7 January 1994, the trial court held that
private respondent Matute must exercise his right
of redemption in accordance with Section 6 of Act
No. 3135 and Sections 29 to 32 of Rule 39 of the
Rules of Court. In particular, Section 30 of Rule 39
provides that the judgment debtor or his

successor-in-interest "may redeem the property

from the purchaser at any time within twelve
months after the sale, on paying the purchaser
the amount of his purchase, with one per centum
per month interest thereon in addition, up to the
time of redemption, together with the amount of
any assessments or taxes which the purchaser
may have paid thereon after the purchase, and
interest on such last-named amount at the same
rate." On petitioners counterclaim, the trial court
declared that petitioner is entitled to recover from
private respondents Environmental Aquatics and
Land Services Management Enterprises, Inc. the
deficiency arising after the extrajudicial
foreclosure of the mortgaged property. The
dispositive portion of the trial courts decision
states
WHEREFORE, judgment is hereby rendered
declaring plaintiff Mario Matute entitled to
redeem or repurchase the parcel of land
described in the complaint from the defendant
Development Bank of the Philippines and, upon
payment by plaintiff Mario Matute of the amount
due to defendant DBP pursuant to Sec. 30 of Rule
39, Revised Rules of Court, defendant
Development Bank of the Philippines is hereby
ordered to surrender the owners duplicate copy
of Transfer Certificate of Title No. 209937 of the
Register of Deeds of Quezon City and transfer the
title to the property in question to plaintiff Mario
Matute.
On the counterclaim, ordering plaintiffs
Environmental Aquatics Incorporated and Land
Services Management Enterprises, Inc., to pay
jointly and severally to defendant Development
Bank of the Philippines their deficiency
outstanding obligation in the amount of
P16,794,653.00, with 6% interest from December
19, 1990 until fully paid.
The complaint against defendant Register of
Deeds of Quezon City and defendant Deputy
Sheriff Cesar P. Cruz is dismissed. The other
claims of the parties against each other for
attorneys fees, exemplary damages and
expenses of litigation are likewise dismissed for
lack of sufficient basis. No costs.
IT IS SO ORDERED.3
On 25 April 1994, petitioners motion for
reconsideration was denied by the trial court.
Thus, petitioner filed its notice of appeal with the
trial court within the reglementary period. On 31
May 1994, the trial court ordered the elevation of
the original records to the Court of Appeals.
On 6 July 1998, petitioner received notice to file
its appellants brief. However, on 20 August 1998,
at the expiration of the period for filing its brief,

petitioner asked the appellate court for an

extension of thirty (30) days, or until 19
September 1998, invoking in support thereof
counsels heavy workload. The Court of Appeals
granted petitioners motion in a resolution dated
8 September 1998.
On 21 September 1998 - as 19 September 1998
was a Saturday - petitioner filed a second motion
for extension of thirty (30) days, or until 19
October 1998. The appellate court granted this
second extension in its resolution of 1 October
1998.
Petitioner filed another motion for extension on
19 October 1998, claiming that the lawyer
assigned to the case was stricken with acute
bronchitis. The twenty (20) day extension prayed
for by petitioner in its third motion, ending on 8
November 1998, was acquiesced to by the Court
of Appeals in its 11 November 1998 resolution.
On 9 November 1998, since 8 November 1998
was a Sunday, petitioner begged the Court of
Appeals for another reprieve of ten (10) days, or
until 18 November 1998, in order to file its
appellants brief, alleging that the handling
lawyer had just reported back to work and
needed time to complete the revisions to the
prepared brief.
Even before having received the appellate courts
action on its most recent motion, on 18
November 1998, petitioner filed a fifth motion for
extension of ten (10) days, or until 28 November
1998. Petitioner claimed that it needed time for
the handling lawyer to input the revisions after
the appellants brief was reviewed by the latters
superiors.
On 20 November 1998, private respondents filed
a motion to dismiss petitioners appeal for failure
to submit its appellants brief.
Petitioner filed a "Last Motion for Extension" on
27 November 1998, seeking an additional ten
(10) days, or until 8 December 1998, since its
computer had allegedly broken down.
On 8 December 1998, petitioner filed a "Very
Urgent Motion" for an extension of five (5) days,
or until 13 December 1998, claiming that
additional time was needed to complete the reencoding of the brief. Petitioner claims that, on
the same day, it received a copy of the appellate
courts resolution dated 27 November 1998
granting its fourth motion for extension but with a
warning against further extensions; however, this
resolution was allegedly received by petitioner
only after it had already sent out its messenger to
file its last motion for extension.

Finally, on 14 December 1998 - as 13 December

1998, which is the last day in the extended period
prayed for in its most recent motion, was a
Saturday - petitioner filed its appellants brief.4
On 25 January 1999, the Court of Appeals
dismissed petitioners appeal for failure to file its
appellants brief within the extended period.5
Petitioners motion for reconsideration was also
denied by the Court of Appeals in a resolution
dated 14 June 1999. Hence, the present petition.
It is petitioners contention that the Court of
Appeals gave undue weight to technicalities when
it dismissed petitioners appeal, in direct
contravention of several cases promulgated by
this Court upholding the primacy of substantive
justice over technical rules of procedure.
Petitioner seeks the reversal of the Court of
Appeals order of dismissal based on the following
considerations: (1) its appellants brief was filed
within the extended period sought in its last
motion; (2) no substantial rights of private
respondents will be affected by giving due course
to its appeal; (3) it received the Court of Appeals
resolution dated 27 November 1998 warning it
against any further extensions only on 8
December 1998; (4) all of its motions for
extension were filed within the extended periods
sought; (5) its motions for extension were all
made in good faith, due to human and
technological errors, and with no intention to
delay the proceedings; (6) petitioner immediately
filed a motion for reconsideration, only three days
after it received the appellate courts resolution
of 25 January 1999 dismissing its appeal, evincing
its earnest efforts to pursue its appeal; and (7)
should the appeal be denied, a government
financial institution stands to lose at least
eighteen million pesos.
Petitioner enumerates several cases promulgated
by this Court setting aside orders of dismissal
issued by the Court of Appeals for failure to
perfect the appeal or to file the appellants brief
within the period granted. In addition, petitioner
cites cases wherein the Court of Appeals gave
due course to appeals despite the late filing of
the appellants brief, which decisions were
subsequently affirmed by the Supreme Court. In
view of these prior rulings, petitioner argues that
it would be tantamount to judicial discrimination
for the appellate court to dismiss its appeal.
According to petitioner, the dismissal of its appeal
would sanction the trial courts erroneous
decision that redemption may be made by merely
reimbursing the acquisition cost of the mortgaged
property at the foreclosure sale, pursuant to
Section 5 of Act No. 3135 and Section 26 of Rule
39 of the Rules of Court. Petitioner claims that the
redemption price consists of the entire loan

obligation as of the date of the foreclosure sale,

with interest thereon at the rate agreed upon, in
accordance with Section 31 of Commonwealth
Act No. 459 in relation to Section 19 of Republic
Act No. 85.1wphi1.nt
As to the assignment of the right of redemption in
favor of private respondent Mario Matute,
petitioner argues that the latter merely stepped
into the shoes of the original mortgagor, subject
to exactly the same obligations. Thus, the right of
redemption can only be exercised by private
respondent Matute in exactly the same manner
as it would have been exercised by private
respondents Environmental Aquatics and Land
Services And Management Enterprises, Inc.
Petitioner claims that it stands to lose at least
P18,000,000.00 should the subject property be
redeemed at P1,507,000.00 since the total
indebtedness of private respondents already
reached P18,301,853.11 as of the date of the
foreclosure sale on 12 December 1990, and
P20,914,766.18 as of 11 February 1993.
Moreover, the potential damage to petitioner is
compounded by the current financial position of
private respondents Environmental Aquatics and
Land Services And Management Enterprises, Inc.,
both of which admitted in their Comment filed
before this Court that they are "moribund outfits"
incapable of satisfying the deficiency judgment
that may be rendered against them.6
On the other hand, private respondents maintain
that the Court of Appeals correctly dismissed
petitioners appeal for failure to file its appellants
brief on time. Petitioners numerous motions for
extension display its lack of sincerity in pursuing
its appeal and prove that it was merely trifling
with judicial processes. With regard to the merits
of the case, private respondents argue that the
applicable law insofar as the redemption price is
concerned is Section 6 of Act No. 3135 and
Section 26 of Rule 39 of the Rules of Court which
provides that the redemption price is the
purchase price in the public auction sale.7
After a thorough and assiduous deliberation of
this case, the Court is of the opinion that the
Court of Appeals should give due course to
petitioners appeal.
The failure of the appellant to file his brief within
the time provided is one of the instances when
the Court of Appeals, on its own motion or on that
of the appellee, may dismiss an appeal.8 Instead
of risking a dismissal, the appellant should ask for
an extension of time to file his brief. An extension
will only be granted, however, if there is good and
sufficient cause, and if the motion asking for the
same is filed before the expiration of the time
sought to be extended.9

The granting of an extension, including the

duration thereof, lies within the sound discretion
of the court, to be exercised in accordance with
the attendant circumstances of each case.10 The
court has the power to relax or suspend the rules
or to except a case from their operation when
compelling circumstances so warrant or when the
purpose of justice requires it.11 However, the
movant is not justified in assuming that the
extension sought will be granted, or that it will be
granted for the length of time sought. Thus, it is
the duty of the movant for extension to exercise
due diligence and inform himself as soon as
possible of the appellate courts action on his
motion.12
In the case at bar, it was only on 8 December
1998 that petitioner received the appellate
courts resolution dated 27 November 1998
granting its fourth motion for extension and
prohibiting any further extensions. By that time,
petitioner had already filed three more motions
for extension. However, it is noted that the
periods prayed for in petitioners last three
motions for extension amounted to only twentyfive (25) days and that all three motions were
filed within the extended period sought in the
immediately preceding motion. It is also
significant that private respondents have not
alleged nor proven that they have sustained any
material injury or that their cause has been
prejudiced by reason of the delay in the filing of
the appellants brief.13
Should its appeal be denied, petitioner, a
government financial institution, stands to lose
millions of pesos. Based on the figures contained
in the petition, petitioner could lose as much as
P16,794,853.00, which is the difference between
the total indebtedness of private respondent as of
the date of the foreclosure sale on 12 December
1990 the amount demanded by petitioner - and
the purchase price at the foreclosure sale - the
amount decreed by the trial court. This does not
even include interest yet, so the losses of
petitioner could actually be much greater.
In the 1999 case of Republic v. Imperial,14 the
Court overturned the Court of Appeals decision
to dismiss the governments appeal for late filing
of its appellants brief. The case had its origins in
a complaint filed by the government, as
represented by the Solicitor General, for the
cancellation of the certificates of title in the name
of defendants covering several parcels of land
with a total area of 18,142 square meters. It was
the position of the government that such
properties belonged to the public domain being
foreshore land. The trial court eventually
dismissed the complaint on the ground of res
judicata. The case was appealed. Invoking its
heavy workload, the Solicitor General asked for

two 30-day extensions, in two successive

motions, within which to file its appellants brief.
The appellate court granted the additional time
prayed for, but in granting the second extension,
it declared that no further extensions would be
permitted. This last resolution was received by
petitioner, however, only after it had already filed
its third motion for extension. Moreover, even
after it had learned of such resolution, petitioner
proceeded to file a fourth motion for extension
with the appellate court. In its decision penned by
Chief Justice Hilario G. Davide, Jr., the Court held
that "[t]he need xxx to determine once and for all
whether the lands subject of petitioners
reversion efforts are foreshore lands constitutes
good and sufficient cause for relaxing procedural
rules and granting the third and fourth motions
for extension xxx" and constituted an
"exceptional circumstance" which impressed
petitioners appeal with public interest. Thus,
petitioners appeal was given due course despite
the late filing of its appellants brief.15

Time and again, this Court has reiterated the

doctrine that the rules of procedure are mere
tools intended to facilitate the attainment of
justice, rather than frustrate it. A strict and rigid
application of the rules must always be eschewed
when it would subvert the rules primary
objective of enhancing fair trials and expediting
justice. Technicalities should never be used to
defeat the substantive rights of the other party.
Every party-litigant must be afforded the amplest
opportunity for the proper and just determination
of his cause, free from the constraints of
technicalities.21

Similarly, the case at bar is impressed with public

interest. If petitioners appeal is denied due
course, a government institution could lose a
great deal of money over a mere technicality.16
Obviously, such an appeal is far from being
merely frivolous or dilatory.17

CARLOS LIM, CONSOLACION LIM, EDMUNDO

LIM,* CARLITO LIM, SHIRLEY LEODADIA
DIZON,** AND ARLEEN LIM FERNANDEZ,
PETITIONERS, vs.DEVELOPMENT BANK OF
THE PHILIPPINES, RESPONDENT.

At this juncture, it bears stressing that a

distinction should be made between the failure to
file a notice of appeal within the reglementary
period and the failure to file a brief within the
period granted by the appellate court. The former
results in the failure of the appellate court to
acquire jurisdiction over the appealed decision
resulting in its becoming final and executory upon
failure of the appellant to move for
reconsideration. Meanwhile, the latter simply
results in the abandonment of the appeal which
could lead to its dismissal upon failure to move
for its reconsideration, in which case the
appealed decision would also become final and
executory but prior thereto, the appellate court
shall have obtained jurisdiction of the appealed
decision.18 In the case at bar, it is not contended
that petitioner failed to perfect its appeal within
the reglementary period; it merely failed to filed
its appellants brief within the last extended
period accorded to it by the appellate court. In a
considerable number of cases, the Court has
deemed it fit to suspend its own rules or to
exempt a particular case from its operation where
the appellant failed to perfect its appeal within
the reglementary period, resulting in the
appellate courts failure to obtain jurisdiction over
the case.19 Thus, there is more leeway to exempt
a case from the strictures of procedural rules
when the appellate court has already obtained
jurisdiction over the appealed case.20

WHEREFORE, the instant petition is hereby

GRANTED. The 25 January 1999 and 14 June 1999
Resolutions of the Court of Appeals are SET ASIDE
and petitioners appeal is REINSTATED. The
instant case is REMANDED to the Court of
Appeals for further proceedings.
SO ORDERED.

"While the law recognizes the right of a bank to

foreclose a mortgage upon the mortgagors
failure to pay his obligation, it is imperative that
such right be exercised according to its clear
mandate. Each and every requirement of the law
must be complied with, lest, the valid exercise of
the right would end."1
This Petition for Review on Certiorari2 under Rule
45 of the Rules of Court assails the February 22,
2007 Decision3 of the Court of Appeals (CA) in
CA-G.R. CV No. 59275.
Factual Antecedents
On November 24, 1969, petitioners Carlos,
Consolacion, and Carlito, all surnamed Lim,
obtained a loan of P40,000.00 (Lim Account) from
respondent Development Bank of the Philippines
(DBP) to finance their cattle raising business.4 On
the same day, they executed a Promissory Note5
undertaking to pay the annual amortization with
an interest rate of 9% per annum and penalty
charge of 11% per annum.
On December 30, 1970, petitioners Carlos,
Consolacion, Carlito, and Edmundo, all surnamed
Lim; Shirley Leodadia Dizon, Arleen Lim
Fernandez, Juan S. Chua,6 and Trinidad D. Chua7
obtained another loan from DBP8 in the amount
of P960,000.00 (Diamond L Ranch Account).9
They also executed a Promissory Note,10
promising to pay the loan annually from August

22, 1973 until August 22, 1982 with an interest

rate of 12% per annum and a penalty charge of
1/3% per month on the overdue amortization.

Claiming to have already paid P902,800.00,

Edmundo requested for an amended statement of
account.20

To secure the loans, petitioners executed a

Mortgage11 in favor of DBP over real properties
covered by the following titles registered in the
Registry of Deeds for the Province of South
Cotabato:

On May 4, 1990, Edmundo made a follow-up on

the request for recomputation of the two
accounts.21 On May 17, 1990, DBPs General
Santos Branch informed Edmundo that the
Diamond L Ranch Account amounted to
P2,542,285.60 as of May 31, 199022 and that the
mortgaged properties located at San Isidro,
Lagao, General Santos City, had been subjected
to Operation Land Transfer under the
Comprehensive Agrarian Reform Program (CARP)
of the government.23 Edmundo was also advised
to discuss with the Department of Agrarian
Reform (DAR) and the Main Office of DBP24 the
matter of the expropriated properties.

(a) TCT No. T-6005 x x x in the name of Edmundo

Lim;
(b) TCT No. T-6182 x x x in the name of Carlos
Lim;
(c) TCT No. T-7013 x x x in the name of Carlos
Lim;
(d) TCT No. T-7012 x x x in the name of Carlos
Lim;
(e) TCT No. T-7014 x x x in the name of Edmundo
Lim;
(f) TCT No. T-7016 x x x in the name of Carlito
Lim;
(g) TCT No. T-28922 x x x in the name of
Consolacion Lim;
(h) TCT No. T-29480 x x x in the name of Shirley
Leodadia Dizon;
(i) TCT No. T-24654 x x x in the name of Trinidad
D. Chua; and
(j) TCT No. T-25018 x x x in the name of Trinidad
D. Chuas deceased husband Juan Chua.12
Due to violent confrontations between
government troops and Muslim rebels in
Mindanao from 1972 to 1977, petitioners were
forced to abandon their cattle ranch.13 As a
result, their business collapsed and they failed to
pay the loan amortizations.14
In 1978, petitioners made a partial payment in
the amount of P902,800.00,15 leaving an
outstanding loan balance of P610,498.30,
inclusive of charges and unpaid interest, as of
September 30, 1978.16
In 1989, petitioners, represented by Edmundo
Lim (Edmundo), requested from DBP Statements
of Account for the "Lim Account" and the
"Diamond L Ranch Account."17 Quoted below are
the computations in the Statements of Account,
as of January 31, 1989 which were stamped with
the words "Errors & Omissions Excepted/Subject
to Audit:"

Edmundo asked DBP how the mortgaged

properties were ceded by DAR to other persons
without their knowledge.25 No reply was
made.26
On April 30, 1991, Edmundo again signified
petitioners intention to settle the Diamond L
Ranch Account.27 Again, no reply was made.28
On February 21, 1992, Edmundo received a
Notice of Foreclosure scheduled the following
day.29 To stop the foreclosure, he was advised by
the banks Chief Legal Counsel to pay an interest
covering a 60-days period or the amount of
P60,000.00 to postpone the foreclosure for 60
days.30 He was also advised to submit a written
proposal for the settlement of the loan
accounts.31
In a letter32 dated March 20, 1992, Edmundo
proposed the settlement of the accounts through
dacion en pago, with the balance to be paid in
equal quarterly payments over five years.
In a reply-letter33 dated May 29, 1992, DBP
rejected the proposal and informed Edmundo that
unless the accounts are fully settled as soon as
possible, the bank will pursue foreclosure
proceedings.
DBP then sent Edmundo the Statements of
Account34 as of June 15, 1992 which were
stamped with the words "Errors & Omissions
Excepted/Subject to Audit" indicating the
following amounts: (1) Diamond L Ranch:
P7,210,990.27 and (2) Lim Account: P187,494.40.
On June 11, 1992, Edmundo proposed to pay the
principal and the regular interest of the loans in
36 equal monthly installments.35
On July 3, 1992, DBP advised Edmundo to
coordinate with Branch Head Bonifacio Tamayo,

Jr. (Tamayo).36 Tamayo promised to review the

accounts.37

restructure the Diamond L Ranch/Carlos Lim

Accounts.

On September 21, 1992, Edmundo received

another Notice from the Sheriff that the
mortgaged properties would be auctioned on
November 22, 1992.38 Edmundo again paid
P30,000.00 as additional interest to postpone the
auction.39 But despite payment of P30,000.00,
the mortgaged properties were still auctioned
with DBP emerging as the highest bidder in the
amount of P1,086,867.26.40 The auction sale,
however, was later withdrawn by DBP for lack of
jurisdiction.41

We wish to clarify that what have been agreed

between you and the Branch are not final until
[the] same has been approved by higher
authorities of the Bank. We did [tell] you during
our discussion that we will be recommending the
restructuring of your accounts with the terms and
conditions as agreed. Unfortunately, our Regional
Credit Committee did not agree to the terms and
conditions as recommended, hence, the subject
of our letter to you on March 15, 1993.

Thereafter, Tamayo informed Edmundo of the

banks new guidelines for the settlement of
outstanding loan accounts under Board
Resolution No. 0290-92.42 Based on these
guidelines, petitioners outstanding loan
obligation was computed at P3,500,000.00
plus.43 Tamayo then proposed that petitioners
pay 10% downpayment and the remaining
balance in 36 monthly installments.44 He also
informed Edmundo that the bank would
immediately prepare the Restructuring
Agreement upon receipt of the downpayment and
that the conditions for the settlement have been
"pre-cleared" with the banks Regional Credit
Committee.45 Thus, Edmundo wrote a letter46 on
October 30, 1992 manifesting petitioners assent
to the proposal.
On November 20, 1992, Tamayo informed
Edmundo that the proposal was accepted with
some minor adjustments and that an initial
payment should be made by November 27,
1992.47
On December 15, 1992, Edmundo paid the
downpayment of P362,271.7548 and was asked
to wait for the draft Restructuring Agreement.49
However, on March 16, 1993, Edmundo received
a letter50 from Tamayo informing him that the
Regional Credit Committee rejected the proposed
Restructuring Agreement; that it required
downpayment of 50% of the total obligation; that
the remaining balance should be paid within one
year; that the interest rate should be non prime
or 18.5%, whichever is higher; and that the
proposal is effective only for 90 days from March
5, 1993 to June 2, 1993.51
Edmundo, in a letter52 dated May 28, 1993,
asked for the restoration of their previous
agreement.53 On June 5, 1993, the bank
replied,54 viz:
This has reference to your letter dated May 28,
1993, which has connection to your desire to

Please be informed further, that the Branch

cannot do otherwise but to comply with the
conditions imposed by the Regional Credit
Committee. More so, the time frame given had
already lapsed on June 2, 1993.
Unless we will receive a favorable action on your
part soonest, the Branch will be constrained to do
appropriate action to protect the interest of the
Bank."55
On July 28, 1993, Edmundo wrote a letter56 of
appeal to the Regional Credit Committee.
In a letter57 dated August 16, 1993, Tamayo
informed Edmundo that the previous
Restructuring Agreement was reconsidered and
approved by the Regional Credit Committee
subject to the following additional conditions, to
wit:
1) Submission of Board Resolution and
Secretarys Certificate designating you as
authorized representative in behalf of Diamond L
Ranch;
2) Payment of March 15 and June 15, 1993
amortizations within 30 days from date hereof;
and
3) Submission of SEC registration.
In this connection, please call immediately x x x
our Legal Division to guide you for the early
documentation of your approved restructuring.
Likewise, please be reminded that upon failure on
your part to sign and perfect the documents and
comply [with] other conditions within (30) days
from date of receipt, your approved
recommendation shall be deemed CANCELLED
and your deposit of P362,271.75 shall be applied
to your account.
No compliance was made by Edmundo.58
On September 21, 1993, Edmundo received
Notice that the mortgaged properties were
scheduled to be auctioned on that day.59 To stop

the auction sale, Edmundo asked for an extension

until November 15, 199360 which was approved
subject to additional conditions:
Your request for extension is hereby granted with
the conditions that:
1) This will be the last and final extension to be
granted your accounts; and
2) That all amortizations due from March 1993 to
November 1993 shall be paid including the
additional interest computed at straight 18.5%
from date of your receipt of notice of approval,
viz:

In a letter68 dated January 6, 1994, Tamayo

informed Edmundo that the bank cancelled the
Restructuring Agreement due to his failure to
comply with the conditions within a reasonable
time.
On January 10, 1994, DBP sent Edmundo a Final
Demand Letter asking that he pay the
outstanding amount of P6,404,412.92, as of
November 16, 1993, exclusive of interest and
penalty charges.69

xxxx

Edmundo, in a letter70 dated January 18, 1994,

explained that his lawyer was not able to review
the agreement due to the Christmas holidays. He
also said that his lawyer was requesting
clarification on the following points:

Failure on your part to comply with these

conditions, the Bank will undertake appropriate
legal measures to protect its interest.

Can the existing obligations of the Mortgagors, if

any, be specified in the Restructuring Agreement
already?

Please give this matter your preferential

attention.61

Is there a statement showing all the accrued

interest and advances that shall first be paid
before the restructuring shall be implemented?

On November 8, 1993, Edmundo sent Tamayo a

telegram, which reads:
Acknowledge receipt of your Sept. 27 letter. I
would like to finalize documentation of
restructuring Diamond L Ranch and Carlos Lim
Accounts. However, we would need clarification
on amortizations due on NTFI means [sic]. I will
call x x x your Legal Department at DBP Head
Office by Nov. 11. Pls. advise who[m] I should
contact. Thank you.62
Receiving no response, Edmundo scheduled a
meeting with Tamayo in Manila.63 During their
meeting, Tamayo told Edmundo that he would
send the draft of the Restructuring Agreement by
courier on November 15, 1993 to the Main Office
of DBP in Makati, and that Diamond L Ranch need
not submit the Board Resolution, the Secretarys
Certificate, and the SEC Registration since it is a
single proprietorship.64
On November 24, 1993 and December 3, 1993,
Edmundo sent telegrams to Tamayo asking for
the draft of theRestructuring Agreement.65
On November 29, 1993, the documents were
forwarded to the Legal Services Department of
DBP in Makati for the parties signatures. At the
same time, Edmundo was required to pay the
amount of P1,300,672.75, plus a daily interest of
P632.15 starting November 16, 1993 up to the
date of actual payment of the said amount.66
On December 19, 1993, Edmundo received the
draft of the Restructuring Agreement.67

Should Mr. Jun Sarenas Chua and his wife Mrs.

Trinidad Chua be required to sign as Mortgagors
considering that Mr. Chua is deceased and the
pasture lease which he used to hold has already
expired?71
Edmundo also indicated that he was prepared to
pay the first quarterly amortization on March 15,
1994 based on the total obligations of
P3,260,445.71, as of December 15, 1992, plus
interest.72
On January 28, 1994, Edmundo received from the
bank a telegram73 which reads:
We refer to your cattle ranch loan carried at our
DBP General Santos City Branch.
Please coordinate immediately with our Branch
Head not later than 29 January 1994, to forestall
the impending foreclosure action on your
account.
Please give the matter your utmost attention.
The bank also answered Edmundos queries, viz:
In view of the extended leave of absence of AVP
Bonifacio A. Tamayo, Jr. due to the untimely
demise of his father, we regret [that] he cannot
personally respond to your letter of January 18,
1994. However, he gave us the instruction to
answer your letter on direct to the point basis as
follows:
- Yes to Items No. 1 and 2,

- No longer needed on Item No. 3

AVP Tamayo would like us also to convey to you
to hurry up with your move to settle the
obligation, while the foreclosure action is still
pending with the legal division. He is afraid you
might miss your last chance to settle the account
of your parents.74
Edmundo then asked about the status of the
Restructuring Agreement as well as the
computation of the accrued interest and
advances75 but the bank could not provide any
definite answer.76
On June 8, 1994, the Office of the Clerk of Court
and Ex-Officio Provincial Sheriff of the RTC of
General Santos City issued a Notice77 resetting
the public auction sale of the mortgaged
properties on July 11, 1994. Said Notice was
published for three consecutive weeks in a
newspaper of general circulation in General
Santos City.78
On July 11, 1994, the Ex-Officio Sheriff conducted
a public auction sale of the mortgaged properties
for the satisfaction of petitioners total obligations
in the amount of P5,902,476.34. DBP was the
highest bidder in the amount of P3,310,176.55.79
On July 13, 1994, the Ex-Officio Sheriff issued the
Sheriffs Certificate of Extra-Judicial Sale in favor
of DBP covering 11 parcels of land.80
In a letter81 dated September 16, 1994, DBP
informed Edmundo that their right of redemption
over the foreclosed properties would expire on
July 28, 1995, to wit:
This is to inform you that your right of redemption
over your former property/ies acquired by the
Bank on July 13, 1994, thru Extra-Judicial
Foreclosure under Act 3135 will lapse on July 28,
1995.
In view thereof, to entitle you of the maximum
condonable amount (Penal Clause, AI on Interest,
PC/Default Charges) allowed by the Bank, we are
urging you to exercise your right within six (6)
months from the date of auction sale on or before
January 12, 1995.
Further, failure on your part to exercise your
redemption right by July 28, 1995 will constrain
us to offer your former property/ies in a public
bidding.
Please give this matter your preferential
attention. Thank you.82
On July 28, 1995, petitioners filed before the RTC
of General Santos City, a Complaint83 against
DBP for Annulment of Foreclosure and Damages

with Prayer for Issuance of a Writ of Preliminary

Injunction and/or Temporary Restraining Order.
Petitioners alleged that DBPs acts and omissions
prevented them from fulfilling their obligation;
thus, they prayed that they be discharged from
their obligation and that the foreclosure of the
mortgaged properties be declared void. They
likewise prayed for actual damages for loss of
business opportunities, moral and exemplary
damages, attorneys fees, and expenses of
litigation.84
On same date, the RTC issued a Temporary
Restraining Order85 directing DBP to cease and
desist from consolidating the titles over
petitioners foreclosed properties and from
disposing the same.
In an Order86 dated August 18, 1995, the RTC
granted the Writ of Preliminary Injunction and
directed petitioners to post a bond in the amount
of P3,000,000.00.
DBP filed its Answer,87 arguing that petitioners
have no cause of action;88 that petitioners failed
to pay their loan obligation;89 that as mandated
by Presidential Decree No. 385, initial foreclosure
proceedings were undertaken in 1977 but were
aborted because petitioners were able to obtain a
restraining order;90 that on December 18, 1990,
DBP revived its application for foreclosure but it
was again held in abeyance upon petitioners
request;91 that DBP gave petitioners written and
verbal demands as well as sufficient time to
settle their obligations;92 and that under Act
3135,93 DBP has the right to foreclose the
properties.94
Ruling of the Regional Trial Court
On December 10, 1996, the RTC rendered a
Decision,95 the dispositive portion of which
reads:
WHEREFORE, in light of the foregoing, judgment
is hereby rendered:
(1) Declaring that the [petitioners] have fully
extinguished and discharged their obligation to
the [respondent] Bank;
(2) Declaring the foreclosure of [petitioners]
mortgaged properties, the sale of the properties
under the foreclosure proceedings and the
resultant certificate of sale issued by the
foreclosing Sheriff by reason of the foreclosure
NULL and VOID;
(3) Ordering the return of the [properties] to
[petitioners] free from mortgage liens;

(4) Ordering [respondent] bank to pay

[petitioners], actual and compensatory damages
of P170,325.80;
(5) Temperate damages of P50,000.00;
(c) Moral damages of P500,000.00;
(d) Exemplary damages of P500,000.00;
(e) Attorneys fees in the amount of P100,000.00;
and
(f) Expenses of litigation in the amount of
P20,000.00.
[Respondent] Banks counterclaims are hereby
DISMISSED.
[Respondent] Bank is likewise ordered to pay the
costs of suit.
SO ORDERED.96
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the RTC
Decision. Thus:
WHEREFORE, in view of the foregoing, the instant
appeal is hereby GRANTED. The assailed Decision
dated 10 December 1996 is hereby REVERSED
and SET ASIDE. A new judgment is hereby
rendered. It shall now read as follows:
WHEREFORE, premises considered, judgment is
hereby rendered:
Ordering the dismissal of the Complaint in Civil
Case No. 5608;
Declaring the extrajudicial foreclosure of
[petitioners] mortgaged properties as valid;
Ordering [petitioners] to pay the [respondent] the
amount of Two Million Five Hundred Ninety Two
Thousand Two Hundred Ninety Nine [Pesos] and
Seventy-Nine Centavos (P2,592,299.79) plus
interest and penalties as stipulated in the
Promissory Note computed from 11 July 1994
until full payment; and
Ordering [petitioners] to pay the costs.
Issues
Hence, the instant recourse by petitioners raising
the following issues:
1. Whether x x x respondents own wanton,
reckless and oppressive acts and omissions in
discharging its reciprocal obligations to
petitioners effectively prevented the petitioners

from paying their loan obligations in a proper and

suitable manner;
2. Whether x x x as a result of respondents said
acts and omissions, petitioners obligations
should be deemed fully complied with and
extinguished in accordance with the principle of
constructive fulfillment;
3. Whether x x x the return by the trial Court of
the mortgaged properties to petitioners free from
mortgage liens constitutes unjust enrichment;
4. Whether x x x the low bid price made by the
respondent for petitioners mortgaged properties
during the foreclosure sale is so gross, shocking
to the conscience and inherently iniquitous as to
constitute sufficient ground for setting aside the
foreclosure sale;
5. Whether x x x the restructuring agreement
reached and perfected between the petitioners
and the respondent novated and extinguished
petitioners loan obligations to respondent under
the Promissory Notes sued upon; and
6. Whether x x x the respondent should be held
liable to pay petitioners actual and compensatory
damages, temperate damages, moral damages,
exemplary damages, attorneys fees and
expenses of litigation.98
Petitioners Arguments
Petitioners seek the reinstatement of the RTC
Decision which declared their obligation fully
extinguished and the foreclosure proceedings of
their mortgaged properties void.
Relying on the Principle of Constructive
Fulfillment, petitioners insist that their obligation
should be deemed fulfilled since DBP prevented
them from performing their obligation by
charging excessive interest and penalties not
stipulated in the Promissory Notes, by failing to
promptly provide them with the correct
Statements of Account, and by cancelling the
Restructuring Agreement even if they already
paid P362,271.75 as downpayment.99 They
likewise deny any fault or delay on their part in
finalizing the Restructuring Agreement.100
In addition, petitioners insist that the foreclosure
sale is void for lack of personal notice101 and the
inadequacy of the bid price.102 They contend
that at the time of the foreclosure, petitioners
obligation was not yet due and demandable,103
and that the restructuring agreement novated
and extinguished petitioners loan obligation.104
Finally, petitioners claim that DBP acted in bad
faith or in a wanton, reckless, or oppressive
manner; hence, they are entitled to actual,

temperate, moral and exemplary damages,

attorneys fees, and expenses of litigation.105
Respondents Arguments
DBP, on the other hand, denies acting in bad faith
or in a wanton, reckless, or oppressive
manner106 and in charging excessive interest
and penalties.107 According to it, the amounts in
the Statements of Account vary because the
computations were based on different cut-off
dates and different incentive schemes.108
DBP further argues that the foreclosure sale is
valid because gross inadequacy of the bid price
as a ground for the annulment of the sale applies
only to judicial foreclosure.109 It likewise
maintains that the Promissory Notes and the
Mortgage were not novated by the proposed
Restructuring Agreement.110
As to petitioners claim for damages, DBP
contends it is without basis because it did not act
in bad faith or in a wanton, reckless, or
oppressive manner.111
Our Ruling
The Petition is partly meritorious.
The obligation was not extinguished or
discharged.
The Promissory Notes subject of the instant
case became due and demandable as early as
1972 and 1976. The only reason the mortgaged
properties were not foreclosed in 1977 was
because of the restraining order from the court.
In 1978, petitioners made a partial payment of
P902,800.00. No subsequent payments were
made. It was only in 1989 that petitioners tried to
negotiate the settlement of their loan obligations.
And although DBP could have foreclosed the
mortgaged properties, it instead agreed to
restructure the loan. In fact, from 1989 to 1994,
DBP gave several extensions for petitioners to
settle their loans, but they never did, thus,
prompting DBP to cancel the Restructuring
Agreement.
Petitioners, however, insist that DBPs
cancellation of the Restructuring Agreement
justifies the extinguishment of their loan
obligation under the Principle of Constructive
Fulfillment found in Article 1186 of the Civil Code.
We do not agree.
As aptly pointed out by the CA, Article 1186
of the Civil Code, which states that "the condition
shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment," does not
apply in this case,112 viz:

Article 1186 enunciates the doctrine of

constructive fulfillment of suspensive conditions,
which applies when the following three (3)
requisites concur, viz: (1) The condition is
suspensive; (2) The obligor actually prevents the
fulfillment of the condition; and (3) He acts
voluntarily. Suspensive condition is one the
happening of which gives rise to the obligation. It
will be irrational for any Bank to provide a
suspensive condition in the Promissory Note or
the Restructuring Agreement that will allow the
debtor-promissor to be freed from the duty to pay
the loan without paying it.113
Besides, petitioners have no one to blame
but themselves for the cancellation of the
Restructuring Agreement. It is significant to point
out that when the Regional Credit Committee
reconsidered petitioners proposal to restructure
the loan, it imposed additional conditions. In fact,
when DBPs General Santos Branch forwarded the
Restructuring Agreement to the Legal Services
Department of DBP in Makati, petitioners were
required to pay the amount of P1,300,672.75,
plus a daily interest of P632.15 starting
November 16, 1993 up to the date of actual
payment of the said amount.114 This, petitioners
failed to do. DBP therefore had reason to cancel
the Restructuring Agreement.
Moreover, since the Restructuring
Agreement was cancelled, it could not have
novated or extinguished petitioners loan
obligation. And in the absence of a perfected
Restructuring Agreement, there was no
impediment for DBP to exercise its right to
foreclose the mortgaged properties.115
The foreclosure sale is not valid.
But while DBP had a right to foreclose the
mortgage, we are constrained to nullify the
foreclosure sale due to the banks failure to send
a notice of foreclosure to petitioners.
We have consistently held that unless the
parties stipulate, "personal notice to the
mortgagor in extrajudicial foreclosure
proceedings is not necessary"116 because
Section 3117 of Act 3135 only requires the
posting of the notice of sale in three public places
and the publication of that notice in a newspaper
of general circulation.
In this case, the parties stipulated in
paragraph 11 of the Mortgage that:
11. All correspondence relative to this
mortgage, including demand letters, summons,
subpoenas, or notification of any judicial or extrajudicial action shall be sent to the Mortgagor at

xxx or at the address that may hereafter be given

in writing by the Mortgagor or the Mortgagee;118

render the foreclosure sale on November 23,

1981 null and void.120 (Emphasis supplied)

However, no notice of the extrajudicial

foreclosure was sent by DBP to petitioners about
the foreclosure sale scheduled on July 11, 1994.
The letters dated January 28, 1994 and March 11,
1994 advising petitioners to immediately pay
their obligation to avoid the impending
foreclosure of their mortgaged properties are not
the notices required in paragraph 11 of the
Mortgage. The failure of DBP to comply with their
contractual agreement with petitioners, i.e., to
send notice, is a breach sufficient to invalidate
the foreclosure sale.

In view of foregoing, the CA erred in finding

the foreclosure sale valid.

In Metropolitan Bank and Trust Company v.

Wong,119 we explained that:
x x x a contract is the law between the
parties and, that absent any showing that its
provisions are wholly or in part contrary to law,
morals, good customs, public order, or public
policy, it shall be enforced to the letter by the
courts. Section 3, Act No. 3135 reads:
Sec. 3. 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 and city.
The Act only requires (1) the posting of
notices of sale in three public places, and (2) the
publication of the same in a newspaper of general
circulation. Personal notice to the mortgagor is
not necessary. Nevertheless, the parties to the
mortgage contract are not precluded from
exacting additional requirements. In this case,
petitioner and respondent in entering into a
contract of real estate mortgage, agreed inter
alia:
all correspondence relative to this
mortgage, including demand letters, summonses,
subpoenas, or notifications of any judicial or
extra-judicial action shall be sent to the
MORTGAGOR at 40-42 Aldeguer St. Iloilo City, or
at the address that may hereafter be given in
writing by the MORTGAGOR to the MORTGAGEE.
Precisely, the purpose of the foregoing
stipulation is to apprise respondent of any action
which petitioner might take on the subject
property, thus according him the opportunity to
safeguard his rights. When petitioner failed to
send the notice of foreclosure sale to respondent,
he committed a contractual breach sufficient to

Penalties and interest rates should be

expressly stipulated in writing
As to the imposition of additional interest and
penalties not stipulated in the Promissory Notes,
this should not be allowed. Article 1956 of the
Civil Code specifically states that "no interest
shall be due unless it has been expressly
stipulated in writing." Thus, the payment of
interest and penalties in loans is allowed only if
the parties agreed to it and reduced their
agreement in writing.121
In this case, petitioners never agreed to pay
additional interest and penalties. Hence, we
agree with the RTC that these are illegal, and
thus, void. Quoted below are the findings of the
RTC on the matter, to wit:
Moreover, in its various statements of account,
[respondent] Bank charged [petitioners] for
additional interests and penalties which were not
stipulated in the promissory notes.
In the Promissory Note, Exhibit "A," for the
principal amount of P960,000.00, only the
following interest and penalty charges were
stipulated:
[Respondent] bank, however, charged
[petitioners] the following items as shown in its
Statement of Account for the period as of 31
January 1989, Exhibit "D:"(1) regular interest in
the amount of P561,037.14;
The Court finds no basis under the Promissory
Note, Exhibit "A," for charging the additional
interest in the amount of P2,590,786.26.
Moreover, it is incomprehensible how the penalty
charge of 1/3% per month on the overdue
amortization could amount to P1,086,147.19
while the regular interest, which was stipulated at
the higher rate of 12% per annum, amounted to
only P561,037.14 or about half of the amount
allegedly due as penalties.
In Exhibit "N," which is the statement of account
x x x as of 15 June 1992, [respondent] bank
charged plaintiffs the following items:
Again, the Court finds no basis in the Promissory
Note, Exhibit "A," for the imposition of additional
interest on principal in the amount of
P1,233,893.79, additional interest on regular
interest in the amount of P859,966.83, penalty
charges on regular interest in the amount of

P1,146,622.55 and penalty charges on advances

in the amount of P40,520.53.
In the Promissory Note, Exhibit "C," for the
principal amount of P40,000.00, only the
following charges were stipulated:
There was nothing in the Promissory Note, Exhibit
"C," which authorized the imposition of additional
interest. Again, this Court notes that the
additional interest in the amount of P92,113.56 is
even larger than the regular interest in the
amount of P5,046.97. Moreover, based on the
Promissory Note, Exhibit "C," if the 11% interest
on unpaid amortization is considered an
"additional interest," then there is no basis for
[respondent] bank to add penalty charges as
there is no other provision providing for this
charge. If, on the other hand, the 11% interest on
unpaid amortization is considered the penalty
charge, then there is no basis to separately
charge plaintiffs additional interest. The same
provision cannot be used to charge plaintiffs both
interest and penalties.
In Exhibit "O," which is the statement of account
x x x as of 15 June 1992, [respondent] charged
[petitioners] with the following:
[Respondent] bank failed to show the basis for
charging additional interest on principal,
additional interest on regular interest and penalty
charges on principal and penalty charges on
regular interest under items (2), (3), (4) and (5)
above.
Moreover, [respondent] bank charged
[petitioners] twice under the same provisions in
the promissory notes. It categorically admitted
that the additional interests and penalty charges
separately being charged [petitioners] referred to
the same provision of the Promissory Notes,
Exhibits "A" and "C." Thus, for the Lim Account in
the amount of P40,000.00, [respondents] Mr.
Ancheta stated:
A perusal of the promissory notes, however,
failed to justify [respondent] banks computation
of both interest and penalty under the same
provision in each of the promissory notes.
[Respondent] bank also admitted that the
additional interests and penalties being charged
[petitioners] were not based on the stipulations in
the Promissory Notes but were imposed
unilaterally as a matter of its internal banking
policies. (TSN, 19 March 1996, pp. 23-24.) This
banking policy, however, has been declared null
and void in Philippine National Bank vs. CA, 196
SCRA 536 (1991). The act of [respondent] bank in
unilaterally changing the stipulated interest rate
is violative of the principle of mutuality of

contracts under 1308 of the Civil Code and

contravenes 1956 of the Civil Code. [Respondent]
bank completely ignored [petitioners] "right to
assent to an important modification in their
agreement and (negated) the element of
mutuality in contracts." (Philippine National Bank
vs. CA, G.R. No. 109563, 9 July 1996; Philippine
National Bank vs. CA, 238 SCRA 20 1994). As in
the PNB cases, [petitioners] herein never agreed
in writing to pay the additional interest, or the
penalties, as fixed by [respondent] bank; hence
[respondent] banks imposition of additional
interest and penalties is null and void.122
(Emphasis supplied)
Consequently, this case should be remanded to
the RTC for the proper determination of
petitioners total loan obligation based on the
interest and penalties stipulated in the
Promissory Notes.
DBP did not act in bad faith or in a wanton,
reckless, or oppressive manner.
Finally, as to petitioners claim for damages, we
find the same devoid of merit.
DBP did not act in bad faith or in a wanton,
reckless, or oppressive manner in cancelling the
Restructuring Agreement. As we have said, DBP
had reason to cancel the Restructuring
Agreement because petitioners failed to pay the
amount required by it when it reconsidered
petitioners request to restructure the loan.
Likewise, DBPs failure to send a notice of the
foreclosure sale to petitioners and its imposition
of additional interest and penalties do not
constitute bad faith. There is no showing that
these contractual breaches were done in bad
faith or in a wanton, reckless, or oppressive
manner.1wphi1
In Philippine National Bank v. Spouses
Rocamora,123 we said that:
Moral damages are not recoverable simply
because a contract has been breached. They are
recoverable only if the defendant acted
fraudulently or in bad faith or in wanton disregard
of his contractual obligations. The breach must be
wanton, reckless, malicious or in bad faith, and
oppressive or abusive. Likewise, a breach of
contract may give rise to exemplary damages
only if the guilty party acted in a wanton,
fraudulent, reckless, oppressive or malevolent
manner.
We are not sufficiently convinced that PNB acted
fraudulently, in bad faith, or in wanton disregard
of its contractual obligations, simply because it
increased the interest rates and delayed the

foreclosure of the mortgages. Bad faith cannot be

imputed simply because the defendant acted
with bad judgment or with attendant negligence.
Bad faith is more than these; it pertains to a
dishonest purpose, to some moral obliquity, or to
the conscious doing of a wrong, a breach of a
known duty attributable to a motive, interest or ill
will that partakes of the nature of fraud. Proof of
actions of this character is undisputably lacking in
this case. Consequently, we do not find the
spouses Rocamora entitled to an award of moral
and exemplary damages. Under these
circumstances, neither should they recover
attorneys fees and litigation expense. These
awards are accordingly deleted.124 (Emphasis
supplied)
WHEREFORE, the Petition is PARTLY GRANTED.
The assailed February 22, 2007 Decision of the
Court of Appeals in CA-G.R. CV No. 59275 is
hereby MODIFIED in accordance with this
Decision. The case is hereby REMANDED to the
Regional Trial Court of General Santos City,
Branch 22, for the proper determination of
petitioners total loan obligations based on the
interest and penalties stipulated in the
Promissory Notes dated November 24, 1969 and
December 30, 1970. The foreclosure sale of the
mortgaged properties held on July 11, 1994 is
DECLARED void ab initio for failure to comply with
paragraph 11 of the Mortgage, without prejudice
to the conduct of another foreclosure sale based
on the recomputed amount of the loan
obligations, if necessary.
SO ORDERED.
RURAL BANK OF STA. BARBARA (ILOILO),
INC., Petitioner, vs.GERRY CENTENO,
Respondent.

Consequently, the subject lots were sold to

petitioner being the highest bidder at the auction
sale. On October 10, 1969, it obtained a
Certificate of Sale at Public Auction4 which was
later registered with the Register of Deeds of
Iloilo City on December 13, 1971.5
Sps. Centeno failed to redeem the subject lots
within the one (1) year redemption period
pursuant to Section 66 of Act No. 3135.7
Nonetheless, they still continued with the
possession and cultivation of the aforesaid
properties. Sometime in 1983, respondent Gerry
Centeno, son of Sps. Centeno, took over the
cultivation of the same. On March 14, 1988, he
purchased the said lots from his parents.
Accordingly, Rosario Centeno paid the capital
gains taxes on the sale transaction and tax
declarations were eventually issued in the name
of respondent.8 While the latter was in
possession of the subject lots, petitioner secured
on November 25, 1997 a Final Deed of Sale
thereof and in 1998, was able to obtain the
corresponding tax declarations in its name.9
On March 19, 1998, petitioner filed a petition for
the issuance of a writ of possession before the
RTC, claiming entitlement to the said writ by
virtue of the Final Deed of Sale covering the
subject lots.10 Respondent opposed the petition,
asserting that he purchased and has, in fact,
been in actual, open and exclusive possession of
the same properties for at least fifteen (15)
years.11 He further averred that the foreclosure
sale was null and void owing to the forged
signatures in the real estate mortgage. Moreover,
he claims that petitioners rights over the subject
lots had already prescribed.12
Ruling of the RTC

Assailed in this Petition for Review on Certiorari1

is the January 31, 2012 Decision2 of the Cebu
City Court of Appeals (CA) in CA-G.R. CV No.
78398 which set aside the October 8, 2002
Decision of the Regional Trial Court of Barotac
Viejo, Iloilo City, Branch -66 (RTC} in Cadastral
Case No. 98-0693 and denied the issuance of a
writ of possession for Cadastral Lot Nos. 964, 958
and 959 of the Ajuy, Iloilo Cadastre (subject lots)
in petitioner's favor.

On October 8, 2002, the RTC rendered its

Decision13 in Cadastral Case No. 98-069, finding
petitioner to be the lawful owner of the subject
lots whose rights became absolute due to
respondents failure to redeem the same.
Consequently, it found the issuance of a writ of
possession ministerial on its part.14 Dissatisfied,
respondent appealed to the CA.

The Facts

The CA, through its January 31, 2012 Decision,15

reversed the RTC and ruled against the issuance
of a writ of possession. It considered respondent
as a third party who is actually holding the
property adverse to the judgment obligor and as
such, has the right to ventilate his claims in a
proper judicial proceeding i.e., an ejectment suit
or reinvindicatory action.16

Spouses Gregorio and Rosario Centeno (Sps.

Centeno) were the previous owners of the subject
lots. During that time, they mortgaged the
foregoing properties in favor of petitioner Rural
Bank of Sta. Barbara (Iloilo), Inc. as security for a
P1,753.65 loan. Sps. Centeno, however, defaulted
on the loan, prompting petitioner to cause the
extrajudicial foreclosure of the said mortgage.

Ruling of the CA

Aggrieved, petitioner filed the instant petition.

Issue Before The Court

The sole issue in this case is whether or not
petitioner is entitled to a writ of possession over
the subject lots.
The Courts Ruling
The petition is meritorious.
It is well-established that after consolidation of
title in the purchasers name for failure of the
mortgagor to redeem the property, the
purchasers right to possession ripens into the
absolute right of a confirmed owner. At that point,
the issuance of a writ of possession, upon proper
application and proof of title, to a purchaser in an
extrajudicial foreclosure sale becomes merely a
ministerial function, 17 unless it appears that the
property is in possession of a third party claiming
a right adverse to that of the mortgagor.18 The
foregoing rule is contained in Section 33, Rule 39
of the Rules of Court which partly provides:
Sec. 33. Deed and possession to be given at
expiration of redemption period; by whom
executed or given.
xxxx
Upon the expiration of the right of redemption,
the purchaser or redemptioner shall be
substituted to and acquire all the rights, title,
interest and claim of the judgment obligor to the
property as of the time of the levy. The
possession of the property shall be given to the
purchaser or last redemptioner by the same
officer unless a third party is actually holding the
property adversely to the judgment obligor.
(Emphasis and underscoring supplied)
In China Banking Corporation v. Lozada,19 the
Court held that the phrase "a third party who is
actually holding the property adversely to the
judgment obligor" contemplates a situation in
which a third party holds the property by adverse
title or right, such as that of a co-owner, tenant or
usufructuary. The co-owner, agricultural tenant,
and usufructuary possess the property in their
own right, and they are not merely the successor
or transferee of the right of possession of another
co-owner or the owner of the property.20 Notably,
the property should not only be possessed by a
third party, but also held by the third party
adversely to the judgment obligor.21
In this case, respondent acquired the subject lots
from his parents, Sps. Centeno, on March 14,
1988 after they were purchased by petitioner and
its Certificate of Sale at Public Auction was
registered with the Register of Deeds of Iloilo City
in 1971. It cannot therefore be disputed that
respondent is a mere successor-in-interest of Sps.

Centeno. Consequently, he cannot be deemed as

a "third party who is actually holding the property
adversely to the judgment obligor" under legal
contemplation. Hence, the RTC had the
ministerial duty to issue as it did issue the said
writ in petitioners favor.
On the issue regarding the identity of the lots as
raised by respondent in his Comment,22 records
show that the RTC had already passed upon
petitioners title over the subject lots during the
course of the proceedings. Accordingly, the
identity of the said lots had already been
established for the purpose of issuing a writ of
possession. It is hornbook principle that absent
any clear showing of abuse, arbitrariness or
capriciousness committed by the lower court, its
findings of facts are binding and conclusive upon
the Court,23 as in this case.1wphi1
Finally, anent the issue of laches, it must be
maintained that the instant case only revolves
around the issuance of a writ of possession which
is merely ministerial on the RTC's part as aboveexplained. As such, all defenses which
respondent may raise including that of laches
should be ventilated through a proper
proceeding.
WHEREFORE, the petition is GRANTED. The
January 31, 2012 Decision of the Cebu City Court
of Appeals in CA-G.R. CV No. 78398 is REVERSED
and SET ASIDE. Accordingly, the October 8, 2002
Decision of the Regional Trial Court of Barotac
Viejo, Iloilo City, Branch 66 in Cadastral Case No.
98-069 is hereby REINSTATED.
METROPOLITAN BANK and TRUST COMPANY,
Petitioner, vs.CENTRO DEVELOPMENT
CORPORATION, CHONGKING KEHYENG,
MANUEL CO KEHYENG and Quirino Kehyeng,
Respondents.
The present Petition for Review1 assails the
Court of Appeals (CA) Decision2 promulgated on
30 August 2007 and Resolution3 dated 26
November 2007 in CA-G.R. CV No. 80778. The
antecedent facts follow.
On 20 March 1990, in a special meeting of
the board of directors of respondent Centro
Development Corporation (Centro), its president
Go Eng Uy was authorized to mortgage its
properties and assets to secure the medium-term
loan of P 84 million of Lucky Two Corporation and
Lucky Two Repacking. The properties and assets
consisted of a parcel of land with a building and
improvements located at Salcedo St., Legaspi
Village, Makati City, and covered by Transfer
Certificate of Title (TCT) Nos. 139880 and 139881.
This authorization was subsequently approved on
the same day by the stockholders.4 Maria Jacinta

V. Go, the corporate secretary, issued a

Secretarys Certificate stating:

Thereafter, the mortgage was duly recorded with

the Registry of Deeds of Makati City.7

I, MARIA JACINTA V. GO, Filipino citizen, of legal

age, married and with office address at second
Floor, CENTRO building, 180 Salcedo Street,
Legaspi Village, Makati, Metro Manila, after being
first duly sworn, depose and say:

On 31 March 1993, Centro and BPI amended the

MTI to allow an additional loan of P 36 million and
to include San Carlos Milling Company, Inc. (San
Carlos) as a borrower in addition to Centro, Lucky
Two Corp. and Lucky Two Repacking.8 Then, on 28
July 1994, Centro and BPI again amended the MTI
for another loan of P 24 million, bringing the total
obligation to P 144 million.9

2) That at a special meeting of the Board of

Directors of the aforesaid corporation duly called
and held on March 20, 1990 and wherein a
quorum was present, the following resolution was
unanimously approved pursuant to the Minutes of
the Special Meeting of the Stockholders of Centro
Development Corporation dated March 16, 1990;
R E S O L U T I O N:
"RESOLVED, as it is hereby resolved, that the
President, GO ENG UY, of Centro Development
Corporation, be as he is hereby authorized to
mortgage and use as collateral the real estate
property of the Corporation identified as a parcel
of land with building and improvements located
at Salcedo St., Legaspi Village, Makati, Metro
Manila covered by Transfer Certificate of Title
Nos. 139880 and 139881 to secure the mediumterm loan of LUCKY TWO CORPORATION, a
corporation duly organized and existing under the
Philippine laws, and LUCKY TWO REPACKING, a
single proprietorship with principal office at
Concepcion, Tarlac, with the Bank of the
Philippine Islands for EIGHTY FOUR (84) MILLION
PESOS, Philippine Currency (P 84,000,000.00);
"RESOLVED FURTHER, that said GO ENG UY, be as
he is hereby authorized to sign all papers and
documents needed and necessary to carry into
effect the aforesaid purpose or undertaking for
the benefit and to the credit of Lucky Two
Corporation and Lucky Two Repacking."
Thus, on 21 March 1990, respondent Centro,
represented by Go Eng Uy, executed a Mortgage
Trust Indenture (MTI) with the Bank of the
Philippines Islands (BPI).5 Under the MTI,
respondent Centro, together with its affiliates
Lucky Two Corporation and Lucky Two Repacking
or Go Eng Uy, expressed its desire to obtain from
time to time loans and other credit
accommodations from certain creditors for
corporate and other business purposes.6 To
secure these obligations from different creditors,
respondent Centro constituted a continuing
mortgage on all or substantially all of its
properties and assets enumerated above unto
and in favor of BPI, the trustee. Should
respondent Centro or any of its affiliates fail to
pay their obligations when due, the trustee shall
cause the foreclosure of the mortgaged property.

Meanwhile, respondent Centro, represented by

Go Eng Uy, approached petitioner Metropolitan
Bank and Trust Company (Metrobank) sometime
in 1994 and proposed that the latter assume the
role of successor-trustee of the existing MTI. After
petitioner Metrobank agreed to the proposal, the
board of directors of respondent Centro allegedly
resolved on 12 August 1994 to constitute
petitioner as successor-trustee of BPI.10
Thereafter, on 27 September 1994,11 petitioner
and respondent Centro executed the assailed
MTI,12 amending the previous agreements by
appointing the former as the successor-trustee of
BPI. It is worth noting that this MTI did not amend
the amount of the total obligations covered by
the previous MTIs.
It was only sometime in 1998 that respondents
herein, Chongking Kehyeng, Manuel Co Kehyeng
and Quirino Kehyeng, allegedly discovered that
the properties of respondent Centro had been
mortgaged, and that the MTI that had been
executed appointing petitioner as trustee.
Notably, respondent Chongking Kehyeng had
been a member of the board of directors of
Centro since 1989, while the two other
respondents, Manuel Co Kehyeng and Quirino
Keyheng, had been stockholders since 1987.
Respondents Kehyeng were minority stockholders
who owned thirty percent (30%) of the
outstanding capital stock of respondent Centro.
On different dates, 4 September 1998, 9
September 1998 and 2 October 1998, the
Kehyengs allegedly questioned the mortgage of
the properties through letters addressed to Go
Eng Uy and Jacinta Go.13 They alleged that they
were not aware of any board or stockholders
meeting held on 12 August 1994, when petitioner
was appointed as successor-trustee of BPI in the
MTI. Respondents demanded a copy of the
minutes of the meeting held on that date, but
received no response.
Thereafter, on 14 October 1998 and 19 November
1998, the Kehyengs allegedly wrote to petitioner,
informing it that they were not aware of the 12
August 1994 board of directors meeting.
Petitioner did not respond to the letters.14

Meanwhile, during the period April 1998 to

December 1998, San Carlos obtained loans in the
total principal amount of P 812,793,513.23 from
petitioner Metrobank.15
San Carlos failed to pay these outstanding
obligations despite demand. Thus, petitioner, as
trustee of the MTI, enforced the conditions
thereof and initiated foreclosure proceedings,
denominated as Foreclosure No. S-04-11, on the
mortgaged properties. On 22 June 2000,
petitioner Metrobank filed a Petition for
Extrajudicial Foreclosure of Mortgage with the
executive judge of the Regional Trial Court (RTC)
of Makati City. Petitioner alleged that the total
amount of the Promissory Notes that San Carlos
executed in favor of the former amounted to P
812,793,513.23. As of 30 April 2000, the total
outstanding obligation, inclusive of interests and
penalties, was P 1,178,961,181.45.16
We note that there are no documents in the
records evidencing the amendment of the MTI to
accommodate these additional obligations. As of
27 September 1994, the date of the last
amendment as borne out by the records, the total
outstanding obligation reflected in the MTI
amounted to only P 144 million. The latest MTI
merely referred to the amendments made on 31
March 1993 and 28 July 1994.
Before the scheduled foreclosure date, on 3
August 2000, respondents herein filed a
Complaint for the annulment of the 27 September
1994 MTI with a prayer for a temporary
restraining order (TRO) and preliminary injunction
at Branch 138 of the RTC of Makati City. Docketed
as Civil Case No. 00-942, the Complaint was
against petitioner, Go Eng Uy, Alexander V. Go,
Ramon V. Go, Maria Jacinta Go and Enriqueto
Magpantay.
The bone of contention in Civil Case No. 00-942
was that since the mortgaged properties
constituted all or substantially all of the corporate
assets, the amendment of the MTI failed to meet
the requirements of Section 40 of the Corporation
Code on notice and voting requirements. Under
this provision, in order for a corporation to
mortgage all or substantially all of its properties
and assets, it should be authorized by the vote of
its stockholders representing at least 2/3 of the
outstanding capital stock in a meeting held for
that purpose. Furthermore, there must be a
written notice of the proposed action and of the
time and place of the meeting. Thus, respondents
alleged, the representation of Go Eng Uy that he
was authorized by the board of directors and/or
stockholders of Centro was false.
On 15 December 2003, after trial on the merits,
the RTC dismissed the Complaint.17 It held that

the evidence presented by respondents was

insufficient to support their claim that there were
no meetings held authorizing the mortgage of
Centros properties. It noted that the stocks of
respondents Kehyeng constituted only 30% of the
outstanding capital stock, while the Go family
owned the majority 70%, which represented more
than the 2/3 vote required by Section 40 of the
Corporation Code. The trial court ruled that
respondents Kehyeng, particularly Chongking
Kehyeng, who sat in the board of directors,
should have done periodic inquiries and
verifications of documents pertaining to
corporate properties. The RTC also held that
laches had attached, considering that eight (8)
years had lapsed before respondents questioned
the mortgage executed in 1990.
The trial court also noted the absence of
evidence showing the steps respondents had
taken to seek redress for the alleged
misrepresentations of Go Eng Uy and Maria
Jacinta Go. On the other hand, the court found
that no neglect could be imputed to petitioner for
relying on the Secretarys Certificate, which
apparently established Go Eng Uys authority to
mortgage Centros properties and assets.
Respondents subsequently filed an appeal with
the CA docketed as CA-G.R. CV No. 80778. On 26
February 2004, they filed an Urgent Motion for
the Issuance of a Temporary Restraining Order
and Writ of Preliminary Injunction seeking to
restrain petitioner, the clerk of court, the exofficio sheriff of the RTC, and their agents from
foreclosing and selling at public auction on 4 and
22 March 2004 the mortgaged properties subject
of Civil Case No. 00-942. On 3 March 2004, a TRO
was issued by the CA effective for a period of
sixty (60) days, unless earlier set aside by a
resolution.18
On 19 May 2004, the CA issued a Resolution19 in
CA-G.R. CV No. 80778 denying the application for
the issuance of a writ of preliminary injunction.
Not giving up, on 27 May 2004, respondents
Centro and San Carlos filed a Complaint docketed
as Civil Case No. 04-612 at Branch 56 of the RTC
of Makati City. They prayed for the nullification of
the foreclosure proceedings and prayed for the
issuance of a TRO/injunction. Centro and San
Carlos alleged that the total obligation due was
only P 657,000,000 and not P 812,793,513.23;
that the sale of the San Carlos properties found in
Negros Occidental fully satisfied their outstanding
obligations; and that the action to foreclose the
Makati properties was illegal and void.20
While Civil Case No. 04-612 was pending, the
clerk of court and the ex-officio sheriff of the RTC
of Makati City held an auction sale of the disputed

property, during which petitioner was adjudged

as the highest bidder for P 344,700,000. A
Certificate of Sale was accordingly issued on 3
June 2004, which states:21
On June 2, 2004, a public auction sale was
conducted and METROPOLITAN BANK & TRUST
CO. submitted a bid for the sale to him/it of the
mortgaged property in the amount of P
344,700,000 xxx, which was the highest bid
hence declared as the winning bidder and being
the creditor he/it did not delivery or pay
cash/monies to the Clerk of Court and Ex-Officio
Sheriff the bid price of P 344,700,000 xxx and the
selling price was credited as partial/full
satisfaction of indebtedness secured by the
mortgage.
In consideration thereof, the Certificate of Sale
was issued in favor of METROPOLITAN BANK&
TRUST CO. of Metrobank Plaza, Sen. Gil Puyat
Ave., Makati.
This sale is subject to redemption in the manner
provided by law.
Because of this development, the Complaint in
Civil Case No. 04-612 was amended, and Centro
and San Carlos prayed for the issuance of a writ
of injunction to prevent the registration of the
Certificate of Sale and the subsequent transfer to
petitioner of the title to the properties. However,
Branch 56 of the RTC of Makati City subsequently
denied the application.
Respondent Centro thereafter filed before the CA
a Petition for Certiorari docketed as CA-G.R. SP
No. 84447. The Petition assailed the Order of the
RTC in Civil Case No. 04-612.
During this time, CA-G.R. CV No. 80778, which
involved the legality of the MTI, was still pending.
On 30 August 2007, the CA promulgated the
assailed Decision in CA-G.R. CV No. 80778. The
appellate court first determined whether the
requirements of Section 40 of the Corporation
Code on the sale of all or substantially all of the
corporations property were complied with. Based
on the 18 August 1994 Secretarys Certificate,
the CA found that only a quorum was present
during the stockholders meeting on 12 August
1994. The appellate court thus held that the 2/3
vote required by Section 40 was not met. It ruled
that the minority stockholders were deprived of
their right to dissent from or to approve the
proposed mortgage, considering that they had
not been notified in writing of the meeting in
which the corporate action was to be discussed.
The CA also considered the testimony of Perla
Saballe, an officer of petitioner Metrobank, who

opined that the term "quorum" meant only the

majority of the stockholders.
Furthermore, the appellate court held that
petitioner was duty-bound to ensure that
respondent Centro submitted proof that the
proposed corporate action had been duly
approved by a vote of the stockholders
representing 2/3 of the outstanding capital stock.
Regarding the issue of whether laches had
already attached, the CA ruled that the MTI could
not be ratified, considering that the requirements
of the Corporation Code were not complied with.
Thus, the dispositive portion of the CA Decision in
CA-G.R. CV No. 80778 reads:22
WHEREFORE, the Appeal is PARTIALLY GRANTED.
The Judgment dated 15 December 2003 of the
Regional Trial Court of Makati City, Branch 138, is
REVERSED and SET ASIDE insofar as the dismissal
of the Complaint for Annulment of Trust Indenture
Agreement is concerned. The Trust Indenture
executed on 27 September 1994 is hereby
declared NULL and VOID. Accordingly, the
foreclosure of the mortgage and the sale at public
auction involving the subject properties are
declared of no force and effect. The certificates of
title issued in the name of Metropolitan Bank and
Trust Company are CANCELLED.
Conformably with the foregoing discussion, the
appellants prayer for damages is hereby DENIED.
SO ORDERED.
On 14 September 2007, a different Division of the
CA rendered a Decision23 denying the Petition in
CA-G.R. SP No. 84447. That Petition had
questioned the Decision of Branch 56 of the RTC
of Makati City denying a Petition to enjoin the
foreclosure of the mortgaged properties on the
ground that respondents Centro and San Carlos
had failed to show any clear right of the RTC to
issue an injunctive writ. The CA further ruled that
the foreclosure of the property became a matter
of right on the part of petitioner because of
respondents failure to pay the loans due.
On 26 November 2007, the CA in CA-G.R. CV No.
80778 rendered the assailed Resolution denying
petitioners Motion for Reconsideration.
Hence, this Petition.
Petitioner contends that the stockholders
Resolution No. 005, s. 1994 did not constitute a
new mortgage in favor of petitioner. Instead, the
stockholders merely amended the existing MTI by
appointing petitioner as the new trustee for the
MTI, which was already existing and held by BPI.
Thus, there was no need to secure a 2/3 vote

from the stockholders. Petitioner posits that the

authority to mortgage the properties was granted
in 1990, upon the execution of the first MTI
between respondent Centro and BPI.

Further, petitioner alleges that respondents do

not deny or question the previous MTI and its
subsequent amendments. It further alleges that
the constituted mortgage under the MTI was duly
annotated with the Registry of Deeds of Makati
City.
Petitioner also maintains that the CA erred in
interpreting the phrase "at which meeting a
quorum was present" contained in the Secretarys
Certificate dated 18 August 1994. The bank
points out that the phrase indicates that at least
a quorum was present, rather than that only a
quorum was present. Thus, the Secretarys
Certificate did not in any way limit the number of
those actually present.
Additionally, petitioner argues that Perla Saballe,
whose testimony was considered by the CA, was
not a competent witness to interpret the
directors Resolution. Allegedly, she was never
present during the meetings of Centro regarding
the present issue, and she was not in a position
to answer the questions propounded to her in
relation to the requirements of Section 40 of the
Corporation Code.
Moreover, petitioner cites the CA Decision in CAG.R. SP No. 84447, which upheld the validity of
the foreclosure of the mortgage. It also
challenges the CA ruling that the former failed to
exercise due diligence in transacting with
respondent Centro. Finally, petitioner insists that
laches attached when respondents failed to
question the MTI and the stockholders Resolution
at the earliest possible time.
On the other hand, respondents contend that,
based on the Pre-Trial Brief and the Amended PreTrial Order, petitioner admitted that the subject
properties were mortgaged under the MTI of 27
September 1994, and not under that of 21 March
1990.
Second, on the issue of whether the 2/3 voting
requirement was met, respondents claim that
petitioner cannot impugn the testimony of its own
officer and witness, Perla Saballe, on the
interpretation of the term "quorum" as referred to
in the Secretarys Certificate dated 18 August
1994.
Respondents also allege that petitioner failed to
controvert the testimony of Chongking Kehyeng,
a member and vice-chairperson of the board of

directors, that he was unaware of any

stockholders meeting ever being held, and that
he and the other Kehyengs were not informed of
that meeting. Respondents further insist that
petitioner was negligent when it merely relied on
the Secretarys Certificate, instead of exercising
due diligence to ensure that all legal
requirements had been complied with under the
MTI. On the issue of laches, respondents contend
that it was not raised before the trial court, and is
thus improperly invoked in the present Petition.
Nevertheless, they allegedly undertook a number
of measures to question the transactions
between petitioner and CENTRO. Moreover, they
argue that the MTI, being null and void, cannot be
given effect through laches.
The Courts Ruling
In summary, this Court is tasked to resolve the
following issues:
1. Whether the requirements of Section 40 of the
Corporation Code was complied with in the
execution of the MTI;
2. Whether petitioner was negligent or failed to
exercise due diligence;
3. Whether laches has already attached, such
that respondents can no longer question the MTI.
We shall first discuss the issue of laches.
Laches is defined as the failure or neglect for an
unreasonable and unexplained length of time to
do that which, by exercising due diligence, could
or should have been done earlier; it is negligence
or omission to assert a right within a reasonable
time, warranting a presumption that the party
entitled to assert it either has abandoned it or
declined to assert it.24
In the case at bar, the RTC in Civil Case No. 00942 held that laches attached when respondents
allowed eight (8) years to pass before questioning
the mortgage, which was constituted in 1990.
Thus, the trial court said:
As it appears now, the mortgage on the land and
building of Centro was first constituted in 1990 in
favor of [the] Bank of the Philippine Islands.
Individual plaintiffs stated that discovery of the
mortgage was "sometime in 1998", (par. 6,
Affidavit of Chongking Kehyeng). He was in the
Board of Directors of Centro and he holds office at
the fourth floor of the building on the mortgaged
property. There is evidence that the holding of
meetings of the Board of Directors was irregular
and purely "reportorial".

Considering that as shown by planitiffs evidence,

conduct of business in Centro was informal,
vigilance over its property was required from all
individual plaintiffs, particularly plaintiff
Chongking Kehyeng who sits in the Board of
Directors. Periodic inquiries and verification of
documents pertaining to corporate properties
should have been done and the existence of the
mortgage was verifiable. A simple inquiry about
the status of the title, information on the title
number and actual verification with the Register
of Deeds a task which can be accomplished in
an hour or two will provide information about the
existence of the mortgage. None of the individual
plaintiffs did this.
The inaction of the plaintiffs for which no
explanation was submitted resulted in the
acquisition of rights by the defendant Bank
adverse to them. Such neglect, taken in
conjunction with the lapse of time of about eight
(8) years operates as a bar.25

It cannot therefore be said that laches had

attached and that respondents were already
barred from assailing the MTI in 1998. We now
proceed to discuss the validity of the challenged
MTI.
The 18 August 1994 Secretarys Certificate issued
by Maria Jacinta V. Go reads as follows:28
I, JACINTA V. GO, Corporate Secretary of CENTRO
DEVELOPMENT CORPORATION, a corporation duly
organized and existing under our laws with
principal office located at the 2nd Floor Centro
Buidling, 180 Salcedo St., Legaspi Village, Makati,
Metro Manila, do hereby certify that during a
special meeting of the board of Directors of the
Corporation held at its main office in Makati,
Metro Manila on August 12, 1994, at 3:00 p.m., at
which meeting a quorum was present, the
following resolution was approved and adopted:
"Resolution No. 005, s. 1994

A perusal of the TCTs26 of the subject properties

would reveal that only the values of the mortgage
securing the loans totalling P 144 million were
annotated, based on the MTIs executed on 21
March 1990, 31 March 1993 and 28 July 1994. As
for the last annotation, it only stated that
petitioner was the successor-trustee to all
obligations due to the creditors. Respondents, in
their Complaint, did not question these
mortgages constituted by the MTIs executed on
21 March 1990, 31 March 1993 and 28 July 1994,
respectively. What they questioned was the
additional loans granted to San Carlos after the
execution of the 27 September 1994 MTI and the
foreclosure of the mortgage resulting from the
nonpayment of San Carlos obligations. Thus,
contrary to the finding of the trial court, only four
years had lapsed from the execution of the 27
September 1994 MTI when respondents
questioned the mortgage allegedly constituted to
cover these loans.

APPOINTING METROBANK TRUST BANKING

GROUP AS THE NEW TRUSTEE FOR THE EXISTING
MTI OF CDC REAL ESTATE PROPERTYRESOLVED,
AS IT IS HEREBY RESOLVED, that in connection
with the existing Mortgage Trust Indenture of real
estate property covered by Transfer Certificate of
Title Nos. 139880 and 139881 situated at 180
Salcedo St., Legaspi Village, Makati, Metro Manila,
with an area of 1,608 square meters more or less,
the Corporation be [sic], as it is hereby
authorized, to appoint Metrobank Trust Banking
Group ("Metrobank") as the new trustee for the
existing mortgage trust indenture presently held
by the Bank of the Philippines Islands;

Furthermore, as mentioned earlier, the TCTs were

not accordingly annotated to cover these
additional loans. Also, the mortgage of the
property securing all the loans were not disclosed
in Centros financial statements for the years
1991 to 1998.27 Thus, absent any proof that the
individual respondents were notified of the
stockholders meeting on 12 August 1994 or that
they were present during the meeting, these
respondents could not have been informed of the
alleged additional loans and the corresponding
mortgage constituted over the properties.

RESOLVED FINALLY, that any resolution or

resolutions heretofore adopted by this Board,
inconsistent with the provisions hereof be, as
they hereby are amended and/or revoked
accordingly."

RESOLVED FURTHER, that the President, Mr. Go

Eng Uy be, as he is hereby, authorized and
empowered to sign the Real Estate Mortgage and
all documents/instruments with the said bank, for
and in behalf of the Company which are
necessary and pertinent thereto;

That at the meeting of the Stockholders of said

corporation held on August 12, 1994 at 4:00 p.m.,
at which meeting a quorum was present and
acting throughout, the following resolution was
unanimously approved:
STOCKHOLDERS RESOLUTION
RESOLVED, that the stockholders approve, ratify
and confirm, as they have hereby approved,
ratified and confirmed, the board resolution dated
August 12, 1994 appointing Metrobank Trust

Banking Group as the new trustee, presently held

by the Bank of the Philippine Islands, for the
existing MTI of real estate property covered by
Transfer Certificate of Title Nos. 139880 and
139881 situated at 180 Salcedo St., Legaspi
Village, Makati, Metro Manila with an area of
1,608 square meters, and that the President, Mr.
Go Eng Uy[,] to sign the Real Estate Mortgage
and all documents/ instruments with the said
bank, for and in behalf of the Company which are
necessary and pertinent thereto; xxx.

After a careful review of the records of this case,

we find that petitioner failed to establish its right
to be entitled to the proceeds of the MTI.

Reading carefully the Secretarys Certificate, it is

clear that the main purpose of the directors
Resolution was to appoint petitioner as the new
trustee of the previously executed and amended
MTI. Going through the original and the revised
MTI, we find no substantial amendments to the
provisions of the contract. We agree with
petitioner that the act of appointing a new trustee
of the MTI was a regular business transaction.
The appointment necessitated only a decision of
at least a majority of the directors present at the
meeting in which there was a quorum, pursuant
to Section 25 of the Corporation Code.

It is the intent of the COMPANY that the

BORROWERS will obtain additional loans or credit
accommodations from certain other banking or
financial institutions in accordance with
arrangements made by the BORROWERS with the
CREDITORS.

The second paragraph of the directors Resolution

No. 005, s. 1994, which empowered Go Eng Uy
"to sign the Real Estate Mortgage and all
documents/instruments with the said bank, for
and in behalf of the Company which are
necessary and pertinent thereto," must be
construed to mean that such power was limited
by the conditions of the existing mortgage, and
not that a new mortgage was thereby
constituted.
Moreover, it is worthy to note that respondents
do not assail the previous MTI executed with BPI.
They do not question the validity of the mortgage
constituted over all or substantially all of
respondent Centros assets pursuant to the 21
March 1994 MTI in the amount of P 84 million.
Nor do they question the additional loans
increasing the value of the mortgage to P 144
million; or the use of Centros properties as
collateral for the loans of San Carlos, Lucky Two
Corporation, and Lucky Two Repacking.
Thus, Section 4029 of the Corporation Code finds
no application in the present case, as there was
no new mortgage to speak of under the assailed
directors Resolution.
Nevertheless, while we uphold the validity of the
stockholders Resolution appointing Metrobank as
successor-trustee, this is not to say that we
uphold the validity of the extrajudicial foreclosure
of the mortgage.

There is no evidence that petitioner, as creditor

or as trustee, had a cause of action to move for
the extrajudicial foreclosure of the subject
properties mortgaged under the MTI.
The conditions of the MTI are very clear. Section
3.3 of the MTI provides: 30

ALL OBLIGATIONS covered by this INDENTURE

shall be evidenced by a Mortgage Participation
Certificate in the form of Schedule II hereof, the
issuance of which by the TRUSTEE to the
participating CREDITOR/S shall be in accordance
with Section 7 of this INDENTURE, provided the
aggregate LOAN VALUES of the COLLATERAL,
based on the latest appraisal thereof, are not
exceeded. (Emphasis supplied.)
Section 1.11 of the MTI defines a Mortgage
Participation Certificate (MPC) as a certificate
issued by the trustee to a creditor pursuant to the
MTI, representing an aliquot interest in the
mortgage created by the MTI. The face amount of
the MPC is the value in money of its holders
participation or interest in the mortgaged
property.
To address the gaps in the facts as presented by
the parties and by the lower courts, we issued a
Resolution31 on 5 September 2011. We required
petitioner to submit, among others, all
amendments to the MTI and all the MPCs issued.
Petitioner failed to comply with this directive. For
one reason or another, instead of submitting
MPCs evidencing its interest in the MTI, it
submitted to this Court documents referring to
different instruments altogether.32 Petitioner
should have been more careful in complying with
this Courts Orders.
More glaring is the fact that the assailed MTI is
not even referred to in the Promissory Notes
executed by petitioner in favor of San Carlos,
evidencing the loans extended by the latter to
the former. This omission violated Section 1.13 of
the MTI, which requires that a promissory note
must be covered by an outstanding MPC and
secured by the lien of the MTI. The Promissory
Notes reveal the following:33

Petitioner thus miserably failed to prove that it

was entitled to the benefits of the MTI.
Even if we assume that petitioner was indeed a
creditor protected by the MTI, we find that, as
trustee and as creditor, it failed to comply with
the MTIs conditions for granting additional loans
to San Carlos additions that brought the total
loan amount to P 1,178,961,181.45 when it did
not amend the MTI to accommodate the
additional loans in excess of P 144 million.
In its application for an extrajudicial foreclosure of
Centros properties, petitioner states:34
We have the honor to request your good Office to
conduct/undertake extrajudicial foreclosure sale
proceedings under Act No. 3135, as amended,
and other applicable laws, on the properties
covered by the Mortgage Trust Indenture, dated
March 21, 1990, as amended on March 31, 1993
and further amended on July 28, 1994 executed
by the Mortgagor, CENTRO DEVELOPMENT
CORPORATION, in favor of the Former Trustee,
BANK OF THE PHILIPPINE ISLANDS and Trust
Indenture, dated September 27, 1994, also
executed by the Mortgagor, CENTRO
DEVELOPMENT CORPORATION, in favor of the
Mortgagee/Trustee, METROPOLITAN BANK AND
TRUST COMPANY-TRUST BANKING GROUP, to
secure among others, several obligations of SAN
CARLOS MILLING CO., INC. under various
Promissory Notes, with a total principal amount of
EIGHT HUNDRED TWELVE MILLION SEVEN
HUNDRED NINETY-THREE THOUSAND FIVE
HUNDRED THIRTEEN PESOS AND TWENTY-THREE
CENTAVOS (P 812,793,513.23), for breach of the
terms and conditions of the said Trust Indenture.
(Emphasis in the original.)
However, Section 9.4 of the 27 September 1994
MTI clearly states:35
The written consent of the COMPANY, the
TRUSTEE and all the CREDITORS shall be required
for any amendment of the terms and conditions
of this INDENTURE. Additional loans which will be
covered by the INDENTURE shall require the
written consent of the MAJORITY CREDITORS and
shall be within the loan value stipulated in
Section 1.836 of this INDENTURE. (Emphasis
supplied.)
The fact that the foreclosure of the mortgaged
property was undertaken pursuant to the 27
September 1994 MTI is an indication that the
parties had failed to amend it accordingly.
Because the 27 September 1994 MTI was not
amended to secure the loan granted to the
debtors, petitioner could not have applied for an
extrajudicial foreclosure on the basis of all the

Promissory Notes granted to San Carlos. Instead,

petitioner could have only applied for the
foreclosure of the property corresponding to P
144 million, which was the maximum amount
embodied in the 27 September 1994 MTI. In other
words, as an accommodation debtor, Centros
properties may not be liable for San Carlos debts
beyond this maximum amount, pursuant to the
MTI executed with petitioner. In Caltex Philippines
v. Intermediate Appellate Court,37 we likewise
held that the value of the mortgage should be
limited only to the amount provided by the
contract between the parties.
Section 4 of Rule 68 of the Rules of Court
provides:
Disposition of proceeds of sale - The amount
realized from the foreclosure sale of the
mortgaged property shall, after deducting the
costs of the sale, be paid to the person
foreclosing the mortgage, and when there shall
be any balance or residue, after paying off the
mortgage debt due, the same shall be paid to
junior encumbrancers in the order of their
priority, to be ascertained by the court, or if there
be no such encumbrancers or there be a balance
or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the
person entitled to it.
While it is true that some of the documents
required by this Court to be submitted by the
parties were not presented at the trial stage,
when the legal issues raised begs the reception of
that evidence especially considering that a
case, like the present one has been pending for
more than a decade then the Court may require
the parties to submit such evidence in the
interest of justice. This is clearly provided under
Rule 45, Section 7 of the Rules of Court.38
On a final note, Republic Act No. 8971, or the
General Banking Law of 2000, recognizes the vital
role of banks in providing an environment
conducive to the sustained development of the
national economy and the fiduciary nature of
banking; thus, the law requires banks to have
high standards of integrity and performance. The
fiduciary nature of banking requires banks to
assume a degree of diligence higher than that of
a good father of a family.39 In the case at bar,
petitioner itself was negligent in the conduct of
its business when it extended unsecured loans to
the debtors. Worse, it was in serious breach of its
duty as the trustee of the MTI. It was not able to
protect the interests of the parties and was even
instrumental in violating the terms of the MTI, to
the detriment of the parties thereto. Thus,
petitioner has only itself to blame for being left
with insufficient recourse against petitioner under
the assailed MTI.

WHEREFORE, in view of the foregoing, the

Petition is hereby PARTLY GRANTED. The
Mortgage Trust Indenture is declared
VALID.1wphi1 Nonetheless, for reasons stated
herein, the Decision of the Court of Appeals in
CA-G.R. CV No. 80778, declaring the foreclosure
proceedings in Foreclosure No. S-04-011 over TCT
Nos. 139880 and 139881 of no force and effect, is
AFFIRMED. Likewise, the cancellation of the
Certificates of Title in the name of petitioner
Metropolitan Bank and Trust Company and the
denial of the payment of damages are also
AFFIRMED.

Thereafter, on 13 August 1984, Salita filed with

the RTC a case for Reconveyance, Annulment of
Title and Damages against petitioner. She prayed
for the nullification of foreclosure proceedings
and the reconveyance of the property now
covered by TCT No. 299440. The RTC granted her
prayer.

SO ORDERED.

Pursuant to Section 7 of Act 3135, petitioner filed

with the RTC an Ex-Parte Petition for the Issuance
of a Writ of Possession.5 The Court, through its
Order dated 14 February 2007, required
petitioner to present its evidence. Petitioner then
submitted a Memorandum of Jurisprudence (In
Lieu of Oral Testimony).6

ROYAL SAVINGS BANK, formerly Comsavings

Bank, now GSIS FAMILY BANK, Petitioner,
vs.FERNANDO ASIA, MIKE LATAG, CORNELIA
MARANAN, JIMMY ONG, CONRADO
MACARALAYA, ROLANDO SABA, TOMAS
GALLEGA, LILIA FEDELIMO, MILAGROS
HAGUTAY and NORMA GABATIC (Collectively
referred to as respondents Asia, et al.)
represented by their counsel on record,
ATTY. ROGELIO U. CONCEPCION.,
Respondent.
This is a Petition for Review1 filed by Royal
Savings Bank (petitioner), praying for the reversal
of the Orders dated 4 October 20072 and 25 June
2008,3 which were rendered by Branch 222 of the
RegionTrial Court of Quezon City (RTC) in LRC No.
Q-22780 (07). These Orders granted respondents'
Urgent Motion to Quash the Writ of Possession
and Writ of Execution4 issued by the then
presiding judge of the RTC in petitioner's favor.
Sometime in January 1974, Paciencia Salita
(Salita) and her nephew, Franco Valenderia
(Valenderia), borrowed the amount of 25,000
from petitioner. The latter loaned to them an
additional 20,000 in May 1975. To secure the
payment of the aforementioned amounts loaned,
Salita executed a Real Estate Mortgage over her
property, which was covered by Transfer
Certificate of Title (TCT) No. 103538.
Notwithstanding demands, neither Salita nor
Valenderia were able to pay off their debts.
As a result of their failure to settle their loans,
petitioner instituted an extra-judicial foreclosure
proceeding against the Real Estate Mortgage.
Pursuant to Act No. 3135, the mortgaged
property was sold at a public auction held on 16
October 1979, at which petitioner was the highest
bidder. On 23 April 1983, the redemption period
expired. Both Salita and Valenderia failed to
redeem the foreclosed property. Thus, TCT No.
103538 was cancelled and a new title covering
the same property, TCT No. 299440, was issued
in petitioners name.

Petitioner appealed to the Court of Appeals (CA),

which reversed the Decision of the RTC. Since
Salita did not appeal the CA ruling, it became
final and executory. Accordingly, the Entry of
Judgment was issued on 4 June 2002.

In a Decision dated 28 May 2007,7 the RTC ruled

in favor of petitioner and ordered the issuance of
the Writ of Possession in the latters favor.
Respondents Fernando Asia, Mika Latag, Cornelia
Maranan, Jimmy Ong, Conrado Macaralaya,
Rolando Saba, Tomas Gallega, Lilia Fedelimo,
Milagros Hagutay and Norma Gabatic claimed to
have been in open, continuous, exclusive and
notorious possession in the concept of owners
of the land in question for 40 years.8 Allegedly,
they had no knowledge and notice of all
proceedings involving the property until they
were served a Notice to Vacate9 by RTC Sheriff IV
Neri Loy, on 20 July 2007.10 They further claimed
that, prior to the service of the Notice to Vacate,
they had no knowledge or notice of the lower
courts proceedings or the foreclosure suit of
petitioner.11
The Notice to Vacate gave respondents three
days or until 25 July 2007 to voluntarily vacate
the property. In order to prevent the execution of
the notice, they filed an Urgent Motion to Quash
Writ of Possession and Writ of Execution12 on
even date.
Petitioner filed their Comment13 on respondents
Motion to Quash on 14 August 2007.
In an Order dated 4 October 2007,14 the RTC
granted the Motion to Quash. Petitioner filed a
Motion for Reconsideration (MR),15 to which an
Opposition was filed by respondents.16 Petitioner
claimed that, six months after the filing of the
Opposition, there was still no action taken by the
RTC on the MR. Thus, it filed a Motion for Early
Resolution17 on 16 June 2008. Through an Order

dated 25 June 2008,18 the RTC denied

petitioners MR.
Claiming that it raises no factual issues,
petitioner came straight to this Court through a
Petition for Review under Rule 45 of the Rules on
Civil Procedure.
Petitioner insists that because it is a governmentowned financial institution, the general rules on
real estate mortgage found in Act 3135 do not
apply to it. It prays that this Court rule that
Presidential Decree (P.D.) No. 38519the law
intended specifically to govern mortgage
foreclosures initiated by government-owned
financial institutionsshould be applied to this
case.
According to petitioner, when the RTC quashed
the Writ of Possession,20 the latter violated
Section 2 of P.D. 385, which reads:
Section 2. No restraining order, temporary or
permanent injunction shall be issued by the court
against any government financial institution in
any action taken by such institution in compliance
with the mandatory foreclosure provided in
Section 1 hereof, whether such restraining order,
temporary or permanent injunction is sought by
the borrower(s) or any third party or parties,
except after due hearing in which it is established
by the borrower and admitted by the government
financial institution concerned that twenty
percent (20%) of the outstanding arrearages has
been paid after the filing of foreclosure
proceedings.
Thus, petitioner is now saying that, as a
government financial institution (GFI), it cannot
be enjoined from foreclosing on its delinquent
accounts in observance of the mandate of P.D.
385.
We are not persuaded.
Assuming that petitioner is, as it claims, a GFI
protected under P.D. 385, this Court is still of the
opinion and thus rules that the RTC committed no
error in granting respondents Urgent Motion to
Quash Writ of Possession.
Indeed, while this Court had already declared in
Philippine National Bank v. Adil21 that once the
property of a debtor is foreclosed and sold to a
GFI, it would be mandatory for the court to place
the GFI in the possession and control of the
propertypursuant to Section 4 of P.D. No. 385
this rule should not be construed as absolute or
without exception.
The evident purpose underlying P.D. 385 is
sufficiently served by allowing foreclosure
proceedings initiated by GFIs to continue until a

judgment therein becomes final and executory,

without a restraining order, temporary or
permanent injunction against it being issued. But
if a parcel of land is occupied by a party other
than the judgment debtor, the proper procedure
is for the court to order a hearing to determine
the nature of said adverse possession before it
issues a writ of possession.22
This is because a third party, who is not privy to
the debtor, is protected by the law. Such third
party may be ejected from the premises only
after he has been given an opportunity to be
heard, to comply with the time-honored principle
of due process.23
In the same vein, under Section 33 of Rule 39 of
the Rules on Civil Procedure, the possession of a
mortgaged property may be awarded to a
purchaser in the extrajudicial foreclosure, unless
a third party is actually holding the property
adversely vis--vis the judgment debtor.24
Respondents insist that they are actual
possessors in the concept of owners and that
they have been occupying the land in the concept
of owners for 40 years already.25 Furthermore,
respondents made it clear in the Motion to Quash
that they were not "claiming rights as attorney-infact, nor lessee, nor anything from Mortgagor
PACENCIA SALITA."26 Thus, whatever rights Salita
had over the property that were acquired by
petitioner when the latter purchased it, cannot be
used against respondents, as their claim is
adverse to that of Salita.
In the eyes of this Court, the RTC did not err in
issuing the herein assailed Orders on the basis of
its initial finding that respondents are third
parties who are actually holding the property
adversely vis--vis the judgment debtor. The RTC
did not err in applying the doctrine laid down in
Barican v. Intermediate Appellate Court,27 in
which we ruled that the obligation of a court to
issue a writ of possession in favor of the
purchaser in an extrajudicial foreclosure sale
ceases to be ministerial, once it appears that
there is a third party who is in possession of the
property and is claiming a right adverse to that of
the debtor/mortgagor.
We explained in Philippine National Bank v.
Austria28 that the foregoing doctrinal
pronouncements are not without support in
substantive law, to wit:
x x x. Notably, the Civil Code protects the actual
possessor of a property, to wit:

Art. 433.Actual possession under claim of

ownership raises a disputable presumption of
ownership. Thtrue owner must resort to judicial
process for the recovery of the property.
Under the aforequoted provision, one who claims
to be the owner of a property possessed by
another must bring the appropriate judicial action
for its physical recovery. The term "judicial
process" could mean no less than an ejectment
suit or reivindicatory action, in which the
ownership claims of the contending parties may
be properly heard and adjudicated.
We find that it was only proper for the RTC to
quash the Writ of Possession until a determination
is made as to who, between petitioner and
respondents, has the better right to possess the
property.
Lastly, petitioner alleges that the pairing judge
violated the hierarchy of courts when she
quashed the writ of possession validly issued by
the then presiding Judge of the RTC Quezon City,
a co-equal body.29
No court has the power to interfere by injunction
in the issuance or enforcement of a writ of
possession issued by another court of concurrent
jurisdiction having the power to issue that writ.30
However, as correctly pointed out by respondents
in their Comment, it was the same trial court and
"not another court or co-equal court body that
quashed the subject writ of possession."31 The
pairing judge, who issued the Order quashing the
Writ of Possession, issued it in her capacity as the
judge of Branch 222 of Quezon City-the same
branch, albeit then under a different judge, that
issued the Writ of Possession.1wphi1

reversible error in the assailed judgment4 of the

Court of Appeals (CA).
Petitioners insist that it was error for the CA to
rule that the stipulated exclusive venue of Makati
City is binding only on petitioners complaint for
Annulment of Foreclosure, Sale, and Damages
filed before the Regional Trial Court of Paraaque
City, but not on respondent banks Petition for
Extrajudicial Foreclosure of Mortgage, which was
filed with the same court.
We disagree.
The extrajudicial foreclosure sale of a real estate
mortgage is governed by Act No. 3135, as
amended by Act No. 4118, otherwise known as
"An Act to Regulate the Sale of Property Under
Special Powers Inserted In or Annexed to RealEstate Mortgages." Sections 1 and 2 thereof
clearly state:
Section 1. When a sale is made under a special
power inserted in or attached to any real-estate
mortgage hereafter made as security for the
payment of money or the fulfillment of any other
obligation, the provisions of the following sections
shall govern as to the manner in which the sale
and redemption shall be effected, whether or not
provision for the same is made in the power.
Sec. 2. Said sale cannot be made legally outside
of the province in which the property sold is
situated; and in case the place within said
province in which the sale is to be made is the
subject of stipulation, such sale shall be made in
said place or in the municipal building of the
municipality in which the property or part thereof
is situated.5

With respect to all the arguments raised by the

parties to prove their supposed rightful
possession or ownership of the property, suffice it
to say that these matters should be threshed out
m an appropriate action filed specifically for their
resolution.

The case at bar involves petitioners mortgaged

real property located in Paraaque City over
which respondent bank was granted a special
power to foreclose extra-judicially. Thus, by
express provision of Section 2, the sale can only
be made in Paraaque City.

WIHEREFORE, the instant Petition is DENIED. The

4 October 2007 and 25 June 2008 Orders issued
by Branch 222 of Regional Trial Court of Quezon
City in LRC No. Q-22780 (07) arc AFFIRMED.

The exclusive venue of Makati City, as stipulated

by the parties6 and sanctioned by Section 4, Rule
4 of the Rules of Court,7 cannot be made to apply
to the Petition for Extrajudicial Foreclosure filed
by respondent bank because the provisions of
Rule 4 pertain to venue of actions, which an
extrajudicial foreclosure is not.

SO ORDERED.
SPOUSES HERMES P. OCHOA and ARACELI D.
OCHOA, Petitioners, vs.CHINA BANKING
CORPORATION, Respondent.
For resolution is petitioners motion for
reconsideration1 of our January 17, 2011
Resolution2 denying their petition for review on
certiorari3 for failing to sufficiently show any

Pertinent are the following disquisitions in Supena

v. De la Rosa:8
Section 1, Rule 2 [of the Rules of Court] defines
an action in this wise:
"Action means an ordinary suit in a court of
justice, by which one party prosecutes another

for the enforcement or protection of a right, or

the prevention or redress of a wrong."
Hagans v. Wislizenus does not depart from this
definition when it states that "[A]n action is a
formal demand of one's legal rights in a court of
justice in the manner prescribed by the court or
by the law. x x x." It is clear that the
determinative or operative fact which converts a
claim into an "action or suit" is the filing of the
same with a "court of justice." Filed elsewhere, as
with some other body or office not a court of
justice, the claim may not be categorized under
either term. Unlike an action, an extrajudicial
foreclosure of real estate mortgage is initiated by
filing a petition not with any court of justice but
with the office of the sheriff of the province where
the sale is to be made.1avvphi1 By no stretch of
the imagination can the office of the sheriff come
under the category of a court of justice. And as
aptly observed by the complainant, if ever the
executive judge comes into the picture, it is only
because he exercises administrative supervision
over the sheriff. But this administrative
supervision, however, does not change the fact
that extrajudicial foreclosures are not judicial
proceedings, actions or suits.9
These pronouncements were confirmed on
August 7, 2001 through A.M. No. 99-10-05-0,
entitled "Procedure in Extra-Judicial Foreclosure of
Mortgage," the significant portions of which
provide:
In line with the responsibility of an Executive
Judge under Administrative Order No. 6, date[d]
June 30, 1975, for the management of courts
within his administrative area, included in which
is the task of supervising directly the work of the
Clerk of Court, who is also the Ex-Office Sheriff,
and his staff, and the issuance of commissions to
notaries public and enforcement of their duties
under the law, the following procedures are
hereby prescribed in extra-judicial foreclosure of
mortgages:
1. All applications for extrajudicial foreclosure of
mortgage whether under the direction of the
sheriff or a notary public, pursuant to Act 3135,
as amended by Act 4118, and Act 1508, as
amended, shall be filed with the Executive Judge,
through the Clerk of Court who is also the ExOfficio Sheriff.
Verily then, with respect to the venue of
extrajudicial foreclosure sales, Act No. 3135, as
amended, applies, it being a special law dealing
particularly with extrajudicial foreclosure sales of
real estate mortgages, and not the general
provisions of the Rules of Court on Venue of
Actions.

Consequently, the stipulated exclusive venue of

Makati City is relevant only to actions arising from
or related to the mortgage, such as petitioners
complaint for Annulment of Foreclosure, Sale, and
Damages.
The other arguments raised in the motion are a
mere reiteration of those already raised in the
petition for review. As declared in this Courts
Resolution on January 17, 2011, the same failed
to show any sufficient ground to warrant the
exercise of our appellate jurisdiction.
WHEREFORE, premises considered, the motion for
reconsideration is hereby DENIED.
PHILIPPINE SAVINGS BANK, Petitioner, vs.
SPOUSES DIONISIO GERONIMO and CARIDAD
GERONIMO, Respondents.
The Case
This petition for review1 assails the 30 August
2005 Decision2 and 3 November 2005
Resolution3 of the Court of Appeals in CA-G.R. CV
No. 66672. The Court of Appeals reversed the
decision of Branch 121 of the Regional Trial Court
of Caloocan City, National Capital Region (trial
court) by declaring void the questioned
extrajudicial foreclosure of real estate mortgage
for non-compliance with the statutory
requirement of publication of the notice of sale.
The Facts
On 9 February 1995, respondents Spouses
Dionisio and Caridad Geronimo (respondents)
obtained a loan from petitioner Philippine Savings
Bank (petitioner) in the amount of P3,082,000,
secured by a mortgage on respondents land
situated in Barrio Talipapa, Caloocan City and
covered by Transfer Certificate of Title No. C50575.4 Respondents defaulted on their loan,
prompting petitioner to initiate the extra-judicial
foreclosure of the real estate mortgage. At the
auction sale conducted on 29 March 1996, the
mortgaged property was sold to petitioner,5
being the highest bidder, for P3,000,000.
Consequently, a Certificate of Sale was issued in
favor of petitioner.6
Claiming that the extrajudicial foreclosure was
void for non-compliance with the law, particularly
the publication requirement, respondents filed
with the trial court a complaint for the annulment
of the extrajudicial foreclosure.7
The trial court sustained the validity of the
extrajudicial foreclosure, and disposed of the case
as follows:
WHEREFORE, premises considered, the instant
Complaint for Annulment of Foreclosure of

Mortgage and Damages is hereby DISMISSED for

lack of merit.

Court of Caloocan City to inform the appellate

court of the following facts:

SO ORDERED.8

1. If Ang Pinoy newspaper is a newspaper of

general circulation particularly for the years 1995
and 1996; and

On appeal, the Court of Appeals held:

WHEREFORE, the assailed decision dated 26
November 1999 of the Regional Trial Court of
Caloocan City is REVERSED and SET ASIDE. The
Extrajudicial Foreclosure of Mortgage conducted
on 29 March 1996 is declared NULL and VOID.
SO ORDERED.9
The Court of Appeals denied petitioners motion
for reconsideration.
Hence, this petition.
The Ruling of the Trial Court
The trial court held that "personal notice on the
mortgagor is not required under Act No. 3135."
All that is required is "the posting of the notices
of sale for not less than 20 days in at least three
public places in the municipality or city where the
property is situated, and publication once a week
for at least three consecutive weeks in a
newspaper of general circulation in the
municipality or city, if the property is worth more
than four hundred pesos."
The trial court further ruled there was compliance
with the statutory publication requirement. Since
the affidavit of publication was excluded as
petitioners evidence, the trial court relied instead
on the positive testimony of Deputy Sheriff
Alberto Castillo, that he caused the publication of
the Notice of Sale, in holding there was
publication of the notice of sale in a newspaper of
general circulation. In relation to this, the trial
court cited the presumption of regularity in the
performance of official duty. The trial court found
that respondents, as plaintiffs, failed to discharge
their burden of proving petitioners alleged noncompliance with the requisite publication. The
trial court stated that the testimony of
respondents witness, a newsstand owner, "that
he has never sold Ang Pinoy newspaper can
never lead to the conclusion that such publication
does not exist."
The Ruling of the Court of Appeals
The Court of Appeals reversed the ruling of the
trial court.
The Court of Appeals found no sufficient evidence
to prove that Ang Pinoy is a newspaper of general
circulation in Caloocan City. In a Resolution dated
2 February 2005, the Court of Appeals required
the then Executive Judge of the Regional Trial

2. If there was compliance with Sec. 2 of P.D. No.

1079 which provides:
"The executive judge of the court of first instance
shall designate a regular working day and a
definite time each week during which the said
judicial notices or advertisements shall be
distributed personally by him for publication to
qualified newspapers or periodicals x x x, which
distribution shall be done by raffle."10
Executive Judge Victoria Isabel A. Paredes
(Executive Judge Paredes) complied with the
directive by stating that:
a) Ang Pinoy newspaper is not an accredited
periodical in Caloocan City. Hence, we are unable
tocategorically state whether it is a newspaper of
general circulation at present or for the years
1995 and 1996 (Certification marked as Annex
"A")
b) Sec. 2, P.D. No. 1079 is being observed and
complied with in that the raffle of judicial notices
for publication, is a permanent agenda item in
the regular raffle with the RTC, Caloocan City,
holds every Monday at 2 oclock in the afternoon
at the courtroom of RTC, Branch 124 (Certification
marked as Annex "B"); and
c) We have no knowledge on whether Ang Pinoy
was included in the raffles conducted in 1995 and
1996, as we do not have the case record where
the information may be verified.11
The Court of Appeals concluded that, based on
the compliance of Executive Judge Paredes, Ang
Pinoy is not a newspaper of general circulation in
Caloocan City. Therefore, the extrajudicial
foreclosure is void for non-compliance with the
requirement of the publication of the notice of
sale in a newspaper of general circulation.
The Issue
Basically, the issue in this case is whether the
extra-judicial foreclosure is void for noncompliance with the publication requirement
under Act No. 3135.
The Ruling of the Court
The petition lacks merit.
Section 3 of Act No. 313512 reads:

SECTION 3. 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. (Emphasis supplied)
Petitioner claims that it complied with the above
provision in foreclosing extrajudicially the subject
real estate mortgage. To buttress its claim,
petitioner presented the testimony of Deputy
Sheriff Alberto Castillo of the trial court, the
pertinent portion of which states:
On the other hand, respondents dispute the
existence of the publication of the notice of sale.
Assuming that the notice of sale was published,
respondents contend that Ang Pinoy, where it was
published, is not a newspaper of general
circulation. To bolster their claim of nonpublication, respondents offered the testimony of
Danilo Magistrado, a newsstand owner, which
pertinently states:
Before resolving the principal issue, we
must point out the requirement of accreditation
was imposed by the Court only in 2001, through
A.M. No. 01-1-07-SC or the Guidelines in the
Accreditation of Newspapers and Periodicals
Seeking to Publish Judicial and Legal Notices and
Other Similar Announcements and in the Raffle
Thereof.14 The present case involves an
extrajudicial foreclosure conducted in 1996; thus,
there were no such guidelines in effect during the
questioned foreclosure. At any rate, the
accreditation by the Executive Judge is not
decisive of whether a newspaper is of general
circulation.15
It is settled that for the purpose of
extrajudicial foreclosure of mortgage, the party
alleging non-compliance with the requisite
publication has the burden of proving the
same.16 In this case, respondents presented the
testimony of a newsstand owner to prove that
Ang Pinoy is not a newspaper of general
circulation. However, this particular evidence is
unreliable, as the same witness testified that he
sells newspapers in Quezon City, not in Caloocan
City, and that he is unaware of Ang Pinoy
newspaper simply because he is not selling the
same and he had not heard of it. His testimony
states:

Notwithstanding, petitioner could have easily

produced the affidavit of publication and other
competent evidence (such as the published
notices) to refute respondents claim of lack of
publication of the notice of sale. In Spouses Pulido
v. Court of Appeals,18 the Court held:
While it may be true that the party alleging noncompliance with the requisite publication has the
burden of proof, still negative allegations need
not be proved even if essential to ones cause of
action or defense if they constitute a denial of the
existence of a document the custody of which
belongs to the other party.
In relation to the evidentiary weight of the
affidavit of publication, the Court ruled in China
Banking Corporation v. Spouses Martir19 that the
affidavit of publication executed by the account
executive of the newspaper is prima facie proof
that the newspaper is generally circulated in the
place where the properties are located.20
In the present case, the Affidavit of Publication or
Exhibit "8," although formally offered by
petitioner, was excluded by the trial court for
being hearsay.21 Petitioner never challenged the
exclusion of the affidavit of publication. Instead,
petitioner relies solely on the testimony of Deputy
Sheriff Alberto Castillo to prove compliance with
the publication requirement under Section 3 of
Act No. 3135. However, there is nothing in such
testimony to clearly and convincingly prove that
petitioner complied with the mandatory
requirement of publication. When Sheriff Castillo
was asked how he knew that the notice of sale
was published, he simply replied that "during the
auction sale the mortgagee bank presented the
affidavit of publication."22 Evidently, such an
answer does not suffice to establish petitioners
claim of compliance with the statutory
requirement of publication. On the contrary,
Sheriff Castillos testimony reveals that he had no
personal knowledge of the actual publication of
the notice of sale, much less the extent of the
circulation of Ang Pinoy.
Moreover, the Court notes that Ang Pinoy is a
newspaper of general circulation printed and
published in Manila, not in Caloocan City where
the mortgaged property is located, as indicated in
the excluded Affidavit of Publication. This is
contrary to the requirement under Section 3 of
Act No. 3135 pertaining to the publication of the
notice of sale in a newspaper of general
circulation in the city where the property is
situated. Hence, even if the Affidavit of
Publication was admitted as part of petitioners
evidence, it would not support petitioners case
as it does not clearly prove petitioners
compliance with the publication requirement.

Petitioners invocation of the presumption of

regularity in the performance of official duty on
the part of Sheriff Castillo is misplaced. While
posting the notice of sale is part of a sheriffs
official functions,23 the actual publication of the
notice of sale cannot be considered as such, since
this concerns the publishers business. Simply
put, the sheriff is incompetent to prove that the
notice of sale was actually published in a
newspaper of general circulation.
The Court further notes that the Notice of ExtraJudicial Sale,24 prepared and posted by Sheriff
Castillo, does not indicate the newspaper where
such notice would be published. The space
provided where the name of the newspaper
should be was left blank, with only the dates of
publication clearly written. This omission raises
serious doubts as to whether there was indeed
publication of the notice of sale.1avvphi1
Once again, the Court stresses the importance of
the notice requirement, as enunciated in
Metropolitan Bank and Trust Company, Inc. v.
Peafiel,25 thus:
The object of a notice of sale is to inform the
public of the nature and condition of the property
to be sold, and of the time, place and terms of
the sale. Notices are given for the purpose of
securing bidders and to prevent a sacrifice [sale]
of the property. The goal of the notice
requirement is to achieve a "reasonably wide
publicity" of the auction sale. This is why
publication in a newspaper of general circulation
is required. The Court has previously taken
judicial notice of the "far-reaching effects" of
publishing the notice of sale in a newspaper of
general circulation.
In addition, the Court reminds mortgagees of
their duty to comply faithfully with the statutory
requirements of foreclosure. In Metropolitan Bank
v. Wong,26 the Court declared:
While the law recognizes the right of a bank to
foreclose a mortgage upon the mortgagors
failure to pay his obligation, it is imperative that
such right be exercised according to its clear
mandate. Each and every requirement of the law
must be complied with, lest, the valid exercise of
the right would end. It must be remembered that
the exercise of a right ends when the right
disappears, and it disappears when it is abused
especially to the prejudice of others.
In sum, petitioner failed to establish its
compliance with the publication requirement
under Section 3 of Act No. 3135. Consequently,
the questioned extrajudicial foreclosure of real
estate mortgage and sale are void.27

WHEREFORE, we DENY the petition. We AFFIRM

the 30 August 2005 Decision and 3 November
2005 Resolution of the Court of Appeals in CAG.R. CV No. 66672.
SO ORDERED.
BANK OF THE PHILIPPINE ISLANDS, AS
SUCCESSOR-IN-INTEREST OF FAR EAST
BANK & TRUST COMPANY, Petitioner,
vs.CYNTHIA L. REYES, Respondent.
This is a petition for review on certiorari under
Rule 45 of the 1997 Rules of Civil Procedure of the
Decision1 dated April 30, 2008 of the Court of
Appeals in CA-G.R. CV No. 88004, entitled "Bank
of the Philippine Islands, as successor-in-interest
of Far East Bank & Trust Company vs. Cynthia L.
Reyes" which reversed the Decision2 dated
November 3, 2005 of the Regional Trial Court
(RTC) of Makati City, Branch 148 in Civil Case No.
03-180.
The background facts of this case, as summed by
the trial court, follow:
This is an action for sum of money filed [b]y
[p]laintiff Bank of the Philippine Islands,
hereinafter referred to as BPI, as successor-ininterest of Far East Bank & Trust Company,
referred hereto as Far East Bank, against
defendant Cynthia L. Reyes, hereinafter referred
to as defendant Reyes.
As alleged in the Complaint, defendant Reyes
borrowed, renewed and received from Far East
Bank the principal of Twenty Million Nine Hundred
Thousand Pesos [sic] (P20,950,000.00). In
support of such allegation, four promissory notes
were presented during the course of the trial of
the case. As security for the obligation, defendant
Reyes executed Real Estate Mortgage
Agreements involving twenty[-]two (22) parcels
of land. When the debt became due and
demandable, the defendant failed to settle her
obligation and the plaintiff was constrained to
foreclose the properties. As alleged, after due
publication, the mortgaged properties were sold
at public auction on December 20, 2001 by the
Office of the Clerk of Court & Ex-Officio Sheriff of
the Regional Trial Court of Malolos, Bulacan.
At the public auction, the mortgaged properties
were awarded to BPI in consideration of its
highest bid price amounting to Nine Million
Thirty[-]Two Thousand Nine Hundred Sixty Pesos
(P9,032,960.00). On said date, the obligation
already reached Thirty Million Forty (sic) Hundred
Twenty Thousand Forty[-]One & 67/100 Pesos
(P30,420,041.67), inclusive of interest but
excluding attorneys fees, publication and other
charges. After applying the proceeds of the public

auction to the outstanding obligation, there

remains to be a deficiency and defendant Reyes
is still indebted, as of January 20, 2003, to the
plaintiff in the amount of P24,545,094.67, broken
down as follows:

An appeal with the Court of Appeals was filed by

respondent. This resulted in a reversal of the trial
courts judgment via an April 30, 2008 Decision
by the Court of Appeals, the dispositive portion of
which states:

Principal

WHEREFORE, the instant appeal is GRANTED. The

assailed Decision dated November 3, 2005 is
hereby REVERSED AND SET ASIDE.7

P19,700,000.00

Unsatisfied Interest
Interest

2,244,694.67

2,383,700.00Penalty 216,700.00

TOTAL P24,545,094.67
Also included in the prayer of the plaintiff is the
payment of attorneys fees of at least Five
Hundred Thousand Pesos and the cost of suit.
In the Answer, the defendant claims that based
on the plaintiffs appraisal of the properties
mortgaged to Far East Bank, the twenty[-]two
properties fetched a total appraisal value of
P47,436,000.00 as of January 6, 1998. This
appraisal value is evidenced by the Appraisal,
which is attached as Annex 1 of the Answer.
Considering the appraisal value and the
outstanding obligation of the defendant, it
appears that the mortgaged properties sold
during the public auction are more than enough
as payment to the outstanding obligation of the
defendant.3
Subsequently, upon petitioners motion, the trial
court issued an Order4 dated October 6, 2005
recognizing Asset Pool A (SPV-AMC), Inc. as
substitute plaintiff in lieu of petitioner.
After due trial, the trial court rendered its
Decision dated November 3, 2005, the dispositive
portion of which states:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of plaintiff BANK OF THE
PHILIPPINE ISLANDS, as successor-in-interest of
Far East Bank & Trust Company, and against
defendant CYNTHIA L. REYES. Accordingly, the
defendant is ordered:
1. To pay the plaintiff the amount of
Php22,083,700.00, representing said defendants
outstanding obligation, plus interest at the rate of
twelve percent (12%) per annum, computed from
January 20, 2003 until the whole amount is fully
paid;
2. To pay plaintiff the amount of Php200,000.00
as attorneys fees;
3. Costs of suit against the defendant.5
Respondent filed a motion for reconsideration but
the same was denied by the trial court through an
Order6 dated January 9, 2006.

Aggrieved, petitioner filed the instant petition in

which the following issues were put into
consideration:
A. WHETHER OR NOT THERE WAS DEFICIENCY
WHEN RESPONDENTS PROPERTY WHICH SHE
SUPPOSEDLY VALUED AT P47,536,000.00 WAS
SOLD AT THE EXTRA-JUDICIAL FORECLOSURE
SALE AT ONLY [P9,032,960.00] BY PETITIONER;
B. WHETHER OR NOT RESPONDENTS PROPERTY
WAS OVERVALUED WHEN IT WAS MORTGAGED TO
FEBTC/BPI;
C. WHETHER OR NOT RESPONDENT CAN RAISE
THE ISSUE ON THE NULLITY OF THE EXTRAJUDICIAL FORECLOSURE SALE IN AN ACTION
FILED BY THE PETITIONER (CREDITORMORTGAGEE) FOR THE RECOVERY OF DEFICIENCY
AND FOR THE FIRST TIME ON APPEAL;
D. WHETHER OR NOT THE PRICE OF
P9,032,960.00 FOR RESPONDENTS PROPERTY AT
THE EXTRAJUDICIAL FORECLOSURE SALE WAS
UNCONCIONABLE OR SHOCKING TO THE
CONSCIENCE OR GROSSLY INADEQUATE.
E. WHETHER OR NOT THE PETITION RAISES
QUESTIONS OF LAW AND THE QUESTIONS OF
FACT RAISED FALL WITHIN THE EXCEPTIONS TO
THE RULE THAT ONLY QUESTIONS OF LAW MAY BE
REVIEWED BY THIS HONORABLE COURT UNDER
RULE 45 OF THE RULES OF COURT.8
On the other hand, respondent submits the
following issues:
Whether or not the Court of Appeals erred in
ruling that there exists no deficiency owed by
mortgagor-debtor as the mortgagee-creditor bank
acquired the mortgaged property at the
foreclosure sale worth P47,536,000 at only
P9,032,960;
Whether or not the Court of Appeals erred in
ruling that the properties of the respondent were
not overvalued at P47,536,000;
Whether or not the Court of Appeals erred in
entertaining the issue that the foreclosure sale
was null and void;

Whether or not the Court of Appeals erred in

ruling that the purchase price of P9,032,000 at
the foreclosure sale of respondents mortgaged
properties was unconscionable or grossly
inadequate.9
After consideration of the issues and arguments
raised by the opposing sides, the Court finds the
petition meritorious.
Stripped of surplusage, the singular issue in this
case is whether or not petitioner is entitled to
recover the unpaid balance or deficiency from
respondent despite the fact that respondents
property, which were appraised by petitioners
predecessor-in-interest at P47,536,000.00, was
sold and later bought by petitioner in an
extrajudicial foreclosure sale for only
P9,032,960.00 in order to satisfy respondents
outstanding obligation to petitioner which, at the
time of the sale, amounted to P30,420,041.67
inclusive of interest but excluding attorneys fees,
publication and other charges.
There is no dispute with regard to the total
amount of the outstanding loan obligation that
respondent owed to petitioner at the time of the
extrajudicial foreclosure sale of the property
subject of the real estate mortgage. Likewise, it is
uncontested that by subtracting the amount
obtained at the sale of the property, a loan
balance still remains. Petitioner merely contends
that, contrary to the ruling of the Court of
Appeals, it has the right to collect from the
respondent the remainder of her obligation after
deducting the amount obtained from the
extrajudicial foreclosure sale. On the other hand,
respondent avers that since petitioners
predecessors own valuation of the subject
property shows that its value is more than the
amount of respondents outstanding obligation,
then respondent cannot be held liable for the
balance especially because it was petitioner who
bought the property at the foreclosure sale.
In the recent case of BPI Family Savings Bank,
Inc. v. Avenido,10 we reiterated the wellentrenched rule that a creditor is not precluded
from recovering any unpaid balance on the
principal obligation if the extrajudicial foreclosure
sale of the property subject of the real estate
mortgage results in a deficiency, to wit:
It is settled that if "the proceeds of the sale are
insufficient to cover the debt in an extrajudicial
foreclosure of mortgage, the mortgagee is
entitled to claim the deficiency from the debtor.
While Act No. 3135, as amended, does not
discuss the mortgagees right to recover the
deficiency, neither does it contain any provision
expressly or impliedly prohibiting recovery. If the
legislature had intended to deny the creditor the

right to sue for any deficiency resulting from the

foreclosure of a security given to guarantee an
obligation, the law would expressly so provide.
Absent such a provision in Act No. 3135, as
amended, the creditor is not precluded from
taking action to recover any unpaid balance on
the principal obligation simply because he chose
to extrajudicially foreclose the real estate
mortgage."11
Furthermore, we have also ruled in Suico Rattan
& Buri Interiors, Inc. v. Court of Appeals12 that, in
deference to the rule that a mortgage is simply a
security and cannot be considered payment of an
outstanding obligation, the creditor is not barred
from recovering the deficiency even if it bought
the mortgaged property at the extrajudicial
foreclosure sale at a lower price than its market
value notwithstanding the fact that said value is
more than or equal to the total amount of the
debtors obligation. We quote from the relevant
portion of said decision:
Hence, it is wrong for petitioners to conclude that
when respondent bank supposedly bought the
foreclosed properties at a very low price, the
latter effectively prevented the former from
satisfying their whole obligation. Petitioners still
had the option of either redeeming the properties
and, thereafter, selling the same for a price which
corresponds to what they claim as the properties
actual market value or by simply selling their
right to redeem for a price which is equivalent to
the difference between the supposed market
value of the said properties and the price
obtained during the foreclosure sale. In either
case, petitioners will be able to recoup the loss
they claim to have suffered by reason of the
inadequate price obtained at the auction sale
and, thus, enable them to settle their obligation
with respondent bank. Moreover, petitioners are
not justified in concluding that they should be
considered as having paid their obligations in full
since respondent bank was the one who acquired
the mortgaged properties and that the price it
paid was very inadequate. The fact that it is
respondent bank, as the mortgagee, which
eventually acquired the mortgaged properties
and that the bid price was low is not a valid
reason for petitioners to refuse to pay the
remaining balance of their obligation. Settled is
the rule that a mortgage is simply a security and
not a satisfaction of indebtedness.13 (Emphases
supplied.)
We are aware of our earlier
pronouncements in Cometa v. Court of Appeals14
and in Rosales v. Court of Appeals15 which were
cited by the Court of Appeals in its assailed April
30, 2008 Decision, wherein we declared that a
sale price which is equivalent to more or less
twelve percent (12%) of the value of the property

is shockingly low, unconscionable and grossly

inadequate, thus, warranting a nullification of the
foreclosure sale. In both cases, we declared that
where the inadequacy of the price is purely
shocking to the conscience, such that the mind
revolts at it and such that a reasonable man
would neither directly nor indirectly be likely to
consent to it, the sale shall be declared null and
void. On the other hand, we are likewise
reminded of our ruling in Cortes v. Intermediate
Appellate Court16 and in Ponce De Leon v.
Rehabilitation Finance Corporation17 wherein we
upheld the validity of foreclosure sales in which
the property subject thereof were sold at 11%
and 17%, respectively, of their value.
In the case at bar, the winning bid price of
P9,032,960.00 is nineteen percent (19%) of the
appraised value of the property subject of the
extrajudicial foreclosure sale that is pegged at
P47,536,000.00 which amount, notably, is only an
arbitrary valuation made by the appraising
officers of petitioners predecessor-in-interest
ostensibly for loan purposes only. Unsettled
questions arise over the correctness of this
valuation in light of conflicting evidence on
record.
Notwithstanding the doubtful validity of the
valuation of the property at issue, the resolution
of which is a question of fact that we are
precluded from addressing at this juncture of the
litigation, and confronted by the divergent
jurisprudential benchmarks which define what
can be considered as shockingly or
unconscionably low price in a sale of property,
we, nevertheless, proceed to adjudicate this case
on an aspect in which it is most plain and
unambiguous that it involves a forced sale with
a right of redemption.
Throughout a long line of jurisprudence, we have
declared that unlike in an ordinary sale,
inadequacy of the price at a forced sale is
immaterial and does not nullify a sale since, in a
forced sale, a low price is more beneficial to the
mortgage debtor for it makes redemption of the
property easier.18
In the early case of The National Loan and
Investment Board v. Meneses,19 we also had the
occasion to state that:
As to the inadequacy of the price of the sale, this
court has repeatedly held that the fact that a
property is sold at public auction for a price lower
than its alleged value, is not of itself sufficient to
annul said sale, where there has been strict
compliance with all the requisites marked out by
law to obtain the highest possible price, and
where there is no showing that a better price is
obtainable. (Government of the Philippines vs. De

Asis, G. R. No. 45483, April 12, 1939; Guerrero vs.

Guerrero, 57 Phil., 442; La Urbana vs. Belando, 54
Phil., 930; Bank of the Philippine Islands v .
Green, 52 Phil., 491.)20 (Emphases supplied.)
In Hulst v. PR Builders, Inc.,21 we further
elaborated on this principle:
[G]ross inadequacy of price does not nullify an
execution sale. In an ordinary sale, for reason of
equity, a transaction may be invalidated on the
ground of inadequacy of price, or when such
inadequacy shocks ones conscience as to justify
the courts to interfere; such does not follow when
the law gives the owner the right to redeem as
when a sale is made at public auction, upon the
theory that the lesser the price, the easier it is for
the owner to effect redemption. When there is a
right to redeem, inadequacy of price should not
be material because the judgment debtor may reacquire the property or else sell his right to
redeem and thus recover any loss he claims to
have suffered by reason of the price obtained at
the execution sale. Thus, respondent stood to
gain rather than be harmed by the low sale value
of the auctioned properties because it possesses
the right of redemption. x x x22 (Emphasis
supplied.)1wphi1
It bears also to stress that the mode of forced
sale utilized by petitioner was an extrajudicial
foreclosure of real estate mortgage which is
governed by Act No. 3135, as amended. An
examination of the said law reveals nothing to the
effect that there should be a minimum bid price
or that the winning bid should be equal to the
appraised value of the foreclosed property or to
the amount owed by the mortgage debtor. What
is clearly provided, however, is that a mortgage
debtor is given the opportunity to redeem the
foreclosed property "within the term of one year
from and after the date of sale."23 In the case at
bar, other than the mere inadequacy of the bid
price at the foreclosure sale, respondent did not
allege any irregularity in the foreclosure
proceedings nor did she prove that a better price
could be had for her property under the
circumstances.
Thus, even if we assume that the valuation of the
property at issue is correct, we still hold that the
inadequacy of the price at which it was sold at
public auction does not invalidate the foreclosure
sale.
Even if we are so inclined out of sympathy for
respondents plight, neither could we temper
respondents liability to the petitioner on the
ground of equity. We are barred by our own often
repeated admonition that equity, which has been
aptly described as "justice outside legality," is
applied only in the absence of, and never against,

statutory law or judicial rules of procedure.24 The

law and jurisprudence on the matter is clear
enough to close the door on a recourse to equity.

governance."25 As discussed above, there is a

strong legal basis for petitioners claim against
respondent for the balance of her loan obligation.

Moreover, we fail to see any unjust

enrichment resulting from upholding the validity
of the foreclosure sale and of the right of the
petitioner to collect any deficiency from
respondent. Unjust enrichment exists "when a
person unjustly retains a benefit to the loss of
another, or when a person retains money or
property of another against the fundamental
principles of justice, equity and good

WHEREFORE, premises considered, the

petition is hereby GRANTED. The assailed
Decision dated April 30, 2008 of the Court of
Appeals in CA-G.R. CV No. 88004 is REVERSED
and SET ASIDE. The RTCs November 3, 2005
Decision in Civil Case No. 03-180 is hereby
REINSTATED.
SO ORDERED.