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PNB MADECOR, petitioner, vs. GERARDO C. UY, respondent. 3.

3. On the other hand, PNB MADECOR has payables to PNEI in the amount of
P7,884,000.00 as evidenced by a promissory note executed on October 31,
DECISION 1982 by then NAREDECO in favor of PNEI;

QUISUMBING, J.: 4. Considering that PNB MADECOR is a creditor of PNEI with respect to the
P8,784,227.48 and at the same time its debtor with respect to the
P7,884,000.00, PNB MADECOR and PNEI are therefore creditors and
This is a petition for review on certiorari filed by petitioner PNB Management and debtors of each other; and
Development Corporation (PNB MADECOR) seeking to annul the decision of the Court of
Appeals dated February 19, 1997, and its resolution dated June 19, 1997 in CA-G.R. CV No. 5. By force of the law on compensation, both obligations of PNB MADECOR and
49693, affirming the order of the Regional Trial Court of Manila, Branch 38, dated August 21, PNEI are already considered extinguished to the concurrent amount or up to
1995 in Civil Case No. 95-72685. In said order, the RTC directed the garnishment of the P7,884,000.00 so that PNEI is still obligated to pay PNB MADECOR the
credits and receivables of Pantranco North Express, Inc. (PNEI), also known as Philippine amount of P900,227.48. xxx[4]
National Express, Inc., in the possession of PNB MADECOR, and if these were insufficient to
cover the debt of PNB MADECOR to PNEI, to levy upon the assets of PNB MADECOR. On the other hand, Gerardo Uy filed an omnibus motion controverting PNB
MADECORs claim of compensation. Even if compensation were possible, according to him,
The facts of this case, culled from the decision of the CA, [1] are as follows: PNEI would still have sufficient funds in the hands of PNB MADECOR to fully satisfy his
claim. He explained that:
Guillermo Uy, doing business under the name G.U. Enterprises, assigned to respondent
Gerardo Uy his receivables due from Pantranco North Express Inc. (PNEI) amounting to
P4,660,558.00. The deed of assignment included sales invoices containing stipulations The allegation of PNB MADECOR that it owes PNEI only x x x (P7,884,000.00) is not
regarding payment of interest and attorneys fees. accurate. Apparently, PNB MADECOR only considered the principal amount. In the first
place, to be precise, the principal debt amounts to exactly x x x (P7,884,921.10) as clearly
On January 23, 1995, Gerardo Uy filed with the RTC a collection suit with an indicated in the Promissory Note dated 31 October 1982 x x x. In accordance with the
application for the issuance of a writ of preliminary attachment against PNEI. He sought to stipulations contained in the promissory note, notice of demand was sent by PNEI to PNB
collect from PNEI the amount of P8,397,440.00. He alleged that PNEI was guilty of fraud in MADECOR (then NAREDECO) through a letter dated 28 September 1984 and received by
contracting the obligation sued upon, hence his prayer for a writ of preliminary attachment. the latter on 1 October 1984 x x x. The second paragraph of the subject promissory note states
that [F]ailure to pay the above amount by NAREDECO after due notice has been made by
A writ of preliminary attachment was issued on January 26, 1995, commanding the PNEI would entitle PNEI to collect an 18% [interest] per annum from date of notice of
sheriff to attach the properties of the defendant, real or personal, and/or (of) any person demand. Hence, interest should be computed and start to run from November 1984 until the
representing the defendant[2] in such amount as to cover Gerardo Uys demand. present in order to come up with the outstanding debt of PNB MADECOR to PNEI. And to be
more precise, the outstanding debt of PNB MADECOR to PNEI as of April 1995 amounts to x
On January 27, 1995, the sheriff issued a notice of garnishment addressed to the
x x (P75,813,508.26). Hence, even if the alleged debt of PNEI to PNB MADECOR amounting
Philippine National Bank (PNB) attaching the goods, effects, credits, monies and all other
to x x x (P8,784,227.48) shall be compensated and deducted from PNB MADECORs debt to
personal properties[3] of PNEI in the possession of the bank, and requesting a reply within five
PNEI, there shall still be a remainder of x x x (P67,029,380.78), largely sufficient enough to
days. PNB MADECOR received a similar notice.
cover complainants claim.[5]
On March 1995, the RTC, through the application of Gerardo Uy, issued a
subpoena duces tecum for the production of certain documents in the possession of PNB and Also in his omnibus motion, he prayed for an order directing that levy be made upon all
PNB MADECOR: (1) from PNB, books of account of PNEI regarding trust account nos. T- goods, credits, deposits, and other personal properties of PNEI under the control of PNB
8461-I, 8461-II, and T-8565; and (2) from PNB MADECOR, contracts showing PNEIs MADECOR, to the extent of his demand.
receivables from the National Real Estate Development Corporation (NAREDECO), now
PNB MADECOR, from 1981 up to the period when the documents were requested. PNB MADECOR opposed his omnibus motion, particularly the claim that its obligation
to PNEI earned an interest of 18 percent annually. It argued that PNEIs letter dated September
At the hearing in connection with the subpoena, PNB moved to be allowed to submit a 28, 1984 was not a demand letter but merely a request for the implementation of the
position paper on its behalf and/or on behalf of PNB MADECOR. In its position paper dated arrangement for set-off of receivables between PNEI and PNB, as provided in a dacion en
April 3, 1995, PNB MADECOR alleged that it was the owner of the parcel of land located in pago executed on July 28, 1983.[6] Gerardo Uy again controverted PNB MADECORs
Quezon City that was leased to PNEI for use as bus terminal. Moreover, PNB MADECOR arguments.
claimed:
Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995 against
2. PNEI has not been paying its rentals from October 1990 to March 24, 1994 -- PNEI. The corresponding writ of execution was issued on August 18, 1995.
when it (PNEI) vacated the property. As of the latter date, PNB MADECORs
receivables against PNEI amounted to P8,784,227.48, representing As regards the issue between PNEI and PNB MADECOR, the RTC issued the assailed
accumulated rentals, inclusive of interest; order on August 21, 1995, the decretal portion of which provided:
WHEREFORE, the Sheriff of this Court is hereby directed to garnish/levy or cause to be THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN INTERPRETING THE
garnished/levied the amount stated in the writ of attachment issued by this Court from the PROVISIONS OF SECTION 45, RULE 39 OF THE RULES OF COURT, NOW SECTION
credits and receivables/collectibles of PNEI from PNB MADECOR (NAREDECO) and to 43, RULE 39 OF THE REVISED RULES OF COURT, AS AMENDED ON 1 JULY 1997,
levy and/or cause to levy upon the assets of the debtor PNB MADECOR should its personal BY RULING THAT PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND
assets be insufficient to cover its debt with PNEI. SERVED WITH A NOTICE OF GARNISHMENT BECAME A FORCED INTERVENOR,
HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE ITS
Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust Department, Philippine National POSITION IN A FULL-BLOWN TRIAL AS PROVIDED FOR UNDER SEC. 10, RULE 57,
Bank, and other concerned officials of said bank, is/are hereby directed to submit the books of WHICH REMAINS THE SAME RULE UNDER THE REVISED RULES OF COURT AS
accounts of Pantranco North Express, Inc./Philippine National Express, Inc. under Trust AMENDED ON 1 JULY 1997.
Account Nos. T-8461-I, T-8461-II, T-8565 with its position paper within five (5) days from
notice hereof. III

SO ORDERED. THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT A DEMAND


WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO PNB MADECOR FOR THE
Petitioner appealed said order to the CA which, however, affirmed the RTC in a decision PAYMENT OF THE PROMISSORY NOTE DATED 31 OCTOBER 1982.[7]
dated February 19, 1997. Petitioners motion for reconsideration was denied in a resolution
dated June 19, 1997. After considering these assigned errors carefully insofar as they raise issues of law, we
find that the petition lacks merit. We shall now discuss the reasons for our conclusion.
According to the CA, there could not be any compensation between PNEIs receivables
from PNB MADECOR and the latters obligation to the former because PNB MADECORs Petitioner admits its indebtedness to PNEI, in the principal sum of P7,884,921.10, per a
supposed debt to PNEI is the subject of attachment proceedings initiated by a third party, promissory note dated October 31, 1982 executed by its precursor NAREDECO in favor of
herein respondent Gerardo Uy. This is a controversy that would prevent legal compensation PNEI. It also admits that the principal amount should earn an interest of 18 percent per annum
from taking place, per the requirements set forth in Article 1279 of the Civil Code. Moreover, under the promissory note, in case NAREDECO fails to pay the principal amount after
the CA stressed that it was not clear whether, at the time compensation was supposed to have notice. Petitioner adds that the receivables of PNEI were thereafter conveyed to PNB in
taken place, the rentals being claimed by petitioner were indeed still unpaid. The CA pointed payment of PNEIs loan obligation to the latter, in accordance with a dacion en
out that petitioner did not present evidence in this regard, apart from a statement of account. pago agreement executed between PNEI and PNB.
The CA also questioned petitioners inaction in claiming the unpaid rentals from PNEI, Petitioner, however, maintains that there is nothing now that could be subject of
when the latter started defaulting in its payment as early as 1994. This, according to the CA, attachment or execution in favor of respondent since compensation had already taken place as
indicates that the debt was either already settled or not yet demandable and liquidated. between its debt to PNEI and the latters obligation to it, consistent with Articles 1278, 1279,
and 1290 of the Civil Code. Petitioner assails the CAs ratiocination that compensation could
The CA rejected petitioners contention that Rule 39, Section 43 of the Revised Rules of not have taken place because the receivables in question were the subject of attachment
Court applies to the present case. Said rule sets forth the procedure to follow when a person proceedings commenced by a third party (respondent). This reasoning is contrary to law,
alleged to have property or to be indebted to a judgment obligor claims an interest in the according to petitioner.
property or denies the debt. In such a situation, under said Rule the judgment obligee is
required to institute a separate action against such person. The CA held that there was no need Petitioner insists that even the Asset Privatization Trust (APT), which now has control
for a separate action here since petitioner had already become a forced intervenor in the case over PNEI, recognized the set-off between the subject receivables as indicated in its reply to
by virtue of the notice of garnishment served upon it. petitioners demand for payment of PNEIs unpaid rentals. [8] The APT stated in its letter:
Hence, this petition. Petitioner now assigns the following alleged errors for our xxx
consideration:
I While we have long considered the amount of SEVEN MILLION EIGHT HUNDRED
EIGHTY FIVE THOUSAND PESOS (P7,885,000.00) which PNEI had earlier transmitted to
you as its share in an aborted project as partial payment for PNEIs unpaid rentals in favor of
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE PNB-Madecor, being a creditor like your goodself of PNEI, we are unable to be of assistance
INTERPRETATION OF THE APPLICABLE LAW HEREIN WHEN IT RULED THAT THE to you regarding your claim for the balance thereof. We trust that you will understand our
REQUISITES FOR LEGAL COMPENSATION AS SET FORTH UNDER ARTICLES 1278 common predicament.
AND 1279 OF THE CIVIL CODE DO NOT CONCUR IN THE CASE AT BAR.
xxx
II
Petitioner argues that PNEIs letter dated September 28, 1984 did not contain a demand requisites are present, [11] as opposed to conventional compensation which takes place when the
for payment but only notice of the implementation of the dacion en pago agreement between parties agree to compensate their mutual obligations even in the absence of some requisites. [12]
PNB and PNEI.
Legal compensation requires the concurrence of the following conditions:
Petitioner contends that the CAs statement that PNEIs obligation to petitioner had either
been settled or was not yet demandable is highly speculative and conjectural. On the contrary, (1) that each one of the obligors be bound principally, and that he be at the same time a
petitioner asserts that its failure to institute a judicial action against PNEI proved that the principal creditor of the other;
receivables of petitioner and PNEI had already been subject to legal compensation.
Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court applies to the (2) that both debts consist in a sum of money, or if the things due are consumable, they
present case. It asserts that it stands to lose more than P7 million if not given the opportunity be of the same kind, and also of the same quality if the latter has been stated;
to present its side in a formal proceeding such as that provided under the cited rule. According
to petitioner, it was not an original party to this case but only became involved when it was (3) that the two debts be due;
issued a subpoena duces tecum by the trial court.
For his part, respondent claims that the requisites for legal compensation are not present (4) that they be liquidated and demandable;
in this case, contrary to petitioners assertion. He argues that the better rule should be that
compensation cannot take place where one of the obligations sought to be compensated is the (5) that over neither of them there be any retention or controversy, commenced by third
subject of a suit between a third party and a party interested in the compensation, as in this persons and communicated in due time to the debtor.[13]
case.
Moreover, respondent points out that, while the alleged demand letter sent by PNEI to Petitioner insists that legal compensation had taken place such that no amount of money
petitioner was dated September 28, 1984, the unpaid rentals due petitioner from PNEI accrued belonging to PNEI remains in its hands, and, consequently, there is nothing that could be
during the period October 1990 to March 1994, or before petitioners obligation to PNEI garnished by respondent.
became due. This being so, respondent argues that there can be no compensation since there
was as yet no compensable debt in 1984 when PNEI demanded payment from petitioner. We find, however, that legal compensation could not have occurred because of the
absence of one requisite in this case: that both debts must be due and demandable.
Even granting that there had been compensation, according to respondent, PNEI would
still have sufficient funds with petitioner since the PNB MADECORs obligation to PNEI The CA observed:
earned interest.
Under the terms of the promissory note, failure on the part of NAREDECO (PNB
Respondent echoes the observation of the CA that petitioner failed to file a suit against MADECOR) to pay the value of the instrument after due notice has been made by PNEI
PNEI at the time when it should have. This failure gave rise to the presumption that PNEIs would entitle PNEI to collect an 18% [interest] per annum from date of notice of demand. [14]
obligation might have already been settled, waived, or otherwise extinguished, according to
him. He contends that petitioners explanation that it did not sue PNEI because there had been
legal compensation is only an afterthought and contrary to logic and reason. Petitioner makes a similar assertion in its petition, that

On petitioners claim that it had been denied due process, respondent avers that he did xxx It has been stipulated that the promissory note shall earn an interest of 18% per
not have to file a separate action against petitioner since this would only result in multiplicity annum in case NAREDECO, after notice, fails to pay the amount stated therein. [15]
of suits. Furthermore, he points out that the order of attachment is an interlocutory order that
may not be the subject of appeal.
Petitioners obligation to PNEI appears to be payable on demand, following the above
Finally, respondent calls the attention of this Court to the sale by PNB of its shares in observation made by the CA and the assertion made by petitioner. Petitioner is obligated to
PNB MADECOR to the Dy Group, which in turn assigned its majority interest to the Atlanta pay the amount stated in the promissory note upon receipt of a notice to pay from PNEI. If
Group. Respondent claims that the Dy Group set aside some P30 million for expenses to be petitioner fails to pay after such notice, the obligation will earn an interest of 18 percent per
incurred in litigating PNB MADECORs pending cases, and asks that his claim over this annum.
amount, arising from the instant case, [9] be given preference in case the PNEI properties
already garnished prove insufficient to satisfy his claim. Respondent alleges that PNEI had already demanded payment. The alleged demand
letter reads in part:
The first and third errors assigned by petitioner are obviously interrelated and must be
resolved together. We wish to inform you that as of August 31, 1984 your outstanding accounts amounted to
Worth stressing, compensation is a mode of extinguishing to the concurrent amount the P10,376,078.67, inclusive of interest.
obligations of persons who in their own right and as principals are reciprocally debtors and
creditors of each other.[10] Legal compensation takes place by operation of law when all the
In accordance with our previous arrangement, we have conveyed in favor of the Philippine As regards respondents averment that there was as yet no compensable debt when PNEI
National Bank P7,884,921.10 of said receivables from you. With this conveyance, the unpaid sent petitioner a demand letter on September 1984, since PNEI was not yet indebted to
balance of your account will be P2,491,157.57.[16] petitioner at that time, the law does not require that the parties obligations be incurred at the
same time. What the law requires only is that the obligations be due and demandable at the
To forestall further accrual of interest, we request that you take up with PNB the same time.
implementation of said arrangement. xxx[17] Coming now to the second assigned error, which we reserved as the last for our
We agree with petitioner that this letter was not one demanding payment, but one that discussion, petitioner contends that it did not become a forced intervenor in the present case
merely informed petitioner of (1) the conveyance of a certain portion of its obligation to PNEI even after being served with a notice of garnishment. Petitioner argues that the correct
per a dacion en pagoarrangement between PNEI and PNB, and (2) the unpaid balance of its procedure would have been for respondent to file a separate action against PNB MADECOR,
obligation after deducting the amount conveyed to PNB. The import of this letter is not that per Section 43 of Rule 39 of the Rules of Court. [21]Petitioner insists it was denied its right to
PNEI was demanding payment, but that PNEI was advising petitioner to settle the matter of ventilate its claims in a separate, full-blown trial when the courts a quo ruled that the
implementing the earlier arrangement with PNB. abovementioned rule was inapplicable to the present case.

Apart from the aforecited letter, no other demand letter appears on record, nor has any of On this score, we had occasion to rule as early as 1921 in Tayabas Land Co. v. Sharruf,
[22]
the parties adverted to another demand letter. as follows:

Since petitioners obligation to PNEI is payable on demand, and there being no demand garnishment consists in the citation of some stranger to the litigation, who is debtor to
made, it follows that the obligation is not yet due. Therefore, this obligation may not be one of the parties to the action. By this means such debtor stranger becomes a forced
subject to compensation for lack of a requisite under the law. Without compensation having intervenor; and the court, having acquired jurisdiction over his person by means of the
taken place, petitioner remains obligated to PNEI to the extent stated in the promissory citation, requires him to pay his debt, not to his former creditor, but to the new creditor,
note. This obligation may undoubtedly be garnished in favor of respondent to satisfy PNEIs who is creditor in the main litigation. It is merely a case of involuntary novation by the
judgment debt.[18] substitution of one creditor for another. Upon principle the remedy is a species of
As to respondents claim that legal compensation could not have taken place due to the attachment or execution for reaching any property pertaining to a judgment debtor
existence of a controversy involving one of the mutual obligations, we find this matter no which may be found owing to such debtor by a third person.
longer controlling. Said controversy was not seasonably communicated to petitioner as
required under Article 1279 of the Civil Code. Again, in Perla Compania de Seguros, Inc. v. Ramolete,[23] we declared:

The controversy, i.e., the action instituted by respondent against PNEI, must have been
communicated to PNB MADECOR in due time to prevent compensation from taking Through service of the writ of garnishment, the garnishee becomes a virtual party to, or a
place. By in due time should be meant the period before legal compensation was supposed to forced intervenor in, the case and the trial court thereby acquires jurisdiction to bind him to
take place, considering that legal compensation operates so long as the requisites concur, even compliance with all orders and processes of the trial court with a view to the complete
without any conscious intent on the part of the parties. [19] A controversy that is communicated satisfaction of the judgment of the court.
to the parties after that time may no longer undo the compensation that had taken place by
force of law, lest the law concerning legal compensation be for naught. Petitioner here became a forced intervenor by virtue of the notice of garnishment served
upon him. It could have presented evidence on its behalf. The CA, in fact, noted that petitioner
Petitioner had notice of the present controversy when it received the subpoena duces presented a statement of account purportedly showing that PNEI had not yet settled its
tecum issued by the trial court. The exact date when petitioner received the subpoena is not on obligation to petitioner.[24] That petitioner failed to present any more proof of its claim, as
record, but petitioner was allowed to submit a position paper regarding said subpoena per observed by the CA, is no longer the fault of the courts.
order of the trial court dated March 27, 1995. [20] We assume that petitioner had notice of the
pending litigation at least no later than this date. Now, was this date before that period when There is no need for the institution of a separate action under Rule 39, Section 43,
legal compensation would have occurred, assuming all other requisites to be present? contrary to petitioners claim. This provision contemplates a situation where the person
allegedly holding property of (or indebted to) the judgment debtor claims an adverse interest
Clearly, it is not. PNB MADECORs obligation to PNEI was contracted in 1982 and the in the property (or denies the debt). In this case, petitioner expressly admits its obligation to
alleged demand letter was sent by PNEI to petitioner on September 1984. On the other hand, PNEI.[25]
PNEIs obligation to petitioner, the payment of monthly rentals, accrued during the period
October 1990 to March 1994 and a demand to pay was sent in 1993. Assuming the other WHEREFORE, the petition is DENIED. The assailed decision and resolution of the
requisites to be present, legal compensation of the mutual obligations would have taken place Court of Appeals are AFFIRMED. Costs against petitioner.
on March 1994 at the latest. Obviously, this was before petitioner received notice of the
pendency of this litigation in 1995. The controversy communicated to petitioner in 1995 could SO ORDERED.
not have affected the legal compensation that would have taken place in 1994.
Republic of the Philippines date, respondent Fernando, as vendor, was authorized to declare the contract cancelled and to
SUPREME COURT dispose of the parcel of land, as if the contract had not been entered into. The payments made,
Manila together with all the improvements made on the premises, shall be considered as rents paid for
the use and occupation of the premises and as liquidated damages. 6
FIRST DIVISION
After the execution of the contract, Carmelita Leao made several payments in lump
G.R. No. 129018 November 15, 2001 sum.7 Thereafter, she constructed a house on the lot valued at P800,000.00. 8 The last payment
that she made was on April 1, 1989.
CARMELITA LEAO, assisted by her husband GREGORIO CUACHON, petitioner,
vs. On September 16, 1991, the trial court rendered a decision in an ejectment case 9 earlier filed
COURT OF APPEALS and HERMOGENES FERNANDO, respondents. by respondent Fernando ordering petitioner Leao to vacate the premises and to pay P250.00
per month by way of compensation for the use and occupation of the property from May 27,
1991 until she vacated the premises, attorney's fees and costs of the suit. 10 On August 24,
PARDO, J.: 1993, the trial court issued a writ of execution which was duly served on petitioner Leao.

The Case On September 27, 1993, petitioner Leao filed with the Regional Trial Court of Malolos,
Bulacan a complaint for specific performance with preliminary injunction. 11 Petitioner Leao
The case is a petition for review on certiorari of the decision 1 of the Court of Appeals assailed the validity of the judgment of the municipal trial court 12 for being violative of her
affirming that of the Regional Trial Court, Malolos, Branch 7 2 ordering petitioner Leao to pay right to due process and for being contrary to the avowed intentions of Republic Act No. 6552
respondent Hermogenes Fernando the sum of P183,687.70 corresponding to her outstanding regarding protection to buyers of lots on installments. Petitioner Leao deposited P18,000.00
obligations under the contract to sell, with interest and surcharges due thereon, attorney's fees with the clerk of court, Regional Trial Court, Bulacan, to cover the balance of the total cost of
and costs.1wphi1.nt Lot 876-B.13

The Facts On November 4, 1993, after petitioner Leao posted a cash bond of P50,000.00, 14 the trial
court issued a writ of preliminary injunction15 to stay the enforcement of the decision of the
On November 13, 1985, Hermogenes Fernando, as vendor and Carmelita Leao, as vendee municipal trial court.16
executed a contract to sell involving a piece of land, Lot No. 876-B, with an area of 431
square meters, located at Sto. Cristo, Baliuag, Bulacan. 3 On February 6, 1995, the trial court rendered a decision, the dispositive portion of which
reads:
In the contract, Carmelita Leao bound herself to pay Hermogenes Fernando the sum of one
hundred seven thousand and seven hundred and fifty pesos (P107,750.00) as the total purchase "WHEREFORE, judgment is hereby rendered as follows:
price of the lot. The manner of paying the total purchase price was as follows:
"1. The preliminary injunction issued by this court per its order dated November 4,
"The sum of TEN THOUSAND SEVEN HUNDRED SEVENTY FIVE 1993 is hereby made permanent;
(P10,775.00) PESOS, shall be paid at the signing of this contract as DOWN
PAYMENT, the balance of NINETY SIX THOUSAND NINE HUNDRED "2. Ordering the plaintiff to pay to the defendant the sum of P103,090.70
SEVENTY FIVE PESOS (P96,975.00) shall be paid within a period of TEN (10) corresponding to her outstanding obligations under the contract to sell (Exhibit "A"
years at a monthly amortization of P1,747.30 to begin from December 7, 1985 with Exhibit "B") consisting of the principal of said obligation together with the interest
interest at eighteen per cent (18%) per annum based on balances." 4 and surcharges due thereon as of February 28, 1994, plus interest thereon at the rate
of 18% per annum in accordance with the provision of said contract to be computed
The contract also provided for a grace period of one month within which to make payments, from March 1, 1994, until the same becomes fully paid;
together with the one corresponding to the month of grace. Should the month of grace expire
without the installments for both months having been satisfied, an interest of 18% per annum "3. Ordering the defendant to pay to plaintiff the amount of P10,000 as and by way
will be charged on the unpaid installments.5 of attorney's fees;

Should a period of ninety (90) days elapse from the expiration of the grace period without the "4. Ordering the defendant to pay to plaintiff the costs of the suit in Civil Case No.
overdue and unpaid installments having been paid with the corresponding interests up to that 1680 aforementioned.
"SO ORDERED. Hence, this petition.28

"Malolos, Bulacan, February 6, 1995. The Issues

The issues to be resolved in this petition for review are (1) whether the transaction between the
parties in an absolute sale or a conditional sale; (2) whether there was a proper cancellation of
"(sgd.) DANILO A. MANALASTAS the contract to sell; and (3) whether petitioner was in delay in the payment of the monthly
Judge"17 amortizations.

On February 21, 1995, respondent Fernando filed a motion for reconsideration 18 and the The Court's Ruling
supplement19 thereto. The trial court increased the amount of P103,090.70 to P183,687.00 and
ordered petitioner Leao ordered to pay attorney's fees. 20 Contrary to the findings of the trial court, the transaction between the parties was a conditional
sale not an absolute sale. The intention of the parties was to reserve the ownership of the land
According to the trial court, the transaction between the parties was an absolute sale, making in the seller until the buyer has paid the total purchase price.
petitioner Leao the owner of the lot upon actual and constructive delivery thereof.
Respondent Fernando, the seller, was divested of ownership and cannot recover the same Consider the following:
unless the contract is rescinded pursuant to Article 1592 of the Civil Code which requires a
judicial or notarial demand. Since there had been no rescission, petitioner Leao, as the owner First, the contract to sell makes the sale, cession and conveyance "subject to conditions" set
in possession of the property, cannot be evicted. forth in the contract to sell.29

On the issue of delay, the trial court held: Second, what was transferred was the possession of the property, not ownership. The
possession is even limited by the following: (1) that the vendee may continue therewith "as
"While the said contract provides that the whole purchase price is payable within a long as the VENDEE complies with all the terms and conditions mentioned, and (2) that the
ten-year period, yet the same contract clearly specifies that the purchase price shall buyer may not sell, cede, assign, transfer or mortgage or in any way encumber any right,
be payable in monthly installments for which the corresponding penalty shall be interest or equity that she may have or acquire in and to the said parcel of land nor to lease or
imposed in case of default. The plaintiff certainly cannot ignore the binding effect of to sublease it or give possession to another person without the written consent of the seller.30
such stipulation by merely asserting that the ten-year period for payment of the
whole purchase price has not yet lapsed. In other words, the plaintiff has clearly Finally, the ownership of the lot was not transferred to Carmelita Leao. As the land is covered
defaulted in the payment of the amortizations due under the contract as recited in the by a torrens title, the act of registration of the deed of sale was the operative act that could
statement of account (Exhibit "2") and she should be liable for the payment of transfer ownership over the lot.31 There is not even a deed that could be registered since the
interest and penalties in accordance with the stipulations in the contract pertaining contract provides that the seller will execute such a deed "upon complete payment by the
thereto."21 VENDEE of the total purchase price of the property" with the stipulated interest. 32

The trial court disregarded petitioner Leaos claim that she made a downpayment of In a contract to sell real property on installments, the full payment of the purchase price is a
P10,000.00, at the time of the execution of the contract. positive suspensive condition, the failure of which is not considered a breach, casual or
serious, but simply an event that prevented the obligation of the vendor to convey title from
The trial court relied on the statement of account 22 and the summary23 prepared by respondent acquiring any obligatory force.33 The transfer of ownership and title would occur after full
Fernando to determine petitioner Leao's liability for the payment of interests and penalties. payment of the price.34

The trial court held that the consignation made by petitioner Leao in the amount of In the case at bar, petitioner Leao's non-payment of the installments after April 1, 1989,
P18,000.00 did not produce any legal effect as the same was not done in accordance with prevented the obligation of respondent Fernando to convey the property from arising. In fact,
Articles 1176, 1177 and 1178 of the Civil Code. it brought into effect the provision of the contract on cancellation.

In time, petitioner Leao appealed the decision to the Court of Appeals. 24 On January 22, Contrary to the findings of the trial court, Article 1592 of the Civil Code is inapplicable to the
1997, Court of Appeals promulgated a decision affirming that of the Regional Trial Court in case at bar.35 However, any attempt to cancel the contract to sell would have to comply with
toto.25 On February 11, 1997, petitioner Leao filed a motion for reconsideration. 26 On April the provisions of Republic Act No. 6552, the "Realty Installment Buyer Protection Act."
18, 1997, the Court of Appeals denied the motion.27
R.A. No. 6552 recognizes in conditional sales of all kinds of real estate (industrial,
commercial, residential) the right of the seller to cancel the contract upon non-payment of an
installment by the buyer, which is simply an event that prevents the obligation of the vendor to
convey title from acquiring binding force.36 The law also provides for the rights of the buyer in
case of cancellation. Thus, Sec. 3 (b) of the law provides that:
The Fallo
"If the contract is cancelled, the seller shall refund to the buyer the cash surrender
value of the payments on the property equivalent to fifty percent of the total IN VIEW WHEREOF, we DENY the petition and AFFIRM the decision of the Court of
payments made and, after five years of installments, an additional five percent every Appeals44 in toto.
year but not to exceed ninety percent of the total payment made: Provided, That the
actual cancellation of the contract shall take place after thirty days from receipt by No costs.
the buyer of the notice of cancellation or the demand for rescission of the contract
by a notarial act and upon full payment of the cash surrender value to the buyer." SO ORDERED.
[Emphasis supplied]

Davide, Jr., Puno, Kapunan, and Ynares-Santiago, JJ., concur.


The decision in the ejectment case37 operated as the notice of cancellation required by Sec.
3(b). As petitioner Leao was not given then cash surrender value of the payments that she
made, there was still no actual cancellation of the contract. Consequently, petitioner Leao
may still reinstate the contract by updating the account during the grace period and before
actual cancellation.38

Should petitioner Leao wish to reinstate the contract, she would have to update her accounts
with respondent Fernando in accordance with the statement of account 39 which amount was
P183,687.00.40

On the issue of whether petitioner Leao was in delay in paying the amortizations, we rule that
while the contract provided that the total purchase price was payable within a ten-year period,
the same contract specified that the purchase price shall be paid in monthly installments for
which the corresponding penalty shall be imposed in case of default. Petitioner Leao cannot
ignore the provision on the payment of monthly installments by claiming that the ten-year
period within which to pay has not elapsed.

Article 1169 of the Civil Code provides that in reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the
other begins.1wphi1.nt

In the case at bar, respondent Fernando performed his part of the obligation by allowing
petitioner Leao to continue in possession and use of the property. Clearly, when petitioner
Leao did not pay the monthly amortizations in accordance with the terms of the contract, she
was in delay and liable for damages.41 However, we agree with the trial court that the default
committed by petitioner Leao in respect of the obligation could be compensated by the
interest and surcharges imposed upon her under the contract in question. 42

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulation shall control.43 Thus, as there is no ambiguity in the language of the contract, there
is no room for construction, only compliance.
329-330). A year later, on October 30, 1989, Dennis Z. Laforteza executed
another Special Power of Attorney in favor of defendants Roberto Z.
THIRD DIVISION Laforteza and Gonzalo Laforteza, Jr. naming both attorneys-in-fact for the
purpose of selling the subject property and signing any document for the
settlement of the estate of the late Francisco Q. Laforteza. The subsequent
[G.R. No. 137552. June 16, 2000] agency instrument (Exh. "2", record, pp. 371-373) contained similar
provisions that both attorneys-in-fact should sign any document or paper
ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z. executed in the exercise of their authority.
LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA, petitioners,
vs. ALONZO MACHUCA, respondent. In the exercise of the above authority, on January 20, 1989, the heirs of the
late Francisco Q. Laforteza represented by Roberto Z. Laforteza and
DECISION Gonzalo Z. Laforteza, Jr. entered into a Memorandum of Agreement
(Contract to Sell) with the plaintiff[2] over the subject property for the sum
GONZAGA_REYES, J.: of SIX HUNDRED THIRTY THOUSAND PESOS (P630,000.00) payable
as follows:

This Petition for Review on Certiorari seeks the reversal of the Decision of the Court of
Appeals[1] in CA G.R. CV No. 47457 entitled "ALONZO MACHUCA versus ROBERTO Z. (a) P30,000.00 as earnest money, to be forfeited in favor of the defendants
LAFORTEZA, GONZALO Z. LAFORTEZA, LEA ZULUETA-LAFORTEZA MICHAEL Z. if the sale is not effected due to the fault of the plaintiff;
LAFORTEZA, and DENNIS Z. LAFORTEZA".
(b) P600,000.00 upon issuance of the new certificate of title in the name of
The following facts as found by the Court of Appeals are undisputed: the late Francisco Q. Laforteza and upon execution of an extra-judicial
settlement of the decedents estate with sale in favor of the plaintiff (Par. 2,
Exh. "E", record, pp. 335-336).
"The property involved consists of a house and lot located at No. 7757
Sherwood Street, Marcelo Green Village, Paraaque, Metro Manila,
covered by Transfer Certificate of Title (TCT) No. (220656) 8941 of the Significantly, the fourth paragraph of the Memorandum of Agreement
Registered of Deeds of Paraaque (Exhibit "D", Plaintiff, record, pp. 331- (Contract to Sell) dated January 20, 1989 (Exh. "E", supra.) contained a
332). The subject property is registered in the name of the late Francisco provision as follows:
Q. Laforteza, although it is conjugal in nature (Exhibit "8", Defendants,
record pp. 331-386). xxx. Upon issuance by the proper Court of the new title, the
BUYER-LESSEE shall be notified in writing and said BUYER-
On August 2, 1988, defendant Lea Zulueta-Laforteza executed a Special LESSEE shall have thirty (30) days to produce the balance
Power of Attorney in favor of defendants Roberto Z. Laforteza and of P600,000.00 which shall be paid to the SELLER-LESSORS
Gonzalo Z. Laforteza, Jr., appointing both as her Attorney-in-fact upon the execution of the Extrajudicial Settlement with sale.
authorizing them jointly to sell the subject property and sign any
document for the settlement of the estate of the late Francisco Q. Laforteza On January 20, 1989, plaintiff paid the earnest money of THIRTY
(Exh. "A", Plaintiff, record, pp. 323-325). THOUSAND PESOS (P30,000.00), plus rentals for the subject property
(Exh. "F", Plaintiff, record, p. 339).
Likewise on the same day, defendant Michael Z. Laforteza executed a
Special Power of Attorney in favor of defendants Roberto Z. Laforteza and On September 18, 1998[3], defendant heirs, through their counsel wrote a
Gonzalo Laforteza, Jr., likewise, granting the same authority (Exh. "B", letter (Exh. 1, Defendants, record, p. 370) to the plaintiff furnishing the
record, pp. 326-328). Both agency instruments contained a provision that latter a copy of the reconstituted title to the subject property, advising him
in any document or paper to exercise authority granted, the signature of that he had thirty (3) days to produce the balance of SIX HUNDRED
both attorneys-in-fact must be affixed. PESOS (sic) (P600,000.00) under the Memorandum of Agreement which
plaintiff received on the same date.
On October 27, 1988, defendant Dennis Z. Laforteza executed a Special
Power of Attorney in favor of defendant Roberto Z. Laforteza for the On October 18, 1989, plaintiff sent the defendant heirs a letter requesting
purpose of selling the subject property (Exh. "C", Plaintiff, record, pp. for an extension of the THIRTY (30) DAYS deadline up to November 15,
1989 within which to produce the balance of SIX HUNDRED Petitioners appealed to the Court of Appeals, which affirmed with modification the decision of
THOUSAND PESOS (P600,000.00) (Exh. "G", Plaintiff, record, pp. 341- the lower court; the dispositive portion of the Decision reads:
342). Defendant Roberto Z. Laforteza, assisted by his counsel Atty.
Romeo L. Gutierrez, signed his conformity to the plaintiffs letter request "WHEREFORE, the questioned decision of the lower court is hereby
(Exh. "G-1 and "G-2", Plaintiff, record, p. 342). The extension, however, AFFIRMED with the MODIFICATION that defendant heirs Lea Zulueta-
does not appear to have been approved by Gonzalo Z. Laforteza, the Laforteza, Michael Z. Laforteza, Dennis Z. Laforteza and Roberto Z.
second attorney-in-fact as his conformity does not appear to have been Laforteza including Gonzalo Z. Laforteza, Jr. are hereby ordered to pay
secured. jointly and severally the sum of FIFTY THOUSAND PESOS
(P50,000.00) as moral damages.
On November 15, 1989, plaintiff informed the defendant heirs, through
defendant Roberto Z. Laforteza, that he already had the balance of SIX SO ORDERED."[6]
HUNDRED THOUSAND PESOS (P600,000.00) covered by United
Coconut Planters Bank Managers Check No. 000814 dated November 15,
1989 (TSN, August 25, 1992, p. 11; Exhs. "H", record, pp. 343-344; "M", Motion for Reconsideration was denied but the Decision was modified so as to absolve
records p. 350; and "N", record, p. 351). However, the defendants, refused Gonzalo Z. Laforteza, Jr. from liability for the payment of moral damages. [7] Hence this
to accept the balance (TSN, August 24, 1992, p. 14; Exhs. "M-1", Plaintiff, petition wherein the petitioners raise the following issues:
record, p. 350; and "N-1", Plaintiff, record, p. 351). Defendant Roberto Z.
Laforteza had told him that the subject property was no longer for sale "I. WHETHER THE TRIAL AND APPELLATE COURTS
(TSN, October 20, 1992, p. 19; Exh. "J", record, p. 347). CORRECTLY CONSTRUED THE MEMORANDUM OF
AGREEMENT AS IMPOSING RECIPROCAL OBLIGATIONS.
On November 20, 1998[4], defendants informed the plaintiff that they were
canceling the Memorandum of Agreement (Contract to Sell) in view of the II. WHETHER THE COURTS A QUO CORRECTLY RULED THAT
plaintiffs failure to comply with his contractual obligations (Exh. "3"). RESCISSION WILL NOT LIE IN THE INSTANT CASE.

Thereafter, plaintiff reiterated his request to tender payment of the balance III. WHETHER THE RESPONDENT IS UNDER ESTOPPEL
of SIX HUNDRED THOUSAND PESOS (P600,000.00). Defendants, FROM RAISING THE ALLEGED DEFECT IN THE SPECIAL
however, insisted on the rescission of the Memorandum of Agreement. POWER OF ATTORNEY DATED 30 OCTOBER 1989 EXECUTED
Thereafter, plaintiff filed the instant action for specific performance. The BY DENNIS LAFORTEZA.
lower court rendered judgment on July 6, 1994 in favor of the plaintiff, the
dispositive portion of which reads: IV. SUPPOSING EX GRATIA ARGUMENTI THE MEMORANDUM
OF AGREEMENT IMPOSES RECIPROCAL OBLIGATIONS,
WHEREFORE, judgment is hereby rendered in favor of plaintiff WHETHER THE PETITIONERS MAY BE COMPELLED TO SELL
Alonzo Machuca and against the defendant heirs of the late THE SUBJECT PROPERTY WHEN THE RESPONDENT FAILED
Francisco Q. Laforteza, ordering the said defendants. TO MAKE A JUDICIAL CONSIGNATION OF THE PURCHASE
PRICE?
(a) To accept the balance of P600,000.00 as full payment of the
consideration for the purchase of the house and lot located at No. 7757 V. WHETHER THE PETITIONERS ARE IN BAD FAITH SO TO AS
Sherwood Street, Marcelo Green Village, Paraaque, Metro Manila, MAKE THEM LIABLE FOR MORAL DAMAGES?"[8]
covered by Transfer Certificate of Title No. (220656) 8941 of the Registry
of Deeds of Rizal Paraaque, Branch; The petitioners contend that the Memorandum of Agreement is merely a lease agreement with
"option to purchase". As it was merely an option, it only gave the respondent a right to
(b) To execute a registrable deed of absolute sale over the subject property purchase the subject property within a limited period without imposing upon them any
in favor of the plaintiff; obligation to purchase it. Since the respondents tender of payment was made after the lapse of
the option agreement, his tender did not give rise to the perfection of a contract of sale.
(c) Jointly and severally to pay the plaintiff the sum of P20,000.00 as
attorneys fees plus cost of suit. It is further maintained by the petitioners that the Court of Appeals erred in ruling that
rescission of the contract was already out of the question. Rescission implies that a contract of
SO ORDERED. (Rollo, pp. 74-75)."[5] sale was perfected unlike the Memorandum of Agreement in question which as previously
stated is allegedly only an option contract.
Petitioner adds that at most, the Memorandum of Agreement (Contract to Sell) is a mere P600,000.00- upon the issuance of the new certificate of title in
contract to sell, as indicated in its title. The obligation of the petitioners to sell the property to the name of the late Francisco Laforteza and upon the execution
the respondent was conditioned upon the issuance of a new certificate of title and the of an Extrajudicial Settlement of his estate with sale in favor of
execution of the extrajudicial partition with sale and payment of the P600,000.00. This is why BUYER-LESSEE free from lien or any encumbrances.
possession of the subject property was not delivered to the respondent as the owner of the
property but only as the lessee thereof. And the failure of the respondent to pay the purchase 3. Parties reasonably estimate that the issuance of a new title in place of
price in full prevented the petitioners obligation to convey title from acquiring obligatory the lost one, as well as the execution of extrajudicial settlement of estate
force. with sale to herein BUYER-LESSEE will be completed within six (6)
months from the execution of this Agreement. It is therefore agreed that
Petitioners also allege that assuming for the sake of argument that a contract of sale was during the six months period, BUYER-LESSEE will be leasing the subject
indeed perfected, the Court of Appeals still erred in holding that respondents failure to pay the property for six months period at the monthly rate of PESOS: THREE
purchase price of P600,000.00 was only a "slight or casual breach". THOUSAND FIVE HUNDRED (P3,500.00). Provided however, that if
the issuance of new title and the execution of Extrajudicial Partition is
The petitioners also claim that the Court of Appeals erred in ruling that they were not ready to completed prior to the expiration of the six months period, BUYER-
comply with their obligation to execute the extrajudicial settlement. The Power of Attorney to LESSEE shall only be liable for rentals for the corresponding period
execute a Deed of Sale made by Dennis Z. Laforteza was sufficient and necessarily included commencing from his occupancy of the premises to the execution and
the power to execute an extrajudicial settlement. At any rate, the respondent is estopped from completion of the Extrajudicial Settlement of the estate, provided further
claiming that the petitioners were not ready to comply with their obligation for he that if after the expiration of six (6) months, the lost title is not yet
acknowledged the petitioners ability to do so when he requested for an extension of time replaced and the extra judicial partition is not executed, BUYER-LESSEE
within which to pay the purchase price. Had he truly believed that the petitioners were not shall no longer be required to pay rentals and shall continue to occupy, and
ready, he would not have needed to ask for said extension. use the premises until subject condition is complied by SELLER-
LESSOR;
Finally, the petitioners allege that the respondents uncorroborated testimony that third persons
offered a higher price for the property is hearsay and should not be given any evidentiary 4. It is hereby agreed that within reasonable time from the execution of
weight. Thus, the order of the lower court awarding moral damages was without any legal this Agreement and the payment by BUYER-LESSEE of the amount of
basis. P30,000.00 as herein above provided, SELLER-LESSORS shall
immediately file the corresponding petition for the issuance of a new title
in lieu of the lost one in the proper Courts. Upon issuance by the proper
The appeal is bereft of merit. Courts of the new title, the BUYER-LESSEE shall have thirty (30) days to
produce the balance of P600,000.00 which shall be paid to the SELLER-
A perusal of the Memorandum Agreement shows that the transaction between the petitioners LESSORS upon the execution of the Extrajudicial Settlement with sale." [9]
and the respondent was one of sale and lease. The terms of the agreement read:
A contract of sale is a consensual contract and is perfected at the moment there is a meeting of
"1. For and in consideration of the sum of PESOS: SIX HUNDRED the minds upon the thing which is the object of the contract and upon the price. [10] From that
THIRTY THOUSAND (P630,000.00) payable in a manner herein below moment the parties may reciprocally demand performance subject to the provisions of the law
indicated, SELLER-LESSOR hereby agree to sell unto BUYER-LESSEE governing the form of contracts.[11] The elements of a valid contract of sale under Article 1458
the property described in the first WHEREAS of this Agreement within of the Civil Code are (1) consent or meeting of the minds; (2) determinate subject matter and
six (6) months from the execution date hereof, or upon issuance by the (3) price certain in money or its equivalent.[12]
Court of a new owners certificate of title and the execution of extrajudicial
partition with sale of the estate of Francisco Laforteza, whichever is In the case at bench, there was a perfected agreement between the petitioners and the
earlier; respondent whereby the petitioners obligated themselves to transfer the ownership of and
deliver the house and lot located at 7757 Sherwood St., Marcelo Green Village, Paraaque and
2. The above-mentioned sum of PESOS: SIX HUNDRED THIRTY the respondent to pay the price amounting to six hundred thousand pesos (P600,000.00). All
THOUSAND (P630,000.00) shall be paid in the following manner: the elements of a contract of sale were thus present. However, the balance of the purchase
price was to be paid only upon the issuance of the new certificate of title in lieu of the one in
P30,000.00- as earnest money and as consideration for this the name of the late Francisco Laforteza and upon the execution of an extrajudicial settlement
Agreement, which amount shall be forfeited in favor of of his estate. Prior to the issuance of the "reconstituted" title, the respondent was already
SELLER-LESSORS if the sale is not effected because of the placed in possession of the house and lot as lessee thereof for six months at a monthly rate of
fault or option of BUYER-LESSEE; three thousand five hundred pesos (P3,500.00). It was stipulated that should the issuance of
the new title and the execution of the extrajudicial settlement be completed prior to expiration
of the six-month period, the respondent would be liable only for the rentals pertaining to the Where the ownership in the things has not passed, the buyer may treat the
period commencing from the date of the execution of the agreement up to the execution of the fulfillment by the seller of his obligation to deliver the same as described
extrajudicial settlement. It was also expressly stipulated that if after the expiration of the six and as warranted expressly or by implication in the contract of sale as a
month period, the lost title was not yet replaced and the extrajudicial partition was not yet condition of the obligation of the buyer to perform his promise to accept
executed, the respondent would no longer be required to pay rentals and would continue to and pay for the thing."[16]
occupy and use the premises until the subject condition was complied with by the petitioners.
In the case at bar, there was already a perfected contract. The condition was imposed only on
The six-month period during which the respondent would be in possession of the property as the performance of the obligations contained therein. Considering however that the title was
lessee, was clearly not a period within which to exercise an option. An option is a contract eventually "reconstituted" and that the petitioners admit their ability to execute the
granting a privilege to buy or sell within an agreed time and at a determined price. An option extrajudicial settlement of their fathers estate, the respondent had a right to demand fulfillment
contract is a separate and distinct contract from that which the parties may enter into upon the of the petitioners obligation to deliver and transfer ownership of the house and lot.
consummation of the option.[13] An option must be supported by consideration.[14] An option
contract is governed by the second paragraph of Article 1479 of the Civil Code [15], which What further militates against petitioners argument that they did not enter into a contract of
reads: sale is the fact that the respondent paid thirty thousand pesos (P30,000.00) as earnest money.
Earnest money is something of value to show that the buyer was really in earnest, and given to
"Article 1479. xxx the seller to bind the bargain.[17] Whenever earnest money is given in a contract of sale, it is
considered as part of the purchase price and proof of the perfection of the contract. [18]
An accepted unilateral promise to buy or to sell a determinate thing for a
price certain is binding upon the promissor if the promise is supported by We do not subscribe to the petitioners view that the Memorandum Agreement was a contract
a consideration distinct from the price." to sell. There is nothing contained in the Memorandum Agreement from which it can
reasonably be deduced that the parties intended to enter into a contract to sell, i.e. one whereby
In the present case, the six-month period merely delayed the demandability of the contract of the prospective seller would explicitly reserve the transfer of title to the prospective buyer,
sale and did not determine its perfection for after the expiration of the six-month period, there meaning, the prospective seller does not as yet agree or consent to transfer ownership of the
was an absolute obligation on the part of the petitioners and the respondent to comply with the property subject of the contract to sell until the full payment of the price, such payment being
terms of the sale. The parties made a "reasonable estimate" that the reconstitution of the lost a positive suspensive condition, the failure of which is not considered a breach, casual or
title of the house and lot would take approximately six months and thus presumed that after six serious, but simply an event which prevented the obligation from acquiring any obligatory
months, both parties would be able to comply with what was reciprocally incumbent upon force.[19]There is clearly no express reservation of title made by the petitioners over the
them. The fact that after the expiration of the six-month period, the respondent would retain property, or any provision which would impose non-payment of the price as a condition for the
possession of the house and lot without need of paying rentals for the use therefor, clearly contracts entering into force. Although the memorandum agreement was also denominated as
indicated that the parties contemplated that ownership over the property would already be a "Contract to Sell", we hold that the parties contemplated a contract of sale. A deed of sale is
transferred by that time. absolute in nature although denominated a conditional sale in the absence of a stipulation
reserving title in the petitioners until full payment of the purchase price. [20] In such cases,
ownership of the thing sold passes to the vendee upon actual or constructive delivery thereof.
The issuance of the new certificate of title in the name of the late Francisco Laforteza and the [21]
The mere fact that the obligation of the respondent to pay the balance of the purchase price
execution of an extrajudicial settlement of his estate was not a condition which determined the was made subject to the condition that the petitioners first deliver the reconstituted title of the
perfection of the contract of sale. Petitioners contention that since the condition was not met, house and lot does not make the contract a contract to sell for such condition is not
they no longer had an obligation to proceed with the sale of the house and lot is unconvincing. inconsistent with a contract of sale.[22]
The petitioners fail to distinguish between a condition imposed upon the perfection of the
contract and a condition imposed on the performance of an obligation. Failure to comply with
the first condition results in the failure of a contract, while the failure to comply with the The next issue to be addressed is whether the failure of the respondent to pay the balance of
second condition only gives the other party the option either to refuse to proceed with the sale the purchase price within the period allowed is fatal to his right to enforce the agreement.
or to waive the condition. Thus, Art. 1545 of the Civil Code states:
We rule in the negative.
"Art. 1545. Where the obligation of either party to a contract of sale is
subject to any condition which is not performed, such party may refuse to Admittedly, the failure of the respondent to pay the balance of the purchase price was a breach
proceed with the contract or he may waive performance of the condition. of the contract and was a ground for rescission thereof. The extension of thirty (30) days
If the other party has promised that the condition should happen or be allegedly granted to the respondent by Roberto Z. Laforteza (assisted by his counsel Attorney
performed, such first mentioned party may also treat the nonperformance Romeo Gutierrez) was correctly found by the Court of Appeals to be ineffective inasmuch as
of the condition as a breach of warranty. the signature of Gonzalo Z. Laforteza did not appear thereon as required by the Special
Powers of Attorney.[23] However, the evidence reveals that after the expiration of the six-month
period provided for in the contract, the petitioners were not ready to comply with what was The Court of Appeals correctly found the petitioners guilty of bad faith and awarded moral
incumbent upon them, i.e. the delivery of the reconstituted title of the house and lot. It was damages to the respondent. As found by the said Court, the petitioners refused to comply with
only on September 18, 1989 or nearly eight months after the execution of the Memorandum of their obligation for the reason that they were offered a higher price therefor and the respondent
Agreement when the petitioners informed the respondent that they already had a copy of the was even offered P100,000.00 by the petitioners lawyer, Attorney Gutierrez, to relinquish his
reconstituted title and demanded the payment of the balance of the purchase price. The rights over the property. The award of moral damages is in accordance with Article 1191 [31] of
respondent could not therefore be considered in delay for in reciprocal obligations, neither the Civil Code pursuant to Article 2220 which provides that moral damages may be awarded
party incurs in delay if the other party does not comply or is not ready to comply in a proper in case of a breach of contract where the defendant acted in bad faith. The amount awarded
manner with what was incumbent upon him. [24] depends on the discretion of the court based on the circumstances of each case. [32] Under the
circumstances, the award given by the Court of Appeals amounting to P50,000.00 appears to
Even assuming for the sake of argument that the petitioners were ready to comply with their us to be fair and reasonable.
obligation, we find that rescission of the contract will still not prosper. The rescission of a sale
of an immovable property is specifically governed by Article 1592 of the New Civil Code, ACCORDINGLY, the decision of the Court of Appeals in CA G.R. CV No. 47457 is
which reads: AFFIRMED and the instant petition is hereby DENIED.

"In the sale of immovable property, even though it may have been No pronouncement as to costs.
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, SO ORDERED.
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."[25] Melo, (Chairman), Panganiban, and Purisima, JJ., concur.

It is not disputed that the petitioners did not make a judicial or notarial demand for rescission. Vitug, J., Abroad, On Official Business.
The November 20, 1989 letter of the petitioners informing the respondent of the automatic
rescission of the agreement did not amount to a demand for rescission, as it was not notarized.
[26]
It was also made five days after the respondents attempt to make the payment of the
purchase price. This offer to pay prior to the demand for rescission is sufficient to defeat the
petitioners right under article 1592 of the Civil Code. [27] Besides, the Memorandum Agreement
between the parties did not contain a clause expressly authorizing the automatic cancellation
of the contract without court intervention in the event that the terms thereof were violated. A
seller cannot unilaterally and extrajudicially rescind a contract of sale where there is no
express stipulation authorizing him to extrajudicially rescind. [28] Neither was there a judicial
demand for the rescission thereof. Thus, when the respondent filed his complaint for specific
performance, the agreement was still in force inasmuch as the contract was not yet rescinded.
At any rate, considering that the six-month period was merely an approximation of the time it
would take to reconstitute the lost title and was not a condition imposed on the perfection of
the contract and considering further that the delay in payment was only thirty days which was
caused by the respondents justified but mistaken belief that an extension to pay was granted to
him, we agree with the Court of Appeals that the delay of one month in payment was a mere
casual breach that would not entitle the respondents to rescind the contract. Rescission of a
contract will not be permitted for a slight or casual breach, but only such substantial and
fundamental breach as would defeat the very object of the parties in making the agreement. [29]

Petitioners insistence that the respondent should have consignated the amount is not
determinative of whether respondents action for specific performance will lie. Petitioners
themselves point out that the effect of consignation is to extinguish the obligation. It releases
the debtor from responsibility therefor.[30] The failure of the respondent to consignate the
P600,000.00 is not tantamount to a breach of the contract for by the fact of tendering payment,
he was willing and able to comply with his obligation.
Rodolfo N. Regala v. Federico P. Carin Petitioner, denying respondents allegations, claimed in his Answer [6] that he was the
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x sole and exclusive owner of the wall referred to as a perimeter wall, the same having been
built within the confines of his property and being part and parcel of the house and lot package
DECISION he purchased from the developer, BF Homes, Inc., in 1981; that the issue of its ownership has
never been raised by respondent or his predecessor; and that securing the consent of
CARPIO MORALES, J.: respondent and his neighbors was a mere formality in compliance with the requirements of the
Building Official to facilitate the issuance of a building permit, hence, it should not be taken to
Assailed via this petition for review of petitioner Rodolfo N. Regala is the May 26, 2009 mean that he (petitioner) acknowledges respondent to be a co-owner of the wall. He added that
Decision[1] of the Court of Appeals which affirmed with modification the May 29, 2006 he eventually secured the requisite building permit [7] in March 1999 and had duly paid the
Decision[2] of the Regional Trial Court (RTC) of Las Pias City, Br. 255 in Civil Case No. LP- administrative fine.[8]
99-0058, ordering petitioner to pay respondent Federico P. Carin moral and exemplary
damages and attorneys fees. Further, petitioner, denying that a demolition of the whole length of the wall took
place, claimed that he and his contractors laborers had been diligently cleaning respondents
Petitioner and respondent are adjacent neighbors at Spirig Street, BF Resort Village, area after every days work until respondent arrogantly demanded the dismantling of the
Las Pias City. When petitioner decided to renovate his one storey residence by constructing a scaffoldings, and barred the workforce from, and threatening to shoot anyone entering the
second floor, he under the guise of merely building an extension to his residence, approached premises; and that the complaint was instituted by respondent as leverage to force him to
respondent sometime in May 1998 for permission to bore a hole through a perimeter wall withdraw the criminal case for slander and light threats [9] which he had earlier filed against
shared by both their respective properties, to which respondent verbally consented on respondent for uttering threats and obscenities against him in connection with the construction
condition that petitioner would clean the area affected by the work. work.

As earlier indicated, petitioners real intention was to build a second floor, in fact with a terrace At the trial, after respondent and his wife confirmed the material allegations of the
atop the dividing wall. In the course of the construction of the second floor, respondent and his complaint, petitioner took the witness stand and presented his witnesses.
wife Marietta suffered from the dust and dirt which fell on their property. As petitioner failed
to address the problem to respondents satisfaction, respondent filed a letter-complaint [3] with Architect Antonio Punzalan III [10] testified that he installed GI sheets to prevent
the Office of the City Engineer and Building Official of Las Pias City on June 9, 1998. debris from falling onto respondents property and had instructed his workers to clean the
affected area after every work day at 5:00 p.m., but they were later barred by respondent from
In his letter-complaint, respondent related that, despite the lack of a building permit entering his property.
for the construction of a second floor, petitioner had demolished the dividing wall, failed to
clean the debris falling therefrom, allowed his laborers to come in and out of his (respondents) Engineer Crisostomo Chan[11] from the Office of the Building Official of Las Pias
property without permission by simply jumping over the wall, and trampled on his vegetable City testified, among other things, on the circumstances surrounding the complaint for illegal
garden; and that despite his protestations, petitioner persisted in proceeding with the construction filed by respondent and that a building permit was eventually issued to petitioner
construction, he claiming to be the owner of the perimeter wall. on March 15, 1999.

Several sumbongs[4] (complaints) were soon lodged by respondent before the Office Engineer Sonia Haduca[12] declared that upon a joint survey conducted on the
of Barangay Talon Dos against petitioner for encroachment, rampant invasion of privacy and properties of both petitioner and respondent in December 1998 to determine their exact
damages arising from the construction, and for illegal construction of scaffoldings inside his boundaries, she found an encroachment by petitioner of six centimeters at the lower portion of
(respondents) property. the existing wall negligible, since the Land Survey Law permits an encroachment of up to ten
As no satisfactory agreement was reached at the last barangay conciliation proceedings in centimeters.
December 1998, and petitioner having continued the construction work despite issuance of By Decision of May 29, 2006, Branch 255 of the Las Pias City RTC rendered
several stop-work notices from the City Engineers Office for lack of building permit, judgment in favor of respondent whom it awarded moral damages in the sum of P100,000,
respondent filed on March 1999 a complaint [5] for damages against petitioner before the RTC exemplary damages of P100,000 and attorneys fees of P50,000 plus costs of suit.[13]
of Las Pias City.
In finding for respondent, the trial court declared that, apart from the fact that
In his complaint, respondent alleged in the main that, instead of boring just one hole petitioner knowingly commenced the renovation of his house without the requisite building
as agreed upon, petitioner demolished the whole length of the wall from top to bottom into permit from the City Engineers Office, he misrepresented to respondent his true intent of
five parts for the purpose of constructing a second floor with terrace; and that debris and dust introducing renovations. For, it found that instead of just boring a hole in the perimeter wall as
piled up on respondents property ruining his garden and forcing him to, among other things, originally proposed, petitioner divided the wall into several sections to serve as a foundation
shut some of the windows of his house. Respondent thus prayed for the award of moral and for his firewall (which ended up higher than the perimeter wall) and the second storey of his
exemplary damages. house.
The trial court further declared that respondent and his family had thus to contend The trial courts award of moral and exemplary damages, as affirmed by the appellate
with the noise, dust and debris occasioned by the construction, which petitioner and his work court, was premised on the damage and suffering sustained by respondent arising from quasi-
crew failed to address despite respondents protestations, by refusing to clean the mess or delict under Article 2176[17] of the Civil Code. Thus the trial court explained:
install the necessary safety devices.
Indeed, there was fault or negligence on the part of the
Applying Article 2176 of the Civil Code on quasi-delicts, the trial court ruled that defendant when he did not provide sufficient safety measures to prevent
petitioner was at fault and negligent for failing to undertake sufficient safety measures to causing a lot of inconvenience and disturbance to the plaintiff and his
prevent inconvenience and damage to respondent to thus entitle respondent to moral and family. The evidence presented by the plaintiff regarding the dirt or
exemplary damages. debris, as well as the absence of devices or safety measures to prevent
On appeal by petitioner, the Court of Appeals affirmed the trial courts decision with the same from falling inside plaintiffs property, were duly established. It
modification by reducing the award of moral and exemplary damages to P50,000 and P25,000, did not help the cause of the defendant that he made a lot of
respectively. The appellate court anchored its affirmance on Article 19 of the New Civil Code misrepresentations regarding the renovations on his house and he did not
which directs every person to, in the exercise of his rights and in the performance of his duties, initially have a building permit for the same. In fact, it was only after the
act with justice, and observe honesty and good faith. construction works were completed that the said permit was issued and
By Resolution[14] of July 10, 2009, the appellate court denied petitioners motion for upon payment of an administrative fine by the defendant. [18]
reconsideration as well as respondents prayer in his Comment that the original awards made
by the trial court be restored.
In prayers for moral damages, however, recovery is more an exception rather than
Hence, petitioners present petition faulting the appellate court in the rule. Moral damages are not meant to be punitive but are designed to compensate and
alleviate the physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
Affirming with modification the decision of the trial wounded feelings, moral shock, social humiliation, and similar harm unjustly caused to a
court.considering the absence of any competent proof to warrant the person. To be entitled to such an award, the claimant must satisfactorily prove that he has
grant of moral and exemplary damages as well as attorneys fees. suffered damages and that the injury causing it has sprung from any of the cases listed in
[15]
(underscoring supplied) Articles 2219[19] and 2220[20] of the Civil Code. Moreover, the damages must be shown to be
the proximate result of a wrongful act or omission. The claimant must thus establish the
factual basis of the damages and its causal tie with the acts of the defendant.
Petitioner maintains that since moral and exemplary damages are compensatory in
nature, being meant neither to punish nor enrich, the claimant must establish that not only did In fine, an award of moral damages calls for the presentation of 1) evidence of
he sustain injury but also that the other party had acted in bad faith or was motivated by ill besmirched reputation or physical, mental or psychological suffering sustained by the
will. To petitioner, respondents failed to discharge this burden. He adds that the trial court did claimant; 2) a culpable act or omission factually established; 3) proof that the wrongful act or
not delve into whether petitioners renovations were the primary cause of respondents claimed omission of the defendant is the proximate cause of the damages sustained by the claimant;
injuries, viz violation of privacy, sleepless nights and mental anguish, among other things, as it and 4) the proof that the act is predicated on any of the instances expressed or envisioned by
instead focused on the lack of a building permit as basis for the awards. Article 2219 and Article 2220 of the Civil Code.[21]

Rebutting the testimony of respondents wife as to the alleged unauthorized intrusion In the present case, respondent failed to establish by clear and convincing evidence
of petitioners workers into respondents property in order to erect scaffoldings, petitioner points that the injuries he sustained were the proximate effect of petitioners act or omission. It thus
out that such an undertaking would take a considerable length of time and could not have gone becomes necessary to instead look into the manner by which petitioner carried out his
unnoticed had consent not been given by respondent. renovations to determine whether this was directly responsible for any distress respondent may
have suffered since the law requires that a wrongful or illegal act or omission must have
Moreover, petitioner posits, if consent had truly been withheld, there was nothing to preceded the damages sustained by the claimant.
prevent respondent from dismantling or immediately removing the offending structures a
course of action he did not even attempt. It bears noting that petitioner was engaged in the lawful exercise of his property
In his Comment[16] to the petition, respondent quotes heavily from the appellate and rights to introduce renovations to his abode. While he initially did not have a building permit
trial courts findings that fault and negligence attended petitioners renovation, thus justifying and may have misrepresented his real intent when he initially sought respondents consent, the
the award of damages. He goes on to reiterate his plea that the awards given by the trial court lack of the permit was inconsequential since it only rendered petitioner liable to administrative
in its decision of May 29, 2006 should be reinstated. sanctions or penalties.

The petition is partly impressed with merit. The testimony of petitioner and his witnesses, specifically Architect Punzalan,
demonstrates that they had actually taken measures to prevent, or at the very least, minimize
the damage to respondents property occasioned by the construction work. Architect Punzalan
details how upon reaching an agreement with petitioner for the construction of the second
floor, he (Punzalan) surveyed petitioners property based on the Transfer Certificate of Title
(TCT) and Tax Declarations[22] and found that the perimeter wall was within the confines of
petitioners property; that he, together with petitioner, secured the consent of the neighbors FIRST DIVISION
(including respondent) prior to the start of the renovation as reflected in a Neighbors
Consent[23] dated June 12, 1998; before the construction began, he undertook measures to
prevent debris from falling into respondents property such as the installation of GI sheet
strainers, the construction of scaffoldings [24] on respondents property, the instructions to his [G.R. No. 141968. February 12, 2001]
workers to clean the area before leaving at 5:00 p.m; [25] and that the workers conducted daily
clean-up of respondents property with his consent, until animosity developed between the
parties.[26]

Malice or bad faith implies a conscious and intentional design to do a wrongful act THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE
for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and MA. LUZ E.
in that malice or bad faith contemplates a state of mind affirmatively operating with furtive GUECO, respondents.
design or ill will.[27] While the Court harbors no doubt that the incidents which gave rise to this
dispute have brought anxiety and anguish to respondent, it is unconvinced that the damage DECISION
inflicted upon respondents property was malicious or willful, an element crucial to merit an
award of moral damages under Article 2220 of the Civil Code. KAPUNAN, J.:

Necessarily, the Court is not inclined to award exemplary damages. [28] The respondents Gueco Spouses obtained a loan from petitioner International Corporate
Bank (now Union Bank of the Philippines) to purchase a car a Nissan Sentra 1600 4DR, 1989
Petitioner, however, cannot steer clear from any liability whatsoever. Respondent Model. In consideration thereof, the Spouses executed promissory notes which were payable
and his familys rights to the peaceful enjoyment of their property have, at the very least, been in monthly installments and chattel mortgage over the car to serve as security for the notes.
inconvenienced from the incident borne of petitioners construction work. Any pecuniary loss
or damage suffered by respondent cannot be established as the records are bereft of any factual The Spouses defaulted in payment of installments. Consequently, the Bank filed on
evidence to establish the same. Nominal damages may thus be adjudicated in order that a right August 7, 1995 a civil action docketed as Civil Case No. 658-95 for Sum of Money with
of the plaintiff, respondent herein, which has been violated or invaded by the defendant, Prayer for a Writ of Replevin [1] before the Metropolitan Trial Court of Pasay City, Branch 45.
[2]
petitioner herein, may be vindicated or recognized, and not for the purpose of indemnifying On August 25, 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff
the plaintiff for any loss suffered by him.[29] and representative of the bank for a meeting in the bank premises. Desi Tomas, the Banks
Assistant Vice President demanded payment of the amount of P184,000.00 which represents
WHEREFORE, the petition is GRANTED. The May 26, 2009 Decision of the the unpaid balance for the car loan. After some negotiations and computation, the amount was
Court of Appeals is VACATED. The Court orders petitioner to pay respondent the sum lowered to P154,000.00, However, as a result of the non-payment of the reduced amount on
of P25,000 as nominal damages. that date, the car was detained inside the banks compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative
No costs.
Support, Auto Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted
in the further reduction of the outstanding loan to P150,000.00.
SO ORDERED.
On August 29, 1995, Dr. Gueco delivered a managers check in the amount
CONCHITA CARPIO MORALES of P150,000.00 but the car was not released because of his refusal to sign the Joint Motion to
Associate Justice Dismiss. It is the contention of the Gueco spouses and their counsel that Dr. Gueco need not
sign the motion for joint dismissal considering that they had not yet filed their
Answer. Petitioner, however, insisted that the joint motion to dismiss is standard operating
procedure in their bank to effect a compromise and to preclude future filing of claims,
counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the respondents
Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court of
Quezon City, Branch 33.The Metropolitan Trial Court dismissed the complaint for lack of
merit.[3]
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the
Metropolitan Trial Court was reversed. In its decision, the RTC held that there was a meeting
of the minds between the parties as to the reduction of the amount of indebtedness and the FOR THE ISSUANCE OF THE NEW MANAGERS/CASHIERS CHECK BY THE
release of the car but said agreement did not include the signing of the joint motion to dismiss RESPONDENTS IN FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL
as a condition sine qua non for the effectivity of the compromise. The court further ordered CASHIERS CHECK THAT ALREADY BECAME STALE.[6]
the bank:
1. to return immediately the subject car to the appellants in good working As to the first issue, we find for the respondents. The issue as to what constitutes the
condition; Appellee may deposit the Managers check the proceeds of which terms of the oral compromise or any subsequent novation is a question of fact that was
have long been under the control of the issuing bank in favor of the appellee resolved by the Regional Trial Court and the Court of Appeals in favor of respondents. It is
since its issuance, whereas the funds have long been paid by appellants to well settled that the findings of fact of the lower court, especially when affirmed by the Court
secure said Managers Check, over which appellants have no control; of Appeals, are binding upon this Court. [7] While there are exceptions to this rule, [8] the present
case does not fall under any one of them, the petitioners claim to the contrary,
2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as notwithstanding.
exemplary damages, and P25,000.00 as attorneys fees, and
Being an affirmative allegation, petitioner has the burden of evidence to prove his claim
3. to pay the cost of suit. that the oral compromise entered into by the parties on August 28, 1995 included the
stipulation that the parties would jointly file a motion to dismiss. This petitioner failed to
In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby AFFIRMED. do. Notably, even the Metropolitan Trial Court, while ruling in favor of the petitioner and
[4] thereby dismissing the complaint, did not make a factual finding that the compromise
agreement included the condition of the signing of a joint motion to dismiss.

The case was elevated to the Court of Appeals, which on February 17, 2000, issued the The Court of Appeals made the factual findings in this wise:
assailed decision, the decretal portion of which reads:
In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related
WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to
and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No. Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount of
Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner. indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18,
5). Respondents, however, maintained that no such condition was ever discussed during their
SO ORDERED.[5] meeting of August 28, 1995 (Rollo, p. 32).

The Court of Appeals essentially relied on the respect accorded to the finality of the The trial court, whose factual findings are entitled to respect since it has the opportunity to
findings of facts by the lower court and on the latter's finding of the existence of fraud which directly observe the witnesses and to determine by their demeanor on the stand the probative
constitutes the basis for the award of damages. value of their testimonies (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a
categorical finding on the issue. In dismissing the claim of damages of the respondents, it
The petitioner comes to this Court by way of petition for review on certiorari under merely observed that respondents are not entitled to indemnity since it was their unjustified
Rule 45 of the Rules of Court, raising the following assigned errors: reluctance to sign of the Joint Motion to Dismiss that delayed the release of the car. The trial
court opined, thus:
I
As regards the third issue, plaintiffs claim for damages is unavailing. First, the plaintiffs could
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT have avoided the renting of another car and could have avoided this litigation had he signed
WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A the Joint Motion to Dismiss. While it is true that herein defendant can unilaterally dismiss the
CONDITION FOR THE COMPROMISE AGREEMENT. case for collection of sum of money with replevin, it is equally true that there is nothing wrong
for the plaintiff to affix his signature in the Joint Motion to Dismiss, for after all, the dismissal
II of the case against him is for his own good and benefit. In fact, the signing of the Joint Motion
to Dismiss gives the plaintiff three (3) advantages.First, he will recover his car. Second, he will
pay his obligation to the bank on its reduced amount of P150,000.00 instead of its original
THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY
claim of P184,985.09. And third, the case against him will be dismissed. Plaintiffs, likewise,
DAMAGES AND ATTORNEYS FEES IN FAVOR OF THE RESPONDENTS.
are not entitled to the award of moral damages and exemplary damages as there is no showing
that the defendant bank acted fraudulently or in bad faith. (Rollo, p. 15)
III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN


THE SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION
The Court has noted, however, that the trial court, in its findings of facts, clearly indicated that Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the
the agreement of the parties on August 28, 1995 was merely for the lowering of the price, voluntary execution of a wrongful act, or a willful omission, knowing and intending the effects
hence - which naturally and necessarily arise from such act or omission; the fraud referred to in Article
1170 of the Civil Code is the deliberate and intentional evasion of the normal fulfillment of
xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff obligation.[11] We fail to see how the act of the petitioner bank in requiring the respondent to
entered into an oral compromise agreement, whereby the original claim of the sign the joint motion to dismiss could constitute as fraud. True, petitioner may have been
bank of P184,985.09 was reduced to P150,000.00 and that upon payment of remiss in informing Dr. Gueco that the signing of a joint motion to dismiss is a standard
which, plaintiff was informed that the subject motor vehicle would be released to operating procedure of petitioner bank. However, this can not in anyway have prejudiced Dr.
him. (Rollo, p. 12) Gueco. The motion to dismiss was in fact also for the benefit of Dr. Gueco, as the case filed by
petitioner against it before the lower court would be dismissed with prejudice. The whole
point of the parties entering into the compromise agreement was in order that Dr. Gueco would
The lower court, on the other hand, expressly made a finding that petitioner failed to include pay his outstanding account and in return petitioner would return the car and drop the case for
the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In dismissing money and replevin before the Metropolitan Trial Court. The joint motion to dismiss was but a
petitioners claim, the lower court declared, thus: natural consequence of the compromise agreement and simply stated that Dr. Gueco had fully
settled his obligation, hence, the dismissal of the case. Petitioner's act of requiring Dr.
If it is true, as the appellees allege, that the signing of the joint motion was a condition sine Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on the part
qua non for the reduction of the appellants obligation, it is only reasonable and logical to of petitioner to renege on the compromise agreement of the parties. It should, likewise, be
assume that the joint motion should have been shown to Dr. Gueco in the August 28, 1995 noted that in cases of breach of contract, moral damages may only be awarded when the
meeting. Why Dr. Gueco was not given a copy of the joint motion that day of August 28, breach was attended by fraud or bad faith. [12] The law presumes good faith. Dr. Gueco failed to
1995, for his family or legal counsel to see to be brought signed, together with the present an iota of evidence to overcome this presumption. In fact, the act of petitioner bank in
P150,000.00 in managers check form to be submitted on the following day on August 29, lowering the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith
1995? (sic) [I]s a question whereby the answer up to now eludes this Courts and sincere desire to settle the case. If respondent did suffer any damage, as a result of the
comprehension. The appellees would like this Court to believe that Dr. Gueco was informed withholding of his car by petitioner, he has only himself to blame. Necessarily, the claim for
by Mr. Rivera of the bank requirement of signing the joint motion on August 28, 1995 but he exemplary damages must fail. In no way, may the conduct of petitioner be characterized as
did not bother to show a copy thereof to his family or legal counsel that day August 28, wanton, fraudulent, reckless, oppressive or malevolent.[13]
1995. This part of the theory of appellee is too complicated for any simple oral agreement. The
idea of a Joint Motion to Dismiss being signed as a condition to the pushing through a deal We, likewise, find for the petitioner with respect to the third assigned error. In the
surfaced only on August 29, 1995. meeting of August 29, 1995, respondent Dr. Gueco delivered a managers check representing
the reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of
respondent bank. However, since Dr. Gueco refused to sign the joint motion to dismiss, he was
This Court is not convinced by the appellees posturing. Such claim rests on too slender a made to execute a statement to the effect that he was withholding the payment of the check.
frame, being inconsistent with human experience. Considering the effect of the signing of the [14]
Subsequently, in a letter addressed to Ms. Desi Tomas, vice president of the bank, dated
Joint Motion to Dismiss on the appellants substantive right, it is more in accord with human September 4, 1995, Dr. Gueco instructed the bank to disregard the hold order letter and
experience to expect Dr. Gueco, upon being shown the Joint Motion to Dismiss, to refuse to demanded the immediate release of his car,[15] to which the former replied that the condition of
pay the Managers Check and for the bank to refuse to accept the manager's check. The only signing the joint motion to dismiss must be satisfied and that they had kept the checkwhich
logical explanation for this inaction is that Dr. Gueco was not shown the Joint Motion to could be claimed by Dr. Gueco anytime. [16] While there is controversy as to whether the
Dismiss in the meeting of August 28, 1995, bolstering his claim that its signing was never put document evidencing the order to hold payment of the check was formally offered as evidence
into consideration in reaching a compromise. xxx. [9] by petitioners,[17] it appears from the pleadings that said check has not been encashed.

We see no reason to reverse. The decision of the Regional Trial Court, which was affirmed in toto by the Court of
Appeals, orders the petitioner:
Anent the issue of award of damages, we find the claim of petitioner meritorious. In
finding the petitioner liable for damages, both the Regional Trial Court and the Court of 1. to return immediately the subject car to the appellants in good working condition. Appellee
Appeals ruled that there was fraud on the part of the petitioner. The CA thus declared: may deposit the Managers Check the proceeds of which have long been under the control of
The lower court's finding of fraud which became the basis of the award of damages was the issuing bank in favor of the appellee since its issuance, whereas the funds have long been
likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as paid by appellants to secure said Managers Check over which appellants have no control. [18]
amended is the deliberate and intentional evasion of the normal fulfillment of obligation When
petitioner refused to release the car despite respondent's tender of payment in the form of a Respondents would make us hold that petitioner should return the car or its value and
manager's check, the former intentionally evaded its obligation and thereby became liable for that the latter, because of its own negligence, should suffer the loss occasioned by the fact that
moral and exemplary damages, as well as attorneys fees. [10] the check had become stale. [19] It is their position that delivery of the managers check produced

We disagree.
the effect of payment[20] and, thus, petitioner was negligent in opting not to deposit or use said
check. Rudimentary sense of justice and fair play would not countenance respondents position.
THIRD DIVISION
A stale check is one which has not been presented for payment within a reasonable time
after its issue. It is valueless and, therefore, should not be paid. Under the negotiable
instruments law, an instrument not payable on demand must be presented for payment on the
day it falls due. When the instrument is payable on demand, presentment must be made within
[G.R. No. 139050. October 2, 2001]
a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if
made within a reasonable time after the last negotiation thereof. [21]
A check must be presented for payment within a reasonable time after its issue, [22] and in
determining what is a reasonable time, regard is to be had to the nature of the instrument, the REPUBLIC OF THE PHILIPPINES, represented by the COMMISSIONER OF
usage of trade or business with respect to such instruments, and the facts of the particular case. CUSTOMS, petitioner, vs. THE COURT OF TAX APPEALS and AGFHA,
[23]
The test is whether the payee employed such diligence as a prudent man exercises in his INCORPORATED, respondents.
own affairs.[24] This is because the nature and theory behind the use of a check points to its
immediate use and payability. In a case, a check payable on demand which was long overdue
by about two and a half (2-1/2) years was considered a stale check. [25] Failure of a payee to DECISION
encash a check for more than ten (10) years undoubtedly resulted in the check becoming stale. VITUG, J.:
[26]
Thus, even a delay of one (1) week[27] or two (2) days,[28] under the specific circumstances
of the cited cases constituted unreasonable time as a matter of law.
On 12 December 1992, a shipment of bales of textile gray cloth, under Bill of Lading
In the case at bar, however, the check involved is not an ordinary bill of exchange but a No. HKT-138899, arrived at the Manila International Container Port (MICP) aboard the vessel
managers check. A managers check is one drawn by the banks manager upon the bank itself. It "S/S ACX Daisy." The shipment's Inward Foreign Manifest stated that the bales of cloth were
is similar to a cashiers check both as to effect and use. A cashiers check is a check of the banks consigned to GQ GARMENTS, Inc., of 244 Escolta Street, Binondo, Manila. The Clean
cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a Report of Findings (CRF) issued by the Societe Generale de Surveilance (SGS), however,
bank upon the bank itself, and accepted in advance by the act of its issuance. [29] It is really the mentioned AGFHA, Incorporated, to be the consignee of the shipment. Forthwith, the shipping
banks own check and may be treated as a promissory note with the bank as a maker. [30] The agent, FIL-JAPAN, requested for an amendment of the Inward Foreign Manifest so as to
check becomes the primary obligation of the bank which issues it and constitutes its written correct the name of the consignee from that of GQ GARMENTS, Inc., to that of AGFHA, Inc.
promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. If
treated as promissory note, the drawer would be the maker and in which case the holder need On 22 January 1993, FIL-JAPAN forwarded to AGFHA, Inc., the amended Inward
not prove presentment for payment or present the bill to the drawee for acceptance. [31] Foreign Manifest which the latter, in turn, submitted to the MICP Law Division. The MICP
indorsed the document to the Customs Intelligence Investigation Services (CIIS). The CIIS
Even assuming that presentment is needed, failure to present for payment within a placed the subject shipment under Hold Order No. H/CI/01/2293/01, dated 22 January 1993,
reasonable time will result to the discharge of the drawer only to the extent of the loss caused on the ground that GQ GARMENTS, Inc., could not be located in its given address at 244
by the delay.[32] Failure to present on time, thus, does not totally wipe out all liability. In fact, Escolta Street, Binondo, Manila, and was thus suspected to be a fictitious firm. Forfeiture
the legal situation amounts to an acknowledgment of liability in the sum stated in the check. In proceedings under Section 2530(f) and (l) (3-5) of the Tariff and Customs Code were initiated.
this case, the Gueco spouses have not alleged, much less shown that they or the bank which
issued the managers check has suffered damage or loss caused by the delay or non- AGFHA, Inc., through its president Wilson Kho, filed a motion for intervention
presentment. Definitely, the original obligation to pay certainly has not been erased. contending that AGFHA, Inc., is the lawful owner and actual consignee of the subject
shipment. The motion for intervention was granted on 2 March 1993. Following a hearing, the
It has been held that, if the check had become stale, it becomes imperative that the Collector of Customs came up with a draft decision ordering the lifting of the warrant of
circumstances that caused its non-presentment be determined. [33] In the case at bar, there is no seizure and detention on the basis of its findings that GQ GARMENTS, Inc., was not a
doubt that the petitioner bank held on the check and refused to encash the same because of the fictitious corporation and that there was a valid waiver of rights over the bales of cloth by GQ
controversy surrounding the signing of the joint motion to dismiss. We see no bad faith or GARMENTS, Inc., in favor of AGFHA, Inc. The draft decision was submitted to the Deputy
negligence in this position taken by the Bank. Commissioner for clearance and approval, who, in turn, transmitted it to the CIIS for
comment. The CIIS opposed the draft decision, insisting that GQ GARMENTS, Inc., was a
WHEREFORE, premises considered, the petition for review is given due course. The fictitious corporation and that even if it did exist, its president, John Barlin, had no authority to
decision of the Court of Appeals affirming the decision of the Regional Trial Court is waive the right over the subject shipment in favor of AGFHA, Inc.
SET ASIDE. Respondents are further ordered to pay the original obligation amounting to
P150,000.00 to the petitioner upon surrender or cancellation of the managers check in the The Deputy Commissioner, relying on the comment of the CIIS, rejected the draft
latters possession, afterwhich, petitioner is to return the subject motor vehicle in good working decision of the Collector of Customs.
condition.
GQ GARMENTS, Inc., and AGFHA, Inc., filed a joint motion for reconsideration,
SO ORDERED. which was given due course. Convinced that the evidence presented established the legal
existence of GQ GARMENTS, Inc., and finding that a resolution passed by the Board of "Section 2530 (f) and (1) 3-5 of the Tariff and Customs Code, provide that in order that a
Directors of GQ GARMENTS, Inc., ratified the waiver of its president, the Collector of shipment be liable to forfeiture, it must be proved that fraud has been committed by the
Customs in another draft decision granted the joint motion. The Office of the Commissioner of importer/consignee to evade payment of the duties due. To establish the existence of fraud, the
Customs, however, disapproved the new draft decision and denied the release of the goods; it onus probandi is on the part of the Bureau of Customs who ordered the forfeiture of the
ruled: subject shipments. The BOC, however, failed.

"1. x x x [I]t is quite suspicious that it took more than one month before the alleged error in the "x x x x x x x x x
consignee was discovered by the shipper and by AGFHA, Inc., and by GQ Garments
especially considering the fact that there is a CRF naming therein AGFHA as consignee of the "'x x x This Court could not fathom any individual or collective importance of the x x x
subject shipment which means that the shipper was contracted by SGS so that the latter can findings [of the BOC] as indicative of the actual commission of fraud or any attempt or
inspect the subject shipment to be imported by consignee; that Mr. Wilson Kho admitted it was frustration thereof. As defined, actual or intentional fraud consists of deception willfully and
AGFHA who ordered the shipment by telephone call; that prior to this shipment there was no deliberately done or resorted to in order to induce another to give up some right. It must
order placed in the name of GQ Garments from Indonesia; and that this is already the second amount to intentional wrong-doing with the sole object of avoiding the tax.
of four shipments ordered by AGFHA, Inc., from Jakarta, Indonesia.
`The circumstances or findings presented by the [BOC] do not reveal x x x any kind of
"2. Mr. Wilson Kho's explanation that the shipper committed an error in naming GQ deception that could have been played upon [the] Bureau to give up some of its right, e.g., to
GARMENTS as the consignee of the subject shipment because his business card contains the collect correct taxes on properly declared shipment of goods.
name of both GQ GARMENTS and AGFHA, Inc. appears to be an afterthought and self-
serving. Moreover, he admitted that he is not an officer nor even a stockholder of GQ
GARMENTS so why should his business card indicate his name as President/General `x x x x x x x x x
Manager of GQ GARMENTS and AGFHA, Inc. That is clearly a misrepresentation.
`[BOC] is saying that the shipper knew all along that AGFHA, Inc., was the real consignee
"3. During the hearing on April 15, 1994, Mr. John John Barlin of GQ GARMENTS admitted due to the pre-inspection done by SGS and the corresponding issuance of the CRF naming
that the letter dated February 11, 1993 purportedly signed by him (in which he allegedly AGFHA, Inc. as the consignee. So that in naming GQ GARMENTS Inc. as the consignee in
informed the Collector of Customs that AGFHA, Inc., is the rightful owner of the subject the Bill of Lading and Inward Foreign Manifest, the same was intentional and deliberately
shipment and that GQ GARMENTS is waiving its right over the same) actually came from done and not a case of error or inadvertence x x x.
Wilson Kho. In other words, the said letter is spurious.
`[The Court] could not believe that [BOC] assumed the above circumstance as a fact in his
"4. From the admissions of both Mr. Wilson Kho and Mr. John John Barlin, it is clear that GQ attempt to forfeit the subject shipment in favor of the government. The respondent is trying to
GARMENTS is actually owned by Mr. Wilson Kho and its corporate franchise appears to be second guess the act of the shipper that the latter had prior knowledge of AGFHA Inc., as the
being used to perpetrate fraud and other scheme to confuse authorities (pp. 1-4, Decision of true consignee before the shipment. [The Court] deem[s] such conclusion as pure
Commissioner of Customs, Custom Case No. 94-017)"[1] hearsay. Obviously, it is only the shipper and/or the SGS who could personally vouch for
events that transpired prior to the shipment of the goods subject matter of this case.
In deference to the directive of the Commissioner, the District Collector of Customs ordered
the forfeiture of the shipment. On 14 October 1994, AGFHA, Inc., interposed an appeal to the `x x x [AGFHA Inc.] has offered the following controverting and convincing evidence x x x:
Office of the Commissioner of Customs. The appeal was dismissed consistently with the
Commissioner's earlier stand that disapproved the Collector of Customs' draft decision. `1. Telex message from the shipping agent of shipper P.T. Mandala Subur Textile Industry to
FIL-JAPAN Shipping Company Manila, requesting amendment of the Bill of Lading and other
On 5 October 1995, AGFHA, Inc., filed a petition for review with the Court of Tax shipping records, to change consignee from GQ Garments, Inc. to Agfha, Inc.;
Appeals questioning the forfeiture of the bales of textile cloth. Finding merit in the plea of
appellants, the Court of Tax Appeals granted the petition and ordered the release of the goods
to AGFHA, Inc. `2. Application for Amendment of the Inward Foreign Manifest filed by the shipper's agent,
FIL-JAPAN Shipping Company, for approval with the Customs Law Division, Manila
On 27 December 1996, the Commissioner of Customs then challenged before the Court International Container Port (MICP), to change the name of the consignee from GQ Garments,
of Appeals the decision of the tax court. Inc. to Agfha, Inc.
In its decision, dated 31 May 1999, the Court of Appeals dismissed the appeal for lack
of merit. Quoting extensively from the assailed decision of the tax court, the appellate court `3. Letter dated February 10, 1993 by Wilson Kho, president of Agfha, Inc. addressed to Atty.
ruled that the Bureau of Customs has failed to satisfy its burden of proving fraud on the part of Buenaventura Maniego, District Collector of Customs, MICP, North Harbor, Manila
the importer or consignee. It expounded thusly: manifesting the former's intention and willingness to pay the corresponding duties and taxes
on the subject shipment based on a higher valuation indicated in the Clean Report of Findings opinion of the Collector, have been used, are or were entered to be used as instruments in the
(CRF) as recommended by the SGS, as against the lower valuation indicated in the invoice. importation or exportation of the former.

`4. Bill of Lading covering the subject shipment showing the shipper as P.T. Mandala Subur "x x x x x x x x x
Textile Industry and the consignee as GQ Garments, Inc.
"1. Any article sought to be imported or exported:
`5. The Clean Report of Findings (CRF) dated December 9, 1992 showing the consignee of
the subject shipment as Agfha, Inc. and the shipper as P.T. Mandala Subur Textile Industry. "x x x x x x x x x

`6. Import Authority No. (IAN) 18.012.37679, assigned by the Central Bank of the Philippines "(3) On the strength of a false declaration or affidavit executed by the owner, importer,
appearing on the right hand portion of the CRF. exporter or consignee concerning the importation of such article;

`The above evidence speak for themselves. If any deception is intended by petitioner Agfha, "(4) On the strength of a false invoice or other document executed by the owner, importer,
Inc., why would it apply for an Import Authority Number under its name? It knew for certain exporter or consignee concerning the importation or exportation of such article; and
that the subject goods will be pre-inspected by SGS under its name.
"(5) Through any other practice or device contrary to law by means of which such articles was
"x x x x x x x x x entered through a customhouse to the prejudice of the government."

`x x x [AGFHA Inc.] expressed its willingness to pay the higher duties and taxes imposed on The requisites for the forfeiture of goods under Section 2530(f), in relation to (1) (3-5),
the subject shipment as indicated in the CRF. x x x From the very start up to the end, petitioner of the Tariff and Customs Code are: (a) the wrongful making by the owner, importer, exporter
had been consistent in its actuations. It applied for an Import Authority with the Central Bank or consignee of any declaration or affidavit, or the wrongful making or delivery by the same
of the Philippines which authority was used by the SGS in making the necessary pre- person of any invoice, letter or paper - all touching on the importation or exportation of
inspection and issuing the CRF. It undertook remedial measures to amend the consignee in the merchandise; (b) the falsity of such declaration, affidavit, invoice, letter or paper; and (c) an
Bill of Lading and Inward Foreign Manifest when the shipper made a mistake. It then intention on the part of the importer/consignee to evade the payment of the duties due. [3]
manifested to pay the correct taxes and duties. The government stands to lose nothing.'"[2]
Petitioner asserts that all of these requisites are present in this case. It contends that it did
The Court of Appeals attributed the error in indicating GQ GARMENTS, Inc., instead of not presume fraud, rather the events positively point to the existence of fraud. Private
AGFHA, Inc., in the Inward Foreign Manifest as being the consignee of the subject shipment respondent AGFHA, Inc., on the other hand, maintains that there has only been an inadvertent
to the shipping agent. It also noted the finding of the tax court that GQ GARMENTS, Inc., error and not an intentional wrongful declaration by the shipper to evade payment of any tax
was, in fact, a registered importer with Registration No. 91-5624 per the Customs Intelligence due. The resolution of this issue would entail a reevaluation of the attendant circumstances, a
and Investigation Service List of Registered Importers contained in Customs Memorandum matter that cannot be freely undertaken by this Tribunal. It has been a settled rule that the
Order No. 149-88 for the year 1991. Supreme Court is not a trier of facts. [4] Findings of the appellate court are generally binding
and cannot be disturbed by this Court unless it is sufficiently shown that there has been no
The BOC instituted the instant petition for review under Rule 45 of the Revised Rules of evidence on record to support such findings. [5] The assessment made by the appellate court
Court assailing the affirmance by the Court of Appeals of the tax court's decision of 04 carry even more weight when it is consistent with that of the trial court. [6] Consonantly, the
November 1996. factual determination of the Court of Tax Appeals, when supported by substantial evidence,
will not be reversed on appeal unless it is clear that the said court has committed gross error in
The appeal is not meritorious. the process.[7] The Collector of Customs, Court of Tax Appeals and the Court of Appeals are
Section 2530 (f) and (1) (3-5) provides: unanimous in concluding that no fraud has been committed by private respondent in the
importation of the bales of cloth. The records do appear to sustain this conclusion.

"Section 2530. Property Subject to Forfeiture Under Tariff and Customs Law. - Any vehicle, Fraud must be proved to justify forfeiture. [8] It must be actual, amounting to intentional
vessel or aircraft, cargo, article and other objects shall, under the following conditions be wrong-doing with the clear purpose of avoiding the tax. [9] Forfeiture is not favored in law nor
subjected to forfeiture; in equity.[10] Mere negligence is not equivalent to the fraud contemplated by law. [11] What is
here involved is an honest mistake, not even directly attributable to private respondent, which
"x x x x x x x x x will not deprive the government of its right to collect the proper tax. The conclusion of the
appellate court, being consistent with the evidence on record and not contrary to law and
jurisprudence, hardly can be overturned by this Court.
"f. Any article the importation or exportation of which is effected or attempted contrary to law,
or any article of prohibited importation or exportation, and all other articles which, in the
WHEREFORE, the petition is hereby DENIED and the assailed decision of the Court Melo, (Chairman), Panganiban, and Sandoval-Gutierrez, JJ., concur.
of Appeals is AFFIRMED.
SO ORDERED.