Credit Transactions Cases

6/24/2017 PHILIPPINEREPORTSANNOTATEDVOLUME044
[No. 19190. November 29, 1922]
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff

and appellee, vs. VENANCIO CONCEPCION, defendant
and appellant.
1. BANKS AND BANKING "CREDIT" AND "LOAN,"

DEFINED AND DISTINGUISHED.The "credit" of an
individual means his ability to borrow money by virtue of
the confidence or trust reposed by a lender that he will
pay what he may promise. A "loan" means the delivery by
one party and the receipt by the other party of a given
sum of money, upon an agreement, express or implied, to
repay the sum loaned, with or without interest. The
concession of a "credit" necessarily involves the granting of
"loans" up to the limit of the amount fixed in the "credit."
2. ID. "LOAN" AND "DISCOUNT" DISTINGUISHED.To

discount a paper is a mode of loaning money, with these
distinctions: (1) In a discount, interest is deducted in
advance, while in a loan, interest is taken at the
expiration of a credit (2) a discount is always on double
name paper a loan is generally on singlename paper.
3. STATUTES INTERPRETATION AND

CONSTRUCTION IN GENERAL.In the interpretation
and construction of statutes, the primary rule is to
ascertain and give effect to the intention of the
Legislature.
4. ID. ID. SECTION 35 OF ACT No. 2747 PROHIBITION

AGAINST INDIRECT LOANS.The purpose of the
Legislature in enacting section 35 of Act No. 2747 was to
erect a wall of safety against temptation for a director of
the Philippine National Bank. The prohibition against
indirect loans is a recognition of the familiar maxim that
no man may serve two mastersthat where personal
interest clashes with fidelity to duty the latter almost
always suffers.
5. ID. ID. ID. ID.A loan to a partnership of which the

wife of a director is a member falls within the prohibition
http://central.com.ph/sfsreader/session/0000015cd9cd02ead9316204003600fb002c009e/t/?o=False 1/9
in section 35 of Act No. 2747 against indirect loans.
6. ID. ID. ID. PROHIBITION ON CORPORATION.When

the corporation itself is forbidden to do an act, the
prohibition extends to the board of directors, and to each
director separately and individually.
7. ID. REPEAL EFFECT UPON VIOLATIONS OF THE

OLD LAW.Where an Act of the Legislature which
penalizes an offense repeals a former Act which penalized
the same offense, such repeal does not have the effect of
thereafter depriving the courts of
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VOL. 44, NOVEMBER 29, 1922 127
People vs. Concepcion
jurisdiction to try, convict, and sentence offenders charged

with violations of the old law.
8. CRIMINAL LAW ACT No. 2747 GOOD FAITH AS A

DEFENSE.Under section 35 of Act No. 2747, criminal
intent is not necessarily material. The doing of the
inhibited act, inhibited on account of public policy and
public interest, constitutes the crime.
9. ID. ID. ID.The law will not allow private profit from a
trust, and will not listen to any proof of honest intent.
APPEAL from a judgment of the Court of First Instance of

Cagayan. Filamor, J.
The facts are stated in the opinion of the court.
Recaredo Ma. Calvo for appellant.
AttorneyGeneral VillaReal for appellee.
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of

the Aparri branch of the Philippine National Bank,
Venancio Concepcion, President of the Philippine National
Bank, between April 10, 1919, and May 7, 1919, authorized
an extension of credit in favor of "Puno y Concepcion, S. en
C." in the amount of P300,000. This special authorization
was essential in view of the memorandum order of
President Concepcion dated May 17, 1918, limiting the
discretional power of the local manager at Aparri,
Cagayan, to grant loans and discount negotiable documents

to P5,000, which, in certain cases, could be increased to ?
10,000. Pursuant to this authorization, credit aggregating
P300,000, was granted the firm of "Puno y Concepcion, S.
en C.," the only security required consisting of six demand
notes. The notes, together with the interest, were taken up
and paid by July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership
capitalized at P100,000. Anacleto Concepcion contributed
P5,000 Clara Vda. de Concepcion, P5,000 Miguel S.
Concepcion, P20,000 Clemente Puno, P20,000 and Rosario
San Agustin, "casada con Gral. Venancio Concepcion,"
P50,000. Member Miguel S. Concepcion was the
administrator of the company.
128
128 PHILIPPINE REPORTS ANNOTATED

On the facts recounted, Venancio Concepcion, as President

of the Philippine National Bank and as member of the
board of directors of this bank, was charged in the Court of
First Instance of Cagayan with a violation of section 35 of
Act No. 2747. He was found guilty by the Honorable
Enrique V. Filamor, Judge of First Instance, and was
sentenced to imprisonment for one year and six months, to
pay a fine of P3,000, with subsidiary imprisonment in case
of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20,
1918, just mentioned, to which reference must hereafter
repeatedly be made, reads as follows: "The National Bank
shall not, directly or indirectly, grant loans to any of the
members of the board of directors of the bank nor to agents
of the branch banks." Section 49 of the same Act provides:
"Any person who shall violate any of the provisions of this
Act shall be punished by a fine not to exceed ten thousand
pesos, or by imprisonment not to exceed five years, or by
both such fine and imprisonment." These two sections were
in effect in 1919 when the alleged unlawful acts took place,
but were repealed by Act No. 2938, approved on January
30, 1921.
Counsel for the defense assign ten errors as having been
committed by the trial court. These errors they have
argued adroitly and exhaustively in their printed brief, and
again in oral argument. AttorneyGeneral VillaReal, in an
exceptionally accurate and comprehensive brief, answers
the propositions of appellant one by one.
The questions presented are reduced to their simplest

elements in the opinion which f ollows:
I. Was the granting of a credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, a
"loan" within the meaning of section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove
that authority to make a loan was given, but only show the
concession of a credit. In this statement of fact,
129
VOL. 44, NOVEMBER 29, 1922 129

counsel is correct, for the exhibits in question speak of a

"crdito" (credit) and not of a "prstamo" (loan).
The "credit" of an individual means his ability to borrow
money by virtue of the confidence or trust reposed by a
lender that he will pay what he may promise. (Donnell vs.
Jones [1848], 13 Ala., 490 Bouvier's Law Dictionary.) A
"loan" means the delivery by one party and the receipt by
the other party of a given sum of money, upon an
agreement, express or implied, to repay the sum loaned,
with or without interest. (Payne vs. Gardiner [1864], 29 N.
Y., 146, 167.) The concession of a "credit" necessarily
involves the granting of "loans" up to the limit of the
amount fixed in the "credit."
II. Was the granting of a credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C.," by Venancio
Concepcion, President of the Philippine National Bank, a
"loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747
prohibits the granting of a "loan," it does not prohibit what
is commonly known as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then
President of the National Bank, inquired of the Insular
Auditor whether section 37 of Act No. 2612 was intended to
apply to discounts as well as to loans. The ruling of the
Acting Insular Auditor, dated August 11, 1916, was to the
effect that said section referred to loans alone, and placed
no restriction upon discount transactions. It becomes
material, therefore, to discover the distinction between a
"loan" and a "discount," and to ascertain if the instant
transaction comes under the first or the latter
denomination.
Discounts are favored by bankers because of their liquid
nature, growing, as they do, out of an actual, live,
transaction. But in its last analysis, to discount a paper is

only a mode of loaning money, with, however, these
distinctions: (1) In a discount, interest is deducted in
advance, while in a loan, interest is taken at the expiration
of a credit (2)
130

a discount is always on doublename paper a loan is

generally on singlename paper.
Conceding, without deciding, that, as ruled by the
Insular Auditor, the law covers loans and not discounts, yet
the conclusion is inevitable that the demand notes signed
by the firm "Puno y Concepcion, S. en C." were not discount
paper but were mere evidences of indebtedness, because (1)
interest was not deducted from the face of the notes, but
was paid when the notes fell due and (2) they were single
name and not doublename paper.
The facts of the instant case having relation to this
phase of the argument are not essentially different f rom
the f acts in the Binalbagan Estate case. Just as there it
was declared that the operations constituted a loan and not
a discount, so should we here lay down the same ruling.
III. Was the granting of a credit of P300,000 to the
copartnership, "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, an
"indirect loan" within the meaning of section 35 of Act No.
2747?
Counsel argue that a loan to the partnership "Puno y
Concepcion, S. en C." was not an "indirect loan." In this
connection, it should be recalled that the wife of the
defendant held onehalf of the capital of this partnership.
In the interpretation and construction of statutes, the
primary rule is to ascertain and give effect to the intention
of the Legislature. In this instance, the purpose of the
Legislature is plainly to erect a wall of safety against
temptation for a director of the bank. The prohibition
against indirect loans is a recognition of the familiar
maxim that no man may serve two mastersthat where
personal interest clashes with fidelity to duty the latter
almost always suffers. If, therefore, it is shown that the
husband is financially interested in the success or failure of
his wife's business venture, a loan to a partnership of
which the wife of a director is a member, falls within the
prohibition.
131
VOL. 44, NOVEMBER 29, 1922 131

Various provisions of the Civil Code serve to establish the

familiar relationship called a conjugal partnership.
(Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be
specially noted.) A loan, therefore, to a partnership of
which the wife of a director of a bank is a member, is an
indirect loan to such director.
That it was the intention of the Legislature to prohibit
exactly such an occurrence is shown by the acknowledged
fact that in this instance the defendant was tempted to
mingle his personal and family affairs with his official
duties, and to permit the loan of P300,000 to a partnership
of no established reputation and without asking for
collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870],
33 Md., 558 3 Am. Rep., 211), the Supreme Court of
Maryland said:
"What then was the purpose of the law when it declared that no
director or officer should borrow of the bank, and 'if any director,'
etc., 'shall be convicted,' etc., 'of directly or indirectly violating this
section he shall be punished by fine and imprisonment?" We say
to protect the stockholders, depositors and creditors of the bank,
against the temptation to which the directors and officers might
be exposed, and the power which as such they must necessarily
possess in the control and management of the bank, and the
legislature unwilling to rely upon the implied understanding that
in assuming this relation they would not acquire any interest
hostile or adverse to the most exact and faithful discharge of duty,
declared in express terms that they should not borrow, etc., of the
bank."
In the case of People vs. Knapp ([1912], 206 N. Y., 373),

relied upon in the Binalbagan Estate decision, it was said:
"We are of opinion the statute forbade the loan to his

copartnership firm as well as to himself directly.. The loan was
made indirectly to him through his firm."
132

IV. Could Venancio Concepcion, President of the Philippine

National Bank, be convicted 'of a violation of section 35 of
Act No. 2747 in relation with section 49 of the same Act,
when these portions of Act No. 2747 were repealed by Act
No. 2938, prior to the filing of the information and the
rendition of the judgment?
As noted along toward the beginning of this opinion,
section 49 of Act No. 2747, in relation to section 35 of the
same Act, provides a punishment for any person who shall
violate any of the provisions of the Act. It is contended,
however, by the appellant, that the repeal of these sections
of Act No. 2747 by Act No. 2938 has served to take away
the basis for criminal prosecution.
This same question has been previously submitted and
has received an answer adverse to such contention in the
cases of United States vs. Cuna ([1908], 12 Phil., 241)
People vs. Concepcion ([1922], 43 Phil., 653) and Ong
Chang Wing and Kwong Fok vs. United States ([1910], 218
U. S., 272 40 Phil., 1046). In other words, it has been the
holding, and it must again be the holding, that where an
Act of the Legislature which penalizes an offense repeals a
former Act which penalized the same offense, such repeal
does not have the effect of thereafter depriving the courts of
jurisdiction to try, convict, and sentence offenders charged
with violations of the old law.
V. Was the granting of a credit of P300,000 to the
copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, in
violation of section 35 of Act No. 2747, penalized by this
law?
Counsel argue that since the prohibition contained in
section 35 of Act No. 2747 is on the bank, and since section
49 of said Act provides a punishment not on the bank when
it violates any provision of the law, but on a person
violating any provision of the same, and imposing
imprisonment as a part of the penalty, the prohibition
contained in said section 35 is without penal sanction.
133
VOL. 44, NOVEMBER 29, 1922 133

The answer is that when the corporation itself is forbidden

to do an act, the prohibition extends to the board of
directors, and to each director separately and individually.
{People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion,

President of the Philippine National Bank, in extending
the credit of P300,000 to the copartnership "Puno y
Concepcion, S. en C." constitute a legal defense?
Counsel argue that if defendant committed the acts of
which he was convicted, it was because he was misled by
rulings coming from the Insular Auditor. It is furthermore
stated that since the loans made to the copartnership
"Puno y Concepcion, S. en C." have been paid, no loss has
been suffered by the Philippine National Bank.
Neither argument, even if conceded to be true, is
conclusive. Under the statute which the defendant has
violated, criminal intent is not necessarily material. The
doing of the inhibited act, inhibited on account of public
policy and public interest, constitutes the crime. And, in
this instance, as previously demonstrated, the acts of the
President of the Philippine National Bank do not f all
within the purview of the rulings of the Insular Auditor,
even conceding that such rulings have controlling effect.
Morse, in his work, Banks and Banking, section 125,
says:
"It is fraud for directors to secure by means of their trust, any

advantage not common to ,the other stockholders. The law will
not allow private profit from a trust, and will not listen to any
proof of honest intent."
JUDGMENT
On a review of the evidence of record, with reference to the

decision of the trial court, and the errors assigned by the
appellant, and with reference to previous decisions of this
court on the same subject, we are irresistibly led to the
conclusion that no reversible error was committed in the
trial of this case, and that the defendant has been proved
guilty beyond a reasonable doubt of the crime
134

People vs. .Columna
charged in the information. The penalty imposed by the

trial judge falls within the limits of the punitive provisions
of the law.
Judgment is affirmed, with the costs of this instance
against the appellant. So ordered.
Araullo, C. J., Johnson, Street, Avancea, Villamor,

Ostrand, Johns, and Romualdez, JJ., concur.
Judgment affirmed.
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6/24/2017 SUPREMECOURTREPORTSANNOTATEDVOLUME006
262 SUPREME COURT REPORTS ANNOTATED

Republic vs. Bagtas
No. L17474. October 25, 1962.
REPUBLIC OF THE PHILIPPINES, plaintiffappellee, vs.

JOSE V. BAGTAS, defendant, FELICIDAD M. BAGTAS,
Administratrix of the Intestate Estate left by the late Jose
V. Bagtas, petitionerappellant.
Contracts Loan of bulls for breeding purposes Nature of

contract affected by payment of fee.The loan by the Bureau of
Animal Industry to the defendant of three bulls for breeding
purposes for a period of one year, later on renewed for another as
regards one bull, was subject to the payment by the borrower of
breeding fee of 10% of the book value of the bulls. If the breeding
fee be considered a compensation, the contract would be a lease of
the bulls it could not be a contract of commodatum, because that
contract is essentially gratuitous.
Judgments Proceedings for administration and settlement of

estate of the deceased Enforcement of money judgments.Where
special proceedings for the administration and settlement of the
estate of the deceased have been instituted, the money judgment
rendered in favor of a party cannot be enforced by means of a writ
of execution, but must be presented to the probate court for
payment by the administrator appointed by the court.
APPEAL from a decision of the Court of First Instance of

Manila. Macadaeg, J.
The facts are stated in the opinion of the Court.

D. T. Reyes, Luison & Associates for petitioner
appellant.
Solicitor General for plaintiffappellee.
263
VOL. 6, OCTOBER 25, 1962 263

Republic vs. Bagtas
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PADILLA, J.:
The Court of Appeals certified this case to this Court

because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the
Republic of the Philippines through the Bureau of Animal
Industry three bulls: a Red Sindhi with a book value of
P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of
P744.46, for a period of one year from 8 May 1948 to 7 May
1949 for breeding purposes subject to a government charge
of breeding fee of 10% of the book value of the bulls. Upon
the expiration on 7 May 1949 of the contract, the borrower
asked for a renewal for another period of one year.
However, the Secretary of Agriculture and Natural
Resources approved a renewal thereof of only one bull for
another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two. On 25 March 1950
Jose V. Bagtas wrote to the Director of Animal Industry
that he would pay the value of the three bulls. On 17
October 1950 he reiterated his desire to buy them at a
value with a deduction of yearly depreciation to be
approved by the Auditor General. On 19 October 1950 the
Director of Animal Industry advised him that the book
value of the three bulls could not be reduced and that they
either be returned or their book value paid not later than
31 October 1950. Jose V. Bagtas failed to pay the book
value of the three bulls or to return them. So, on 20
December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against
him praying that he be ordered to return the three bulls
loaned to him or to pay their book value in the total sum of
P3,241.45 and the unpaid breeding fee in the sum of
P199.62, both with interests, and costs and that other just
and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel
Navarro, Rosete and Manalo, answered that because of the
bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending
appeal he had taken to the Secretary of Agriculture and
Natural Resources and the President of the Philippines
from the refusal by the Director of Animal Industry to
deduct from the book value
264

Republic vs. Bagtas
of the bulls corresponding yearly depreciation of 8% from

the date of acquisition, to which depreciation the Auditor
General did not object, he could not return the animals nor
pay their value and prayed for the dismissal of the
complaint.
After hearing, on 30 July 1956 the trial court rendered
judgment
x x x sentencing the latter (defendant) to pay the sum of P3,

625.09 the total value of the three bulls plus the breeding fees in
the amount of P626.17 with interest on both sums of (at) the legal
rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of

execution which the court granted on 18 October and
issued on 11 November 1958. On 2 December 1958 it
granted an ex parte motion filed by the plaintiff on 28
November 1958 for the appointment of a special sheriff to
serve the writ outside Manila. Of this order appointing a
special sheriff, on 6 December 1958, Felicidad M. Bagtas,
the surviving spouse of the defendant Jose V. Bagtas who
died on 23 October 1951 and as administratrix of his
estate, was notified. On 7 January 1959 she filed a motion
alleging that on 26 June 1952 the two bulls, Sindhi and
Bhagnari, were returned to the Bureau of Animal Industry
and that sometime in November 1958 the third bull, the
Sahiniwal, died from gunshot wounds inflicted during a
Huk raid on Hacienda Felicidad Intal, and praying that the
writ of execution be quashed and that a writ of preliminary
injunction be issued. On 31 January 1959 the plaintiff
objected to her motion. On 6 February 1959 she filed a
reply thereto. On the same day, 6 February, the Court
denied her motion. Hence, this appeal certified by the
Court of Appeals to this Court, as stated at the beginning
of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son
of the appellant by the late defendant, returned the Sindhi
and Bhagnari bulls to Roman Remorin, Superintendent of
the NVB Station, Bureau of Animal Industry, Bayombong,
Nueva Vizcaya, as evidenced by a memorandum receipt
signed by the latter (Exhibit 2). That is why in its objection
of 31 January 1959 to the appellants motion to
265
VOL. 6, OCTOBER 25, 1962 265

Republic vs. Bagtas
quash the writ of execution the appellee prays that

another writ of execution in the sum of P859.53 be issued
against the estate of defendant deceased Jose V. Bagtas.
She cannot be held liable for the two bulls which already
had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was
accidentally killed during a raid by the Huks in November
1953 upon the surrounding barrios of Hacienda Felicidad
Intal, Baggao, Cagayan, where the animal was kept, and
that as such death was due to force majeure she is relieved
from the duty of returning the bull or paying its value to
the appellee. The contention is without merit. The loan by
the appellee to the late defendant Jose V. Bagtas of the
three bulls for breeding purposes for a period of one year
from 8 May 1948 to 7 May 1949, later on renewed for
another year as regards one bull, was subject to the
payment by the borrower of breeding fee of 10% of the book
value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee
retained ownership or title to the bull it should suffer its
loss due to force majeure.
1
A contract of commodatum is
essentially gratuitous. If the breeding fee be considered a
compensation, then the contract would be a lease of the
bull. Under article 1671 of the Civil Code the lessee would
be subject to the responsibilities of a possessor in bad faith,
because she had continued possession of the bull after the
expiry of the contract. And even if the contract be
commodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract
of commodatum
x x x is liable for loss of the things, even if it should be through a

fortuitous event:
(2) If he keeps it longer than the period stipulated x x x

(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee
from responsibility in case of a fortuitous event
The original period of the loan was from 8 May 1948 to 7

May 1949. The loan of one bull was renewed for another
period of one year to end on 8 May 1950. But the
_______________
1 Article 1933 of the Civil Code.
266

Republic vs. Bagtas
appellant kept and used the bull until November 1953

when during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased
husband of the appellant the bulls had each an appraised
book value, to wit: the Sindhi, at P1,176.46, the Bhagnari,
at P1,320.56 and the Sahiniwal, at P744.46. It was not
stipulated that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be exempt
from liability. The appellants contention that the demand
or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be
presented or filed in the intestate proceedings of the
defendant who died on 23 October 1951, is not altogether
without merit. However, the claim that his civil personality
having ceased to exist the trial court lost jurisdiction over
the case against him, is untenable, because section 17 of
Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative of
the deceased to appear and to be substituted for the deceased,
within a period of thirty (30) days, or within such time as may be
granted. x x x.
and after the defendants death on 23 October 1951 his

counsel failed to comply with section 16 of Rule 3 which
provides that
Whenever a party to a pending case dies x x x it shall be the duty

of his attorney to inform the court promptly of such death x x x
and to give the name and residence of the executor,
administrator, guardian, or other legal representative of the
deceased x x x.
The notice by the probate court and its publication in the

Voz de Manila that Felicidad M. Bagtas had been issued
letters of administration of the estate of the late Jose V.
Bagtas and that all persons having claims for money
against the deceased Jose V. Bagtas, arising from contract,
express or implied, whether the same be due not due, or
contingent, for funeral expenses and expenses of the last
sickness of the said decedent, and judgment for money
against him, to file said claims with the Clerk of this Court
at the City Hall Bldg., Highway 54, Quezon City, within
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VOL. 6, OCTOBER 25, 1962 267

Republic vs. Bagtas
six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned
Felicidad M. Bagtas, the appointed administratrix of the
estate of the said deceased, is not a notice to the court and
the appellee who were to be notified of the defendants
death in accordance with the abovequoted rule, and there
was no reason for such failure to notify, because the
attorney who appeared for the defendant was the same who
represented the administratrix in the special proceedings
instituted for the administration and settlement of his
estate. The appellee or its attorney or representative could
not be expected to know of the death of the defendant or of
the administration proceedings of his estate instituted in
another court, if the attorney for the deceased defendant
did not notify the plaintiff or its attorney of such death as
required by the rule.
As the appellant already had returned the two bulls to
the appellee, the estate of the late defendant is only liable
for the sum of P859.63, the value of the bull which has not
been returned to the appellee, because it was killed while
in the custody of the administratrix of his estate. This is
the amount prayed for by the appellee in its objection on 31
January 1959 to the motion filed on 7 January 1959 by the
appellant for the quashing of the writ of execution.
Special proceedings for the administration and
settlement of the estate of the deceased Jose V. Bagtas
having been instituted in the Court of First Instance of
Rizal (Q200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution
but must be presented to the probate court for payment by
the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is
set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador,

Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Barrera, J., concurs in the result.
Writ set aside.

268

Absalud vs. Ramos
Note.Money claims against the estate must be

submitted to the probate court for payment otherwise,
they are barred forever, except that they may be set forth
as counterclaim in any action that the executor or
administrator may bring against the claimants (Rule 86,
Section 5, Rules of Court).
______________

Pajuyo vs. Court of Appeals
*
G.R. No. 146364. June 3, 2004.
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS

and EDDIE GUEVARRA, respondents.
Actions Appeals Pleadings and Practice Decisions of

regional trial courts in the exercise of their appellate jurisdiction
are appealable to the Court of Appeals by petition for review in
cases involving questions of fact or mixed questions of fact and law
while their decisions involving pure questions of law are
appealable directly to the Supreme Court.Decisions of the
regional trial courts in the exercise of their appellate jurisdiction
are appealable to the Court of Appeals by petition for review in
cases involving questions of fact or mixed questions of fact and
law. Decisions of the regional trial courts involving pure questions
of law are appealable directly to this Court by petition for review.
These modes of appeal are now embodied in Section 2, Rule 41 of
the 1997 Rules of Civil Procedure.
Same Same Questions of Law and Questions of Fact Words
and Phrases There is a question of law when the doubt or
difference is on what the law is on a certain state of facts and there
is a question of fact when the doubt or difference is on the truth or
falsity of the facts alleged.Guevarra believed that his appeal of
the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this
Court on 14 December 1996. On 3 January 1997, Guevarra then
filed his petition for review with this Court. A perusal of
Guevarras petition for review gives the impression that the
issues he raised were
_______________
* FIRST DIVISION.
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pure questions of law. There is a question of law when the doubt

or difference is on what the law is on a certain state of facts.
There is a question of fact when the doubt or difference is on the
truth or falsity of the facts alleged.
Same Same The Court of Appeals has the power to grant an
extension of time to file a petition for reviewthe prohibition
against granting an extension of time applies only in a case where
ordinary appeal is perfected by a mere notice of appeal.The
Court of Appeals has the power to grant an extension of time to
file a petition for review. In Lacsamana v. Second Special Cases
Division of the Intermediate Appellate Court, we declared that the
Court of Appeals could grant extension of time in appeals by
petition for review. In Liboro v. Court of Appeals, we clarified that
the prohibition against granting an extension of time applies only
in a case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review
where the pleading needs verification. A petition for review,
unlike an ordinary appeal, requires preparation and research to
present a persuasive position. The drafting of the petition for
review entails more time and effort than filing a notice of appeal.
Hence, the Court of Appeals may allow an extension of time to file
a petition for review.
Same Same Judgments Pleadings and Practice A judgment
becomes final and executory by operation of law The material
dates to consider in determining the timeliness of the filing of the
motion for extension are (1) the date of receipt of the judgment or
final order or resolution subject of the petition, and (2) the date of
filing of the motion for extension.A judgment becomes final and
executory by operation of law. Finality of judgment becomes a
fact on the lapse of the reglementary period to appeal if no appeal
is perfected. The RTC decision could not have gained finality
because the Court of Appeals granted the 30day extension to
Guevarra. The Court of Appeals did not commit grave abuse of
discretion when it approved Guevarras motion for extension. The
Court of Appeals gave due course to the motion for extension
because it complied with the condition set by the appellate court
in its resolution dated 28 January 1997. The resolution stated
that the Court of Appeals would only give due course to the
motion for extension if filed on time. The motion for extension met
this condition. The material dates to consider in determining the
timeliness of the filing of the motion for extension are (1) the date
of receipt of the judgment or final order or resolution subject of
the petition, and (2) the date of filing of the motion for extension.
It is the date of the filing of the motion or pleading, and not the
date of execution, that determines the timeliness of the filing of
that motion or pleading. Thus, even if the motion for extension
bears no date, the date of filing stamped on it is the reckoning
point for determining the timeliness of its filing.
494
Same Same Same Same Estoppel Estoppel sets in not

because the judgment of the court is a valid and conclusive
adjudication but because the practice of attacking the courts
jurisdiction after voluntarily submitting to it is against public
policy.Assuming that the Court of Appeals should have
dismissed Guevarras appeal on technical grounds, Pajuyo did not
ask the appellate court to deny the motion for extension and
dismiss the petition for review at the earliest opportunity.
Instead, Pajuyo vigorously discussed the merits of the case. It was
only when the Court of Appeals ruled in Guevarras favor that
Pajuyo raised the procedural issues against Guevarras petition
for review. A party, who, after voluntarily submitting a dispute
for resolution, receives an adverse decision on the merits, is
estopped from attacking the jurisdiction of the court. Estoppel
sets in not because the judgment of the court is a valid and
conclusive adjudication, but because the practice of attacking the
courts jurisdiction after voluntarily submitting to it is against
public policy.
Same Certification of NonForum Shopping Verification
Pleadings and Practice A partys failure to sign the certification
against forum shopping is different from the partys failure to sign
personally the verification A partys representative, lawyer or any
person who personally knows the truth of the facts alleged in the
pleading may sign the verification.A partys failure to sign the
certification against forum shopping is different from the partys
failure to sign personally the verification. The certificate of non
forum shopping must be signed by the party, and not by counsel.
The certification of counsel renders the petition defective. On the
other hand, the requirement on verification of a pleading is a
formal and not a jurisdictional requisite. It is intended simply to
secure an assurance that what are alleged in the pleading are
true and correct and not the product of the imagination or a
matter of speculation, and that the pleading is filed in good faith.
The party need not sign the verification. A partys representative,
lawyer or any person who personally knows the truth of the facts
alleged in the pleading may sign the verification.
Same Ejectment Ownership The defendants claim of
ownership of the disputed property does not divest the inferior
court of its jurisdiction over an ejectment case.Settled is the rule
that the defendants claim of ownership of the disputed property
will not divest the inferior court of its jurisdiction over the
ejectment case. Even if the pleadings raise the issue of ownership,
the court may pass on such issue to determine only the question
of possession, especially if the ownership is inseparably linked
with the possession. The adjudication on the issue of ownership is
only provisional and will not bar an action between the same
parties involving title to the land. This doctrine is a necessary
consequence of the nature of the two summary actions of
ejectment, forcible entry and unlawful detainer, where the only
issue for adjudication is the physical or material possession over
the real property.
495
VOL. 430, JUNE 3, 2004 495
Same Same Same The absence of title over a contested lot is

not a ground for the courts to withhold relief from the parties in an
ejectment case.Ownership or the right to possess arising from
ownership is not at issue in an action for recovery of possession.
The parties cannot present evidence to prove ownership or right
to legal possession except to prove the nature of the possession
when necessary to resolve the issue of physical possession. The
same is true when the defendant asserts the absence of title over
the property. The absence of title over the contested lot is not a
ground for the courts to withhold relief from the parties in an
ejectment case. The only question that the courts must resolve in
ejectment proceedings iswho is entitled to the physical
possession of the premises, that is, to the possession de facto and
not to the possession de jure. It does not even matter if a partys
title to the property is questionable, or when both parties
intruded into public land and their applications to own the land
have yet to be approved by the proper government agency.
Regardless of the actual condition of the title to the property, the
party in peaceable quiet possession shall not be thrown out by a
strong hand, violence or terror. Neither is the unlawful
withholding of property allowed. Courts will always uphold
respect for prior possession.
Same Same The underlying philosophy behind ejectment

suits is to prevent breach of the peace and criminal disorder and to
compel the party out of possession to respect and resort to the law
alone to obtain what he claims is his.Courts must not abdicate
their jurisdiction to resolve the issue of physical possession
because of the public need to preserve the basic policy behind the
summary actions of forcible entry and unlawful detainer. The
underlying philosophy behind ejectment suits is to prevent breach
of the peace and criminal disorder and to compel the party out of
possession to respect and resort to the law alone to obtain what he
claims is his. The party deprived of possession must not take the
law into his own hands. Ejectment proceedings are summary in
nature so the authorities can settle speedily actions to recover
possession because of the overriding need to quell social
disturbances.
Same Same Pari Delicto One of the exceptions to the
application of the pari delicto principle is where its application
would violate wellestablished public policy.Articles 1411 and
1412 of the Civil Code embody the principle of pari delicto. We
explained the principle of pari delicto in these words: The rule of
pari delicto is expressed in the maxims ex dolo malo non eritur
actio and in pari delicto potior est conditio defedentis. The law
will not aid either party to an illegal agreement. It leaves the
parties where it finds them. The application of the pari delicto
principle is not absolute, as there are exceptions to its application.
One of these exceptions is where the application of the pari delicto
rule would violate wellestablished public policy.
496
Same Same Same Squatting The application of the

principle of pari delicto to a case of ejectment between squatters is
fraught with danger Courts must resolve the issue of possession
even if the parties to the ejectment suit are squatterscourts
should not leave squatters to their own devices in cases involving
recovery of possession.Clearly, the application of the principle of
pari delicto to a case of ejectment between squatters is fraught
with danger. To shut out relief to squatters on the ground of pari
delicto would openly invite mayhem and lawlessness. A squatter
would oust another squatter from possession of the lot that the
latter had illegally occupied, emboldened by the knowledge that
the courts would leave them where they are. Nothing would then
stand in the way of the ousted squatter from reclaiming his prior
possession at all cost. Petty warfare over possession of properties

is precisely what ejectment cases or actions for recovery of
possession seek to prevent. Even the owner who has title over the
disputed property cannot take the law into his own hands to
regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to
the ejectment suit are squatters. The determination of priority
and superiority of possession is a serious and urgent matter that
cannot be left to the squatters to decide. To do so would make
squatters receive better treatment under the law. The law
restrains property owners from taking the law into their own
hands. However, the principle of pari delicto as applied by the
Court of Appeals would give squatters free rein to dispossess
fellow squatters or violently retake possession of properties
usurped from them. Courts should not leave squatters to their
own devices in cases involving recovery of possession.
Same Same Administrative Law Public Lands The
determination of the respective rights of rival claimants to public
land is distinct from the determination of who has the actual
physical possession or who has a better right of physical
possession Courts should not preempt the decision of the
administrative agency mandated by law to determine the
qualifications of applicants for the acquisition of public lands.In
Pitargue, we ruled that courts have jurisdiction over possessory
actions involving public land to determine the issue of physical
possession. The determination of the respective rights of rival
claimants to public land is, however, distinct from the
determination of who has the actual physical possession or who
has a better right of physical possession. The administrative
disposition and alienation of public lands should be threshed out
in the proper government agency. The Court of Appeals
determination of Pajuyo and Guevarras rights under
Proclamation No. 137 was premature. Pajuyo and Guevarra were
at most merely potential beneficiaries of the law. Courts should
not preempt the decision of the administrative agency mandated
by law to determine the qualifications of applicants for the
acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to
prevent disorder and breaches of peace.
497
VOL. 430, JUNE 3, 2004 497
Same Same Unlawful Detainer Unlawful detainer involves

the withholding by a person from another of the possession of real
property to which the latter is entitled after the expiration or
termination of the formers right to hold possession under a
contract, express or implied.Based on the Kasunduan, Pajuyo
permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good
condition. Guevarra promised to vacate the premises on Pajuyos
demand but Guevarra broke his promise and refused to heed
Pajuyos demand to vacate. These facts make out a case for
unlawful detainer. Unlawful detainer involves the withholding by
a person from another of the possession of real property to which
the latter is entitled after the expiration or termination of the
formers right to hold possession under a contract, express or
implied. Where the plaintiff allows the defendant to use his
property by tolerance without any contract, the defendant is
necessarily bound by an implied promise that he will vacate on
demand, failing which, an action for unlawful detainer will lie.
The defendants refusal to comply with the demand makes his
continued possession of the property unlawful. The status of the
defendant in such a case is similar to that of a lessee or tenant
whose term of lease has expired but whose occupancy continues
by tolerance of the owner.
Same Same Contracts Commodatum Precarium Words
and Phrases An essential feature of commodatum is that it is
gratuitous, while another feature is that the use of the thing
belonging to another is for a certain period If the use of the thing
is merely tolerated by the bailor, he can demand the return of the
thing at will, in which case the contractual relation is called a
precarium Precarium is a kind of commodatum.In a contract of
commodatum, one of the parties delivers to another something not
consumable so that the latter may use the same for a certain time
and return it. An essential feature of commodatum is that it is
gratuitous. Another feature of commodatum is that the use of the
thing belonging to another is for a certain period. Thus, the bailor
cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the
use for which the commodatum is constituted. If the bailor should
have urgent need of the thing, he may demand its return for
temporary use. If the use of the thing is merely tolerated by the
bailor, he can demand the return of the thing at will, in which
case the contractual relation is called a precarium. Under the
Civil Code, precarium is a kind of commodatum.
Contracts Human Relations Squatting There must be honor
even between squatters.Guevarra turned his back on the
Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a
contract involving the land they illegally occupy. Guevarra insists

that the contract is void. Guevarra should know that there must
be honor even between squatters. Guevarra freely entered
498
into the Kasunduan. Guevarra cannot now impugn the

Kasunduan after he had benefited from it. The Kasunduan binds
Guevarra.
Same Ejectment Possession Prior possession is not always a
condition sine qua non in ejectment.Prior possession is not
always a condition sine qua non in ejectment. This is one of the
distinctions between forcible entry and unlawful detainer. In
forcible entry, the plaintiff is deprived of physical possession of
his land or building by means of force, intimidation, threat,
strategy or stealth. Thus, he must allege and prove prior
possession. But in unlawful detainer, the defendant unlawfully
withholds possession after the expiration or termination of his
right to possess under any contract, express or implied. In such a
case, prior physical possession is not required.
Same Same Same Possession in the eyes of the law does not
mean that a man has to have his feet on every square meter of the
ground before he is deemed in possession.Pajuyos withdrawal of
his permission to Guevarra terminated the Kasunduan.
Guevarras transient right to possess the property ended as well.
Moreover, it was Pajuyo who was in actual possession of the
property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the
conditions set by Pajuyo in the Kasunduan. Control over the
property still rested with Pajuyo and this is evidence of actual
possession. Pajuyos absence did not affect his actual possession of
the disputed property. Possession in the eyes of the law does not
mean that a man has to have his feet on every square meter of the
ground before he is deemed in possession. One may acquire
possession not only by physical occupation, but also by the fact
that a thing is subject to the action of ones will. Actual or
physical occupation is not always necessary.
Same Same Squatting Where the party that has title or a
better right over the property is not impleaded in the case, the
Court cannot evict on its own the contending parties who are
squatters.We are aware of our pronouncement in cases where
we declared that squatters and intruders who clandestinely enter
into titled government property cannot, by such act, acquire any

legal right to said property. We made this declaration because
the person who had title or who had the right to legal possession
over the disputed property was a party in the ejectment suit and
that party instituted the case against squatters or usurpers. In
this case, the owner of the land, which is the government, is not a
party to the ejectment case. This case is between squatters. Had
the government participated in this case, the courts could have
evicted the contending squatters, Pajuyo and Guevarra. Since the
party that has title or a better right over the property is not
impleaded in this case, we cannot evict on our own the parties.
Such a ruling would discourage squatters from seeking the aid of
the courts in settling the issue of physical possession. Stripping
both the
499
VOL. 430, JUNE 3, 2004 499
plaintiff and the defendant of possession just because they are

squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then
rather settle the issue of physical possession among themselves
than seek relief from the courts if the plaintiff and defendant in
the ejectment case would both stand to lose possession of the
disputed property. This would subvert the policy underlying
actions for recovery of possession.
Attorneys Fees Attorneys fees are not awarded every time a
party prevails in a suit because of the policy that no premium
should be placed on the right to litigate.The MTC and RTC
failed to justify the award of P3,000 attorneys fees to Pajuyo.
Attorneys fees as part of damages are awarded only in the
instances enumerated in Article 2208 of the Civil Code. Thus, the
award of attorneys fees is the exception rather than the rule.
Attorneys fees are not awarded every time a party prevails in a
suit because of the policy that no premium should be placed on
the right to litigate. We therefore delete the attorneys fees
awarded to Pajuyo.
PETITION for review on certiorari of the decision and

resolution of the Court of Appeals.

D.P. Burgos, Jr. for petitioner.
Jason Christopher Rayos Co for SALIGAN.
CARPIO, J.:
The Case
1
Before us
2
is a petition for review of the 21 June 2000
Decision and 14 December 2000 Resolution of the Court of
Appeals in CAG.R. SP No. 43129. The 3
Court of Appeals set
aside the 11 November 1996 decision of 4
the Regional Trial
Court of Quezon City,5 Branch 81, affirming the 15
December 1995 decision 6 of the Metropolitan Trial Court of
Quezon City, Branch 31.
_______________
1 Under Rule 45 of the 1997 Rules of Court.

2 Penned by Associate Justice Andres B. Reyes, Jr. with Associate
Justices Quirino D. Abad Santos, Jr. and Romeo A. Brawner, concurring.
3 Penned by Judge Wenceslao I. Agnir.
4 Docketed as Civil Case No. Q9626943.
5 Penned by Judge Mariano M. Singzon, Jr.
6 Docketed as Civil Case No. 12432.
500

The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid

P400 to a certain Pedro Perez for the rights over a 250
square meter lot in Barrio Payatas, Quezon City. Pajuyo
then constructed a house made of light materials on the lot.
Pajuyo and his family lived in the house from 1979 to 7
December 1985.
On 8 December 1985, Pajuyo and private respondent
Eddie Guevarra (Guevarra) executed a Kasunduan or
agreement. Pajuyo, as owner of the house, allowed
Guevarra to live in the house for free provided Guevarra
would maintain the cleanliness and orderliness of the
house. Guevarra promised that he would voluntarily vacate
the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his
need of the house and demanded that Guevarra vacate the
house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with

the Metropolitan Trial Court of Quezon City, Branch 31
(MTC).
In his Answer, Guevarra claimed that Pajuyo had no
valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set
aside by Proclamation No. 137 for socialized housing.
Guevarra pointed out that from December 1985 to
September 1994, Pajuyo did not show up or communicate
with him. Guevarra insisted that neither he nor Pajuyo has
valid title to the lot.
On 15 December 1995, the MTC rendered its decision in
favor of Pajuyo. The dispositive portion of the MTC decision
reads:
WHEREFORE, premises considered, judgment is hereby

rendered for the plaintiff and against defendant, ordering the
latter to:
A) vacate the house and lot occupied by the defendant or any

other person or persons claiming any right under him
B) pay unto plaintiff the sum of THREE HUNDRED PESOS
(P300.00) monthly as reasonable compensation for the use
of the premises starting from the last demand
C) pay plaintiff the sum of P3,000.00 as and by way of
attorneys fees and
D) pay the cost of suit.
501
VOL. 430, JUNE 3, 2004 501

7
SO ORDERED.
Aggrieved, Guevarra appealed to the Regional Trial Court

of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC
decision. The dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, the Court finds no

reversible error in the decision appealed from, being in accord
with the law and evidence presented, and the same is hereby
affirmed en toto. 8
SO ORDERED.
Guevarra received the RTC decision on 29 November 1996.

Guevarra had only until 14 December 1996 to file his
appeal with the Court of Appeals. Instead of filing his
appeal with the Court of Appeals, Guevarra filed with the

Supreme Court a Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42 (motion for
extension). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme
Court received the motion for extension on 13 December
1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for
review with the Supreme Court.
On 8 January 1997, the First9
Division of the Supreme
Court issued a Resolution referring the motion for
extension to the Court of Appeals, which has concurrent
jurisdiction over the case. The case presented no special
and important matter for the Supreme Court to take
cognizance of at the first instance.
On 28 January 1997, the Thirteenth 10
Division of the
Court of Appeals issued a Resolution granting the motion
for extension conditioned on the timeliness of the filing of
the motion.
On 27 February 1997, the Court of Appeals ordered
Pajuyo to comment on Guevaras petition for review. On 11
April 1997, Pajuyo filed his Comment.
_______________
7 Rollo, p. 41.
8 Ibid., p. 49.
9 Ibid., p. 221.
10 Ibid., p. 224.
502

On 21 June 2000, the Court of Appeals issued its decision

reversing the RTC decision. The dispositive portion of the
decision reads:
WHEREFORE, premises considered, the assailed Decision of the

court a quo in Civil Case No. Q9626943 is REVERSED and SET
ASIDE and it is hereby declared that the ejectment case filed
against defendantappellant
11
is without factual and legal basis.
SO ORDERED.
Pajuyo filed a motion for reconsideration of the decision.

Pajuyo pointed out that the Court of Appeals should have
dismissed outright Guevarras petition for review because
it was filed out of time. Moreover, it was Guevarras

counsel and not Guevarra who signed the certification
against forum shopping.
On 14 December 2000, the Court of Appeals issued a
resolution denying Pajuyos motion for reconsideration. The
dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration

is hereby DENIED. No
12
costs.
SO ORDERED.
The Ruling of the MTC
The MTC ruled that the subject of the agreement between

Pajuyo and Guevarra is the house and not the lot. Pajuyo is
the owner of the house, and he allowed Guevarra to use the
house only by tolerance. Thus, Guevarras refusal to vacate
the house on Pajuyos demand made Guevarras continued
possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the

landlord and tenant relationship between Pajuyo and
Guevarra. The terms of the Kasunduan bound Guevarra to
return possession of the house on demand.
The RTC rejected Guevarras claim of a better right
under Proclamation No. 137, the Revised National
Government Center
_______________
11 Ibid., p. 60.
12 Ibid., p. 73.
503
VOL. 430, JUNE 3, 2004 503

Housing Project Code of Policies and other pertinent laws.

In an ejectment suit, the RTC has no power to decide
Guevarras rights under these laws. The RTC declared that
in an ejectment case, the only issue for resolution is
material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra

are squatters. Pajuyo and Guevarra illegally occupied the
contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights,
was also a squatter. Perez had no right or title over the lot
because it is public land. The assignment of rights between
Perez and Pajuyo, and the Kasunduan between Pajuyo and
Guevarra, did not have any legal effect. Pajuyo and
Guevarra are in pari delicto or in equal fault. The court
will leave them where they are.
The Court of Appeals reversed the MTC and RTC
rulings, which held that the Kasunduan between Pajuyo
and Guevarra created a legal tie akin to that of a landlord
and tenant relationship. The Court of Appeals ruled that
the Kasunduan is not a lease contract but a commodatum
because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to
claim the property, the appellate court held that Guevarra
has a better right over the property under Proclamation
No. 137. President Corazon C. Aquino (President Aquino)
issued Proclamation No. 137 on 7 September 1987. At that
time, Guevarra was in physical possession of the property.
Under Article VI of the Code of Policies Beneficiary
Selection and Disposition of Homelots and Structures in
the National Housing Project (the Code), the actual
occupant or caretaker of the lot shall have first priority as
beneficiary of the project. The Court of Appeals concluded
that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the
appellate court debunked Pajuyos claim that Guevarra
filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras
motion for extension filed before the Supreme Court was
stamped 13 December 1996 at 4:09 PM by the Supreme
Courts Receiving Clerk. The
504

Court of Appeals concluded that the motion for extension

bore a date, contrary to Pajuyos claim that the motion for
extension was undated. Guevarra filed the motion for
extension on time on 13 December 1996 since he filed the

motion one day before the expiration of the reglementary
period on 14 December 1996. Thus, the motion for
extension properly complied with the condition imposed by
the Court of Appeals in its 28 January 1997 Resolution.
The Court of Appeals explained that the thirtyday
extension to file the petition for review was deemed
granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that
the appellate court should have dismissed the petition for
review because it was Guevarras counsel and not
Guevarra who signed the certification against forum
shopping. The Court of Appeals pointed out that Pajuyo did
not raise this issue in his Comment. The Court of Appeals
held that Pajuyo could not now seek the dismissal of the
case after he had extensively argued on the merits of the
case. This technicality, the appellate court opined, was
clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED

ITS AUTHORITY AND DISCRETION TANTAMOUNT TO LACK
OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents

Motion for an Extension of thirty days to file petition for
review at the time when there was no more period to
extend as the decision of the Regional Trial Court had
already become final and executory.
2) in giving due course, instead of dismissing, private
respondents Petition for Review even though the
certification against forumshopping was signed only by
counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by
the parties was in fact a commodatum, instead of a
Contract of Lease as found by the Metropolitan Trial
Court and in holding that the ejectment case filed against
defendantappellant is without legal and factual basis.
4) in reversing and setting aside the Decision of the Regional
Trial Court in Civil Case No. Q9626943 and in holding
that
505
VOL. 430, JUNE 3, 2004 505

the parties are in pari delicto being both squatters, therefore,

illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so

called Code of Policies of the National Government Center
Housing Project instead of deciding the same under the
Kasunduan voluntarily executed by the parties, the terms
and conditions
13
of which are the laws between
themselves.
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless.

However, we find merit in the substantive issues Pajuyo is
submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have

dismissed outright Guevarras petition for review because
the RTC decision had already become final and executory
when the appellate court acted on Guevarras motion for
extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period
to appeal the RTC decision. Instead of filing the petition for
review with the Court of Appeals, Guevarra filed with this
Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion
to the Court of Appeals. Pajuyo believes that the filing of
the motion for extension with this Court did not toll the
running of the period to perfect the appeal. Hence, when
the Court of Appeals received the motion, the period to
appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of
their appellate jurisdiction are appealable to the Court of
Appeals by petition for review in cases involving
14
questions
of fact or mixed questions of fact and law. Decisions of the
regional trial courts involving pure questions of law are 15
appealable directly to this Court by petition for review.
These modes of appeal are now embodied in Section 2, Rule
41 of the 1997 Rules of Civil Procedure.
_______________
13 Rollo, p. 134.
14 Macawiwili Gold Mining and Development Co., Inc. v. Court of
Appeals, 358 Phil. 245 297 SCRA 602 (1998).
15 Ibid.
506

Guevarra believed that his appeal of the RTC decision

involved only questions of law. Guevarra thus filed his
motion for extension to file petition for review before this
Court on 14 December 1996. On 3 January 1997, Guevarra
then filed his petition for review with this Court. A perusal
of Guevarras petition for review gives the impression that
the issues he raised were pure questions of law. There is a
question of law when the doubt or 16difference is on what the
law is on a certain state of facts. There is a question of
fact when the doubt 17
or difference is on the truth or falsity
of the facts alleged.
In his petition for review before this Court, Guevarra no
longer disputed the facts. Guevarras petition for review
raised these questions: (1) Do ejectment cases pertain only
to possession of a structure, and not the lot on which the
structure stands? (2) Does a suit by a squatter against a
fellow squatter constitute a valid case for ejectment? (3)
Should a Presidential Proclamation governing the lot on
which a squatters structure stands be considered in an
ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of
the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions
Guevarra raised appeared purely legal. However, some
factual questions still have to be resolved because they
have a bearing on the legal questions raised in the petition
for review. These factual matters refer to the metes and
bounds of the disputed property and the application of
Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an
extension of time to file a petition for review. In
Lacsamana v. Second Special 18
Cases Division of the
Intermediate Appellate Court, we declared that the Court
of Appeals could grant extension of time in appeals 19
by
petition for review. In Liboro v. Court of Appeals, we
clarified that the prohibition against granting an extension
of time applies only in a case where ordinary appeal is
perfected by a mere notice of appeal. The prohibition does
not apply in a petition for review where the pleading needs

verification. A petition for review, unlike
_______________
16 Ibid.
17 Ibid.
18 227 Phil. 606 143 SCRA 643 (1986).
19 G.R. No. 101132, 29 January 1993, 218 SCRA 193.
507
VOL. 430, JUNE 3, 2004 507

an ordinary appeal, requires 20preparation and research to

present a persuasive position. The drafting of the petition
for review 21entails more time and effort than filing a notice
of appeal. Hence, the Court of Appeals may allow an
extension of time to file a petition for review.
In the more recent case of 22Commissioner of Internal
Revenue v. Court of Appeals, we held that Liboros
clarification of Lacsamana is consistent with the Revised
Internal Rules of the Court of Appeals and Supreme Court
Circular No. 191. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The
extension, however, should be limited to only fifteen days
save in exceptionally meritorious cases where the Court of
Appeals may grant a longer period.
A judgment becomes final and executory by operation
of law. Finality of judgment becomes a fact on the lapse of
the reglementary
23
period to appeal if no appeal is
perfected. The RTC decision could not have gained finality
because the Court of Appeals granted the 30day extension
to Guevarra.
The Court of Appeals did not commit grave abuse of
discretion when it approved Guevarras motion for
extension. The Court of Appeals gave due course to the
motion for extension because it complied with the condition
set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of
Appeals would only give due course to the motion for
extension if filed on time. The motion for extension met this
condition.
The material dates to consider in determining the
timeliness of the filing of the motion for extension are (1)
the date of receipt of the judgment or final order or
resolution subject of the petition, and (2) the date of filing
24
of the motion for extension. It is the date of the filing of
24
of the motion for extension. It is the date of the filing of
the motion or pleading, and not the date of execution, that
determines the timeliness of the filing of that motion or
_______________
20 Ibid.
21 Ibid.
22 Commissioner of Internal Revenue v. Court of Appeals, G.R. No.
110003, 9 February 2001, 351 SCRA 436.
23 City of Manila v. Court of Appeals, G.R. No. 100626, 29 November
1991, 204 SCRA 362.
24 Castilex Industrial Corporation v. Vasquez, Jr., 378 Phil. 1009 321
SCRA 393 (1999).
508

pleading. Thus, even if the motion for extension bears no

date, the date of filing stamped on it is the reckoning point
for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal
from the RTC decision. Guevarra filed his motion for
extension before this Court on 13 December 1996, the date
stamped by this Courts Receiving Clerk on the motion for
extension. Clearly, Guevarra filed the motion for extension
exactly one day before the lapse of the reglementary period
to appeal.
Assuming that the Court of Appeals should have
dismissed Guevarras appeal on technical grounds, Pajuyo
did not ask the appellate court to deny the motion for
extension and dismiss the petition for review at the earliest
opportunity. Instead, Pajuyo vigorously discussed the
merits of the case. It was only when the Court of Appeals
ruled in Guevarras favor that Pajuyo raised the procedural
issues against Guevarras petition for review.
A party, who, after voluntarily submitting a dispute for
resolution, receives an adverse decision on the merits, is 25
estopped from attacking the jurisdiction of the court.
Estoppel sets in not because the judgment of the court is a
valid and conclusive adjudication, but because the practice
of attacking the courts jurisdiction26 after voluntarily
submitting to it is against public policy.
In his Comment before the Court of Appeals, Pajuyo also
failed to discuss Guevarras failure to sign the certification
against forum shopping. Instead, Pajuyo harped on
Guevarras counsel signing the verification, claiming that

the counsels verification is insufficient since it is based
only on mere information.
A partys failure to sign the certification against forum
shopping is different from the partys failure to sign
personally the verification. The certificate of nonforum 27
shopping must be signed by the party, and not by counsel.28
The certification of counsel renders the petition defective.
_______________
25 Refugia v. Court of Appeals, 327 Phil. 982 258 SCRA 347 (1996).
26 Ibid.
27 Far Eastern Shipping Company v. Court of Appeals, 357 Phil. 703
297 SCRA 30 (1998).
28 Ibid.
509
VOL. 430, JUNE 3, 2004 509

On the other hand, the requirement on verification29 of a

pleading is a formal and not a jurisdictional requisite. It is
intended simply to secure an assurance that what are
alleged in the pleading are true and correct and not the
product of the imagination or a matter30 of speculation, and
that the pleading is filed in good faith. The party need not
sign the verification. A partys representative, lawyer or
any person who personally knows the truth of31 the facts
alleged in the pleading may sign the verification.
We agree with the Court of Appeals that the issue on the
certificate against forum shopping was merely an
afterthought. Pajuyo did not call the Court of Appeals
attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late in
the proceedings.
Absence of Title over the Disputed Property will not

Divest the Courts of Jurisdiction to Resolve the Issue
of Possession
Settled is the rule that the defendants claim of ownership

of the disputed property will not divest the inferior
32
court of
its jurisdiction over the ejectment case. Even if the
pleadings raise the issue of ownership, the court may pass
on such issue to determine only the question of possession,

especially if33 the ownership is inseparably linked with the
possession. The adjudication on the issue of ownership is
only provisional and will not bar an action
34
between the
same parties involving title to the land. This doctrine is a
necessary consequence of the nature of the two summary
actions of ejectment, forcible entry and unlawful detainer,
where the only issue for adjudication is 35the physical or
material possession over the real property.
In this case, what Guevarra raised before the courts was
that he and Pajuyo are not the owners of the contested
property and that
_______________
29 Buenaventura v. Uy, G.R. No. L28156, 31 March 1987, 149 SCRA

220.
30 Ibid.
31 FLORENZ D. REGALADO, REMEDIAL LAW COMPENDIUM, VOL.
I, SIXTH REV. ED., 143.
32 Dizon v. Court of Appeals, 332 Phil. 429 264 SCRA 391 (1996).
33 Ibid.
34 De Luna v. Court of Appeals, G.R. No. 94490, 6 August 1992, 212
SCRA 276.
35 Ibid.
510

they are mere squatters. Will the defense that the parties
to the ejectment case are not the owners of the disputed lot
allow the courts to renounce their jurisdiction over the
case? The Court of Appeals believed so and held that it
would just leave the parties where they are since they are
in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from
ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove
ownership or right to legal possession except to prove the
nature of the possession when36
necessary to resolve the
issue of physical possession. The same is true when the
defendant asserts the absence of title over the property.
The absence of title over the contested lot is not a ground
for the courts to withhold relief from the parties in an

ejectment case.
The only question that the courts must resolve in
ejectment proceedings iswho is entitled to the physical
possession of the premises, that is, to 37the possession de
facto and not to the possession de jure. It does not even 38
matter if a partys title to the property is questionable, or
when both parties intruded into public land and their
applications to own the land have
39
yet to be approved by the
proper government agency. Regardless of the actual
condition of the title to the property, the party in peaceable
quiet possession shall
40
not be thrown out by a strong hand,
violence or terror. Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for
prior possession.
Thus, a party who can prove prior possession can 41
recover such possession even against the owner himself.
Whatever may be the character of his possession, if he has
in his favor prior possession in time, he has the security
that entitles him to remain on the
_______________
36 Pitargue v. Sorilla, 92 Phil. 5 (1952) Dizon v. Court of Appeals, supra

note 32 Section 16, Rule 70 of the 1997 Rules of Court.
37 Ibid. Fige v. Court of Appeals, G.R. No. 107951, 30 June 1994, 233
SCRA 586 Oblea v. Court of Appeals, 313 Phil. 804 244 SCRA 101 (1995).
38 Dizon v. Court of Appeals, supra note 32.
39 Supra note 36.
40 Drilon v. Gaurana, G.R. No. L35482, 30 April 1987, 149 SCRA 342.
41 Rubio v. The Hon. Municipal Trial Court in Cities, 322 Phil. 179 252
SCRA 172 (1996).
511
VOL. 430, JUNE 3, 2004 511

property
42
until a person with a better right lawfully ejects
him. To repeat, the only issue that the court has to settle
in an ejectment suit is the43 right to physical possession.
In Pitargue v. Sorilla, the government owned the land
in dispute. The government did not authorize either the
plaintiff or the defendant in the case of forcible entry case
to occupy the land. The plaintiff had prior possession and
had already introduced improvements on the public land.
The plaintiff had a pending application for the land with
the Bureau of Lands when the defendant ousted him from

possession. The plaintiff filed the action of forcible entry
against the defendant. The government was not a party in
the case of forcible entry.
The defendant questioned the jurisdiction of the courts
to settle the issue of possession because while the
application of the plaintiff was still pending, title remained
with the government, and the Bureau of Public Lands had
jurisdiction over the case. We disagreed with the
defendant. We ruled that courts have jurisdiction to
entertain ejectment suits even before the resolution of the
application. The plaintiff, by priority of his application and
of his entry, acquired prior physical possession over the
public land applied for as against other private claimants.
That prior physical possession enjoys legal protection
against other private claimants because only a court can
take away such physical possession in an ejectment case.
While the Court did44 not brand the plaintiff and the
defendant in Pitargue as squatters, strictly speaking,
their entry into the disputed land was illegal. Both the
plaintiff and defendant entered the public land without the
owners permission. Title to the land remained with the
government because it had not awarded to anyone
ownership of the contested public land. Both the plaintiff
and the defendant were in effect squatting on government
property. Yet, we upheld the courts jurisdiction to resolve
the issue of possession even if the plaintiff and the
defendant in the ejectment case did not have any title over
the contested land.
Courts must not abdicate their jurisdiction to resolve the
issue of physical possession because of the public need to
preserve the
_______________
42 Ibid.
43 92 Phil. 5 (1952).
44 Ibid.
512

basic policy behind the summary actions of forcible entry

and unlawful detainer. The underlying philosophy behind
ejectment suits is to prevent breach of the peace and
criminal disorder and to compel the party out of possession
to respect and45
resort to the law alone to obtain what he
claims is his. The party deprived46 of possession must not
take the law into his own hands. Ejectment proceedings
are summary in nature so the authorities can settle
speedily actions to recover possession because
47
of the
overriding need to quell social disturbances.
We further explained in Pitargue the greater interest
that is at stake in actions for recovery of possession. We
made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without
jurisdiction to take cognizance of possessory actions involving
these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public
lands everywhere and there are thousands of settlers, especially
in newly opened regions. It also involves a matter of policy, as it
requires the determination of the respective authorities and
functions of two coordinate branches of the Government in
connection with public land conflicts.
Our problem is made simple by the fact that under the Civil
Code, either in the old, which was in force in this country before
the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the
physical possession of real property, irrespective of the question
as to who has the title thereto. Under the Spanish Civil Code we
had the accion interdictal, a summary proceeding which could be
brought within one year from dispossession (Roman Catholic
Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291) and as early as
October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we
implanted the common law action of forcible entry (section 80 of
Act No. 190), the object of which has been stated by this Court to
be to prevent breaches of the peace and criminal disorder which
would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves
entitled to the possession of prop
_______________
45 Ibid. Reynoso v. Court of Appeals, G.R. No. 49344, 23 February 1989, 170
SCRA 546 Aguilon v. Bohol, G.R. No. L27169, 20 October 1977, 79 SCRA 482.
46 Ibid.
47 Ibid.
513
VOL. 430, JUNE 3, 2004 513

erty, resort to force to gain possession rather than to some

appropriate action in the court to assert their claims. (Supia and
Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of
forcible entry was already available in the courts of the country.
So the question to be resolved is, Did the Legislature intend,
when it vested the power and authority to alienate and dispose of
the public lands in the Lands Department, to exclude the courts
from entertaining the possessory action of forcible entry between
rival claimants or occupants of any land before award thereof to
any of the parties? Did Congress intend that the lands applied for,
or all public lands for that matter, be removed from the
jurisdiction of the judicial Branch of the Government, so that any
troubles arising therefrom, or any breaches of the peace or
disorders caused by rival claimants, could be inquired into only by
the Lands Department to the exclusion of the courts? The answer
to this question seems to us evident. The Lands Department does
not have the means to police public lands neither does it have the
means to prevent disorders arising therefrom, or contain breaches
of the peace among settlers or to pass promptly upon conflicts of
possession. Then its power is clearly limited to disposition and
alienation, and while it may decide conflicts of possession in order
to make proper award, the settlement of conflicts of possession
which is recognized in the court herein has another ultimate
purpose, i.e., the protection of actual possessors and occupants
with a view to the prevention of breaches of the peace. The power to
dispose and alienate could not have been intended to include the
power to prevent or settle disorders or breaches of the peace among
rival settlers or claimants prior to the final award. As to this,
therefore, the corresponding branches of the Government must
continue to exercise power and jurisdiction within the limits of
their respective functions. The vesting of the Lands Department
with authority to administer, dispose, and alienate public lands,
therefore, must not be understood as depriving the other branches
of the Government of the exercise of the respective functions or
powers thereon, such as the authority to stop disorders and quell
breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising
therefrom not involving, directly or indirectly, alienation and
disposition.
Our attention has been called to a principle enunciated in
American courts to the effect that courts have no jurisdiction to
determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the
Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 1093
1094) We have no quarrel with this principle. The determination

of the respective rights of rival claimants to public lands is
different from the determination of who has the actual physical
possession or occupation with a view to protecting the same and
preventing disorder and breaches of the peace. A judgment of the
court ordering restitution of the possession
514

of a parcel of land to the actual occupant, who has been deprived

thereof by another through the use of force or in any other illegal
manner, can never be prejudicial interference with the
disposition or alienation of public lands. On the other hand, if
courts were deprived of jurisdiction of cases involving conflicts of
possession, that threat of judicial action against breaches of the
peace committed on public lands would be eliminated, and a state
of lawlessness would probably be produced between applicants,
occupants or squatters, where force or might, not right or justice,
would rule.
It must be borne in mind that the action that would be used to
solve conflicts of possession between rivals or conflicting
applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in
our jurisdiction, is a summary and expeditious remedy whereby
one in peaceful and quiet possession may recover the possession of
which he has been deprived by a stronger hand, by violence or
terror its ultimate object being to prevent breach of the peace and
criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59
Phil. 312, 314) The basis of the remedy is mere possession as a
fact, of physical possession, not a legal possession. (Mediran vs.
Villanueva, 37 Phil. 752.) The title or right to possession is never
in issue in an action of forcible entry as a matter of fact, evidence
thereof is expressly banned, except to prove the nature of the
possession. (Second 4, Rule 72, Rules of Court.) With this nature
of the action in mind, by no stretch of the imagination can
conclusion be arrived at that the use of the remedy in the courts
of justice would constitute an interference with the alienation,
disposition, and control of public lands. To limit ourselves to the
case at bar can it be pretended at all that its result would in any
way interfere with the manner of the alienation or disposition of
the land contested? On the contrary, it would facilitate
adjudication, for the question of priority of possession having been
decided in a final manner by the courts, said question need no
longer waste the time of the land officers making the adjudication
or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to

Ejectment Cases
The Court of Appeals erroneously applied the principle of

pari delicto to this case. 48
Articles 1411 and 1412 of the Civil Code embody the
principle of pari delicto. We explained the principle of pari
delicto in these words:
_______________
48 Art. 1411. When the nullity proceeds from the illegality of the cause
or object of the contract, and the act constitutes a criminal offense, both
parties being in pari delicto, they shall have no action against each
515
VOL. 430, JUNE 3, 2004 515

The rule of pari delicto is expressed in the maxims ex dolo malo

non eritur actio and in pari delicto potior est conditio defedentis.
The law will not aid either party49 to an illegal agreement. It leaves
the parties where it finds them.
The application of the pari delicto principle is not absolute,

as there are exceptions to its application. One of these
exceptions is where the application of the pari
50
delicto rule
would violate wellestablished
51
public policy.
In Drilon v. Gaurana, we reiterated the basic policy
behind the summary actions of forcible entry and unlawful
detainer. We held that:
It must be stated that the purpose of an action of forcible entry

and detainer is that, regardless of the actual condition of the title
to the property, the party in peaceable quiet possession shall not
be turned out by strong hand, violence or terror. In affording this
remedy of restitution the object of the statute is to prevent
breaches of the peace and criminal disorder which would ensue
from the withdrawal of the remedy, and the reasonable hope such
withdrawal would create that some advantage must
_______________
other, and both shall be prosecuted. Moreover, the provisions of the Penal Code
relative to the disposal of effects or instruments of a crime shall be applicable to
the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty but the
innocent one may claim what he has given, and shall not be bound to comply with
his promise.
Art. 1412. If the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rule shall be observed:
(1) When the fault is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or demand the
performance of the others undertaking
(2) When only one of the contracting parties is at fault, he cannot recover what
he has given by reason of the contract, or ask for the fulfillment of what
has been promised to him. The other, who is not at fault, may demand the
return of what he has given without any obligation to comply with his
promise.
49 TopWeld Manufacturing, Inc. v. ECED S.A., G.R. No. L44944, 9 August

1985, 138 SCRA 118.
50 Silagan v. Intermediate Appellate Court, 274 Phil. 182 196 SCRA 774 (1991).
51 Supra note 40.
516

accrue to those persons who, believing themselves entitled to the

possession of property, resort to force to gain possession rather
than to some appropriate action in the courts to assert their
claims. This is the philosophy at the foundation of all these
actions of forcible entry and detainer which are designed to
compel the party out of possession to 52respect and resort to the law
alone to obtain what he claims is his.
Clearly, the application of the principle of pari delicto to a

case of ejectment between squatters is fraught with danger.
To shut out relief to squatters on the ground of pari delicto
would openly invite mayhem and lawlessness. A squatter
would oust another squatter from possession of the lot that
the latter had illegally occupied, emboldened by the
knowledge that the courts would leave them where they
are. Nothing would then stand in the way of the ousted
squatter from reclaiming his prior possession at all cost.
Petty warfare over possession of properties is precisely
what ejectment cases
53
or actions for recovery of possession
seek to prevent. Even the owner who has title over the
disputed property cannot take the law into his own hands
to regain possession of his property. The owner must go to
court.
Courts must resolve the issue of possession even if the

parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a
serious and urgent matter that cannot be left to the
squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property
owners from taking the law into their own hands. However,
the principle of pari delicto as applied by the Court of
Appeals would give squatters free rein to dispossess fellow
squatters or violently retake possession of properties
usurped from them. Courts should not leave squatters to
their own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an

Ejectment Case
The case for review before the Court of Appeals was a

simple case of ejectment. The Court of Appeals refused to
rule on the issue of physical possession. Nevertheless, the
appellate court held that the pivotal issue in this case is
who between Pajuyo and Guevarra
_______________
52 Ibid.
53 Dizon v. Concilia, 141 Phil. 589 303 SCRA 897 (1969) Cine Ligaya v.
Labrador, 66 Phil. 659 (1938).
517
VOL. 430, JUNE 3, 2004 517

has the priority right as beneficiary

54
of the contested land
under Proclamation No. 137. According to the Court of
Appeals, Guevarra enjoys preferential right under
Proclamation No. 137 because Article VI of the Code
declares that the actual occupant or caretaker is the one
qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and
legal basis.
First. Guevarra did not present evidence to show that
the contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down the
metes and bounds of the land that it declared open for
disposition to bona fide residents.
The records do not show that the contested lot is within

the land specified by Proclamation No. 137. Guevarra had
the burden to prove that the disputed lot is within the
coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given
credence to Guevarras unsubstantiated claim that he is
the beneficiary of Proclamation No. 137. Guevarra merely
alleged that in the survey the project administrator
conducted, he and not Pajuyo appeared as the actual
occupant of the lot.
There is no proof that Guevarra actually
54
availed of the
benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985.
President Aquino signed Proclamation No. 137 into law on
11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the
property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never
applied as beneficiary of Proclamation No. 137. Even when
Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any step
to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the
coverage of Proclamation No. 137 and Guevarra has a
pending application over the lot, courts should still assume
jurisdiction and resolve the issue of possession. However,
the jurisdiction of the courts would be limited to the issue
of physical possession only.
_______________
54 Rollo, p. 54.
518

55
In Pitargue, we ruled that courts have jurisdiction over
possessory actions involving public land to determine the
issue of physical possession. The determination of the
respective rights of rival claimants to public land is,
however, distinct from the determination of who has the
actual physical possession
56
or who has a better right of
physical possession. The administrative disposition and
alienation of public lands 57should be threshed out in the
proper government agency.
The Court of Appeals determination of Pajuyo and

Guevarras rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely
potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency
mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead,
courts should expeditiously resolve the issue of physical
possession in ejectment
58
cases to prevent disorder and
breaches of peace.
Pajuyo is Entitled to Physical Possession of the

Disputed Property
Guevarra does not dispute Pajuyos prior possession of the

lot and ownership of the house built on it. Guevarra
expressly admitted the existence and due execution of the
Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, mayari ng bahay at lote sa Bo.

Payatas, Quezon City, ay nagbibigay pahintulot kay G. Eddie
Guevarra, na pansamantalang manirahan sa nasabing bahay at
lote ng walang bayad. Kaugnay nito, kailangang panatilihin nila
ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay
kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to

reside in the house and lot free of rent, but Guevarra was
under obligation to maintain the premises in good
condition. Guevarra prom
_______________
55 Supra note 43.

56 Ibid. Aguilon v. Bohol, supra note 45 Reynoso v. Court of Appeals,
supra note 45.
57 Reynoso v. Court of Appeals, supra note 45.
58 Aguilon v. Bohol, supra note 45.
519
VOL. 430, JUNE 3, 2004 519

ised to vacate the premises on Pajuyos demand but

Guevarra broke his promise and refused to heed Pajuyos
demand to vacate.
These facts make out a case for unlawful detainer.

Unlawful detainer involves the withholding by a person
from another of the possession of real property to which the
latter is entitled after the expiration or termination of the
formers right59
to hold possession under a contract, express
or implied.
Where the plaintiff allows the defendant to use his
property by tolerance without any contract, the defendant
is necessarily bound by an implied promise that he will
vacate on demand, 60
failing which, an action for unlawful
detainer will lie. The defendants refusal to comply with
the demand 61
makes his continued possession of the property
unlawful. The status of the defendant in such a case is
similar to that of a lessee or tenant whose term of lease has
expired62 but whose occupancy continues by tolerance of the
owner.
This principle should apply with greater force in cases
where a contract embodies the permission or tolerance to
use the property. The Kasunduan expressly articulated
Pajuyos forbearance. Pajuyo did not require Guevarra to
pay any rent but only to maintain the house and lot in good
condition. Guevarra expressly vowed in the Kasunduan
that he would vacate the property on demand. Guevarras
refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that
the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers
to another something not consumable so that the latter 63
may use the same for a certain time and return it. An
essential feature of
_______________
59 Section 1, Rule 70 of the 1964 Rules of Court.

60 Arcal v. Court of Appeals, 348 Phil. 813 285 SCRA 34 (1998).
61 Ibid.
62 Ibid.
63 Art. 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract is called a
commodatum or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
520

commodatum is that it is gratuitous. Another feature of

commodatum is that the use of 64
the thing belonging to
another is for a certain period. Thus, the bailor cannot
demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment
65
of the use for which the commodatum is constituted. If the
bailor should have urgent need of the 66
thing, he may
demand its return for temporary use. If the use of the
thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which
67
case the contractual
relation is called a precarium. Under 68
the Civil Code,
precarium is a kind of commodatum.
The Kasunduan reveals that the accommodation
accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra
to pay rent, it obligated him to maintain the property in
good condition. The imposition of this obligation makes the
Kasunduan a contract different from a commodatum. The
effects of the Kasunduan are also different from that of a
commodatum. Case law on ejectment has treated
relationship based on tolerance as one that is akin to a
landlordtenant relationship where the withdrawal of
permission would result in
_______________
Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned,
while in simple loan, ownership passes to the borrower.
64 Pascual v. Mina, 20 Phil. 202 (1911).
65 Art. 1946. The bailor cannot demand the return of the thing loaned
till after the expiration of the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted. However, if in the meantime, he should have urgent need of
the thing, he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is
suspended while the thing is in the possession of the bailor.
66 Ibid.
67 Art. 1947. The bailor may demand the thing at will, and the
contractual relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which the
thing loaned should be devoted, has been stipulated or
(2) If the use of the thing is merely tolerated by the owner.
68 ARTURO M. TOLENTINO, COMMENTARIES AND

JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol.
V, 448.
521
VOL. 430, JUNE 3, 2004 521

69
the termination of the lease. The tenants withholding of
the property would then be unlawful. This is settled
jurisprudence.
Even assuming that the relationship between Pajuyo
and Guevarra is one of commodatum, Guevarra as bailee
would still have the duty to turn over possession of the
property to Pajuyo, the bailor. The obligation to deliver or
to return the thing received attaches to contracts for
safekeeping, or contracts
70
of commission, administration
and commodatum. These contracts certainly involve 71
the
obligation to deliver or return the thing received.
Guevarra turned his back on the Kasunduan on the sole
ground that like him, Pajuyo is also a squatter. Squatters,
Guevarra pointed out, cannot enter into a contract
involving the land they illegally occupy. Guevarra insists
that the contract is void.
Guevarra should know that there must be honor even
between squatters. Guevarra freely entered into the
Kasunduan. Guevarra cannot now impugn the Kasunduan
after he had benefited from it. The Kasunduan binds
Guevarra.
The Kasunduan is not void for purposes of determining
who between Pajuyo and Guevarra has a right to physical
possession of the contested property. The Kasunduan is the
undeniable evidence of Guevarras recognition of Pajuyos
better right of physical possession. Guevarra is clearly a
possessor in bad faith. The absence of a contract would not
yield a different result, as there would still be an implied
promise to vacate.
Guevarra contends that there is a pernicious evil that is
sought to be avoided, and that is allowing an absentee
squatter
72
who (sic) makes (sic) a profit out of his illegal
act. Guevarra bases his argument on the preferential
right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with
Guevarra because Guevarra stayed in the property without
paying any rent. There is also no proof that Pajuyo is a

professional squatter who
_______________
69 Arcal v. Court of Appeals, supra note 60 Dakudao v. Consolacion,

207 Phil. 750 122 SCRA 877 (1983) Calubayan v. Pascual, 21 SCRA 146
128 Phil. 160 (1967).
70 United States v. Camara, 28 Phil. 238 (1914).
71 Ibid.
72 Rollo, p. 87.
522

rents out usurped properties to other squatters. Moreover,

it is for the proper government agency to decide who
between Pajuyo and Guevarra qualifies for socialized
housing. The only issue that we are addressing is physical
possession.
Prior possession
73
is not always a condition sine qua non
in ejectment. This is one of the 74distinctions between
forcible entry and unlawful detainer. In forcible entry, the
plaintiff is deprived of physical possession of his land or
building by means of force, intimidation, threat, strategy or 75
stealth. Thus, he must allege and prove prior possession.
But in unlawful detainer, the defendant unlawfully
withholds possession after the expiration or termination of
his right to possess under any contract, express or implied.
76
In such a case, prior physical possession is not required.
Pajuyos withdrawal of his permission to Guevarra
terminated the Kasunduan. Guevarras transient right to
possess the property ended as well. Moreover, it was
Pajuyo who was in actual possession of the property
because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow
the conditions set by Pajuyo in the Kasunduan. Control
over the property still rested with Pajuyo and this is
evidence of actual possession.
Pajuyos absence did not affect his actual possession of
the disputed property. Possession in the eyes of the law
does not mean that a man has to have his feet on every
square meter77
of the ground before he is deemed in
possession. One may acquire possession not only by
physical occupation, but also by the fact that a thing is
78
subject to the action of ones will. Actual
http://central.com.ph/sfsreader/session/0000015cd9d0b03d83e8457c003600fb002c009e/t/?o=False or physical 35/39
78
subject to the action of ones will.
79
Actual or physical
occupation is not always necessary.
_______________
73 Benitez v. Court of Appeals, G.R. No. 104828, 16 January 1997, 266

SCRA 242.
74 Ibid.
75 Ibid.
76 Ibid.
77 Dela Rosa v. Carlos, G.R. No. 147549, 23 October 2003, 414 SCRA
226.
78 Benitez v. Court of Appeals, supra note 73.
79 Ibid.
523
VOL. 430, JUNE 3, 2004 523

Ruling on Possession Does not Bind Title to the Land

in Dispute
We are aware of our pronouncement in cases where we

declared that squatters and intruders who clandestinely
enter into titled government property cannot,
80
by such act,
acquire any legal right to said property. We made this
declaration because the person who had title or who had
the right to legal possession over the disputed property was
a party in the ejectment suit and that party instituted the
case against squatters or usurpers.
In this case, the owner of the land, which is the
government, is not a party to the ejectment case. This case
is between squatters. Had the government participated in
this case, the courts could have evicted the contending
squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the
property is not impleaded in this case, we cannot evict on
our own the parties. Such a ruling would discourage
squatters from seeking the aid of the courts in settling the
issue of physical possession. Stripping both the plaintiff
and the defendant of possession just because they are
squatters would have the same dangerous implications as
the application of the principle of pari delicto. Squatters
would then rather settle the issue of physical possession
among themselves than seek relief from the courts if the
plaintiff and defendant in the ejectment case would both

stand to lose possession of the disputed property. This
would subvert the policy underlying actions for recovery of
possession.
Since Pajuyo has in his favor priority in time in holding
the property, he is entitled to remain on the property until
a person who has title or a better right lawfully ejects him.
Guevarra is certainly not that person. The ruling in this
case, however, does not preclude Pajuyo and Guevarra from
introducing evidence and presenting arguments before the
proper administrative agency to establish 81
any right to
which they may be entitled under the law.
In no way should our ruling in this case be interpreted
to condone squatting. The ruling on the issue of physical
possession does not affect title to the property nor
constitute a binding and conclu
_______________
80 Caballero v. Court of Appeals, G.R. No. 59888, 29 January 1993, 218

SCRA 56 Florendo, Jr. v. Coloma, G.R. No. L60544, 19 May 1984, 214
SCRA 268.
81 Florendo, Jr. v. Coloma, supra note 80.
524

82
sive adjudication on the merits on the issue of ownership.
The owner can still go to court to recover lawfully the
property from the person who holds the property without
legal title. Our ruling here does not diminish the power of
government agencies, including local governments, to
condemn, abate, remove or demolish illegal or
unauthorized structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000

attorneys fees to Pajuyo. Attorneys fees as part of
damages are awarded only in the instances
83
enumerated in
Article 2208 of the Civil Code. Thus, the award of84
attorneys fees is the exception rather than the rule.
Attorneys fees are not awarded every time a party prevails
in a suit because of the policy that no premium should be
85
placed on the right to litigate. We therefore
http://central.com.ph/sfsreader/session/0000015cd9d0b03d83e8457c003600fb002c009e/t/?o=False delete the 37/39
85
placed on the right to litigate. We therefore delete the
attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC
assessed against Guevarra. Guevarra did not dispute this
factual finding of the two courts. We find the amount
reasonable compensation to Pajuyo. The P300 monthly
rental is counted from the last demand to vacate, which
was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision
dated 21 June 2000 and Resolution dated 14 December
2000 of the Court of Appeals in CAG.R. SP No. 43129 are
SET ASIDE. The Decision dated 11 November 1996 of the
Regional Trial Court of Quezon City, Branch 81 in Civil
Case No. Q9626943, affirming the Decision dated 15
December 1995 of the Metropolitan Trial Court of Quezon
City, Branch 31 in Civil Case No. 12432, is REINSTATED
with MODIFICATION. The award of attorneys fees is
deleted. No costs.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Panganiban, Ynares

Santiago and Azcuna, JJ., concur.
_______________
82 Dizon v. Court of Appeals, supra note 32 Section 7, Rule 70 of the

1964 Rules of Court.
83 Padillo v. Court of Appeals, 442 Phil. 344 371 SCRA 27 (2001).
84 Ibid.
85 Ibid.
525
VOL. 430, JUNE 3, 2004 525

Philippine Appliance Corporation (PHILACOR) vs. Court
of Appeals
Petition granted, assailed decision set aside.
Notes.A final judgment may be amended if

necessitated by compelling circumstances. (Ramos vs.
Court of Appeals, 244 SCRA 72 [1995])
A partys occupation of a parcel of land, after the denial
of its application for Miscellaneous Sales Patent, becomes
illegal and it, as a consequence, becomes a squatter.
Squatters acquire no legal right over the land they occupy.
(Cagayan de Oro City Landless Residents Association, Inc.
[COCLAI] vs. Court of Appeals, 254 SCRA 220 [1996])
The specter of landlessness on one hand and the uneasy

partnership between the landed and the landless on the
other have often haunted our countrys restive socio
economic past. Now more pronounced than ever is this
affliction with the mushrooming of squatter colonies in the
urban centers and of landless tenantfarmers in the rural
areas. This case is a miniature representation of this
continuing societal malady that breeds discord and
lawlessness. (People vs. Lopez, 342 SCRA 431 [2000])
o0o
VOL. 397, FEBRUARY 19, 2003 651

Producers Bank of the Philippines vs. Court of Appeals
*
G.R. No. 115324. February 19, 2003.
PRODUCERS BANK OF THE PHILIPPINES (now FIRST

INTERNATIONAL BANK), petitioner, vs. HON. COURT
OF APPEALS AND FRANKLIN VIVES, respondents.
Civil Procedure Pleadings and Practice Appeals Only

questions of law may be raised in a petition for review filed with
the Court.At the outset, it must be emphasized that only
questions of law may be raised in a petition for review filed with
this Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence
presented by the parties during trial. The Courts jurisdiction is in
principle limited to reviewing errors of law that might have been
committed by the Court of Appeals. Moreover, factual findings of
courts, when adopted and confirmed by the Court of Appeals, are
final and conclusive on this Court unless these findings are not
supported by the evidence on record.
_______________
* SECOND DIVISION.
652
Civil Law Contracts Loan Distinguished from

Commodatum Article 1933 of the Civil Code distinguishes
between the two kinds of loans.By the contract of loan, one of
the parties delivers to another, either something not consumable
so that the latter may use the same for a certain time and return
it, in which case the contract is called a commodatum or money
or other consumable thing, upon the condition that the same
http://central.com.ph/sfsreader/session/0000015cd9d26459fb7f4a2c003600fb002c009e/t/?o=False 1/16
amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum. Commodatum is
essentially gratuitous. Simple loan may be gratuitous or with a
stipulation to pay interest. In commodatum, the bailor retains the
ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.
Same QuasiDelicts EmployerEmployee Relationship
Solidary Liability Employers shall be held primarily and
solidarily liable for damages caused by their employees acting
within the scope of their assigned tasks.Under Article 2180 of
the Civil Code, employers shall be held primarily and solidarily
liable for damages caused by their employees acting within the
scope of their assigned tasks. To hold the employer liable under
this provision, it must be shown that an employeremployee
relationship exists, and that the employee was acting within the
scope of his assigned task when the act complained of was
committed. Case law in the United States of America has it that a
corporation that entrusts a general duty to its employee is
responsible to the injured party for damages flowing from the
employees wrongful act done in the course of his general
authority, even though in doing such act, the employee may have
failed in its duty to the employer and disobeyed the latters
instructions.


Domingo &Dizon for petitioner.
Mauricio Law Office for private respondent.
CALLEJO, SR., J.:

1
This is a petition for review on certiorari of the Decision of
the Court of Appeals dated June 25, 2
1991 in CAG.R. CV
No. 11791 and of its Resolution dated May 5, 1994,
denying the motion for
_______________
1 Justice Asaali S. Isnani, Ponente, with Justices Rodolfo A. Nocon,

Presiding Justice, and Antonio M. Martinez, concurring.
2 Rollo, pp. 5455.
653
VOL. 397, FEBRUARY 19, 2003 653

reconsideration of said decision filed by petitioner

Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives
was asked by his neighbor and friend Angeles Sanchez to
help her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and
Services (Sterela for brevity). Specifically, Sanchez asked
private respondent to deposit in a bank a certain amount of
money in the bank account of Sterela for purposes of its
incorporation. She assured private respondent that he
could withdraw his money from said account within a
months time. Private respondent asked Sanchez to bring
Doronilla to their 3
house so that they could discuss
Sanchezs request.
On May 9, 1979, private respondent, Sanchez, Doronilla
and a certain Estrella Dumagpi, Doronillas private
secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez
and Doronilla, private respondent issued a check in the
amount of Two Hundred Thousand Pesos (P200,000.00) in
favor of Sterela. Private respondent instructed his wife,
Mrs. Inocencia Vives, to accompany Doronilla and Sanchez
in opening a savings account in the name of Sterela in the
Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and
Dumagpi went to the bank to deposit the check. They had
with them an authorization letter from Doronilla
authorizing Sanchez and her companions, in coordination
with Mr, Rufo Atienza, to open an account for Sterela
Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were
Inocencia Vives and/or Angeles Sanchez. A passbook for
Savings4
Account No. 101567 was thereafter issued to Mrs.
Vives.
Subsequently, private respondent learned that Sterela
was no longer holding office in the address previously given
to him. Alarmed, he and his wife went to the Bank to verify
if their money was still intact. The bank manager referred
them to Mr. Rufo Atienza, the assistant manager, who
informed them that part of the money in Savings Account
No. 101567 had been withdrawn by Doronilla, and that
only P90,000.00 remained therein. He likewise told them
that Mrs. Vives could not withdraw said remaining
_______________
3 Id. at p. 37.
4 Ibid.
654

amount because it had to answer for some postdated checks

issued by Doronilla. According to Atienza, after Mrs. Vives
and Sanchez opened Savings Account No. 101567,
Doronilla opened Current Account No. 100320 for Sterela
and authorized the Bank to debit Savings Account No. 10
1567 for the amounts necessary to cover overdrawings in
Current Account No. 100320. In opening said current
account, Sterela, through Doronilla, obtained a loan of
P175,000.00 from the Bank. To cover payment thereof,
Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or
withdraw the money in Savings Account No. 101567
because he was 5
the sole proprietor
of Sterela.
Private respondent tried to get in touch with Doronilla
through Sanchez. On June 29, 1979, he received a letter
from Doronilla, assuring him that his money was intact
and would be returned to him. On August 13, 1979,
Doronilla issued a postdated check for Two Hundred
Twelve Thousand Pesos (P212,000.00) in favor of private
respondent. However, upon presentment thereof by private
respondent to the drawee bank, the check was dishonored.
Doronilla requested private respondent to present the same
check on September 15, 1979 but when 6
the latter presented
the check, it was again dishonored.
Private respondent referred the matter to a lawyer, who
made a written demand upon Doronilla for the return of his
clients money. Doronilla issued another check for
P212,000.00 in private respondents favor but7 the check
was again dishonored for insufficiency of funds.
Private respondent instituted an action for recovery of
sum of money in the Regional Trial Court (RTC) in Pasig,
Metro Manila against Doronilla, Sanchez, Dumagpi and
petitioner. The case was docketed as Civil Case No. 44485.
He also filed criminal actions against Doronilla, Sanchez
and Dumagpi in the RTC. However, Sanchez passed away
on March 16, 1985 while the case was pending before the
trial court. On October 3, 1995, the RTC of Pasig, Branch
157, promulgated its Decision in Civil Case No. 44485, the
dispositive portion of which reads:
_______________
5 Id., at pp. 3738.

6 Id., at p. 38.
7 Id.
655
VOL. 397, FEBRUARY 19, 2003 655

IN VIEW OF THE FOREGOING, judgment is hereby rendered

sentencing defendants Arturo J. Doronila, Estrella Dumagpi and
Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally
(a) the amount of P200,000.00, representing the money

deposited, with interest at the legal rate from the filing of
the complaint until the same is fully paid
(b) the sum of P50,000.00 for moral damages and a similar
amount for exemplary damages
(c) the amount of P40,000.00 for attorneys fees and
(d) the costs of the suit.
8
SO ORDERED.
Petitioner appealed the trial courts decision to the Court of

Appeals. In its Decision dated June 25, 1991, the 9
appellate
court affirmed in toto the decision of the RTC. It likewise
denied with finality petitioners motion
10
for reconsideration
in its Resolution dated May 5, 1994.
On June 30, 1994, petitioner filed the present petition,
arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN

UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS
ONE OF SIMPLE LOAN AND NOT ACCOMMODATION
II.

UPHOLDING THAT PETITIONERS BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER
DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE
PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE
_______________
8 Id., at p. 63.
9 Id., at pp. 3547.
10 Id., at pp. 5455.
656

III.

ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT
APPEALED FROM, AS THE FINDINGS OF THE REGIONAL
TRIAL COURT WERE BASED ON A MISAPPREHENSION OF
FACTS
IV.

DECLARING THAT THE CITED DECISION IN SALUDARES
VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY
OF AN EMPLOYER FOR ACTS COMMITTED BY AN
EMPLOYEE IS APPLICABLE
V.

UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
LIABLE WITH THE OTHER DEFENDANTS FOR THE
AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS
ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES,
P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00
11
FOR
ATTORNEYS FEES AND THE COSTS OF SUIT.
Private respondent filed his Comment on September 23,

1994. Petitioner filed its Reply thereto on September 25,
1995. The Court then required private respondent to
submit a rejoinder to the reply. However, said rejoinder
was filed only on April 21, 1997, due to petitioners delay
12
in
furnishing private respondent with copy of the reply and
several substitutions
13
of counsel on the part of private
respondent. On January 17, 2001, the Court resolved to
give due course to the petition and required
14
the parties to
submit their respective memoranda. Petitioner filed its
memorandum on April 16, 2001 while private respondent

submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private
respondent and Doronilla is a simple loan (mutuum) since
all the elements of a mutuum are present: first, what was
delivered by
_______________
11 Id., at pp. 1819.

12 Id., at pp. 148, 181.
13 Id., at pp. 176, 199.
14 Id., at p. 227.
657
VOL. 397, FEBRUARY 19, 2003 657

private respondent to Doronilla was money, a consumable

thing and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced by the
check issued by Doronilla in the amount of P212,000.00, or
P12,000 more than what 15
private respondent deposited in
Sterelas bank account. Moreover, the fact that private
respondent sued his good friend Sanchez for his failure to
recover his money from Doronilla shows that the
transaction was not merely gratuitous but had a business
angle to it. Hence, petitioner argues that it cannot be held
liable for the return of private respondents P200,000.00
because it is not
16
privy to the transaction between the latter
and Doronilla.
It argues further that petitioners Assistant Manager,
Mr. Rufo Atienza, could not be faulted for allowing
Doronilla to withdraw from the savings account of Sterela
since the latter was the sole proprietor of said company.
Petitioner asserts that Doronillas May 8, 1979 letter
addressed to the bank, authorizing Mrs. Vives and Sanchez
to open a savings account for Sterela, did not contain any
authorization for these two to withdraw from said account.
Hence, the authority to withdraw therefrom remained
exclusively with Doronilla, who was the sole proprietor of
Sterela, 17and who alone had legal title to the savings
account. Petitioner points out that no evidence other than
the testimonies of private respondent and Mrs. Vives was
presented during trial to prove that private respondent
deposited his P200,000.00
18
in Sterelas account for purposes
of its incorporation. Hence, petitioner should not be held
liable for allowing Doronilla to withdraw from Sterelas

savings account.
Petitioner also asserts that the Court of Appeals erred in
affirming the trial courts decision since the findings of fact
therein were not accord with the evidence presented by
petitioner during trial to prove that the transaction
between private respondent and Doronilla was a mutuum,
and that it committed no wrong in allowing 19
Doronilla to
withdraw from Sterelas savings account.
_______________
15 Id., at p. 21.
16 Id., at p. 22.
17 Id., at pp. 2427.
18 Id., at p. 23.
19 Id., at p. 28.
658

Finally, petitioner claims that since there is no wrongful

act or omission on its part, it is not liable for the actual
damages suffered by private respondent, and neither may
it be held liable for
20
moral and exemplary damages as well
as attorneys fees.
Private respondent, on the other hand, argues that the
transaction between him 21
and Doronilla is not a mutuum
but an accommodation, since he did not actually part with
the ownership of his P200,000.00 and in fact asked his wife
to deposit said amount in the account of Sterela so that a
certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the
same time, he retained some degree of control over his
money through his wife who was made a signatory to the
savings account and in whose 22
possession the savings
account passbook was given.
He likewise asserts that the trial court did not err in
finding that petitioner, Atienzas employer, is liable for the
return of his money. He insists that Atienza, petitioners
assistant manager, connived with Doronilla in defrauding
private respondent since it was Atienza who facilitated the
opening of Sterelas current account three days after Mrs.
Vives and Sanchez opened a savings account with
petitioner for said company, as well as the approval of the
authority to debit Sterelas savings23 account to cover any

overdrawings in its current account.
There is no merit in the petition.
At the outset, it must be emphasized that only questions
of law may be raised in a petition for review filed with this
Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again 24
the evidence
presented by the parties during trial. The Courts
jurisdiction is in principle limited to reviewing errors of law
25
that might have been committed by the Court of Appeals.
Moreover, factual findings of courts, when adopted and
confirmed by the Court of Appeals, are final and conclusive
on this
_______________
20 Rollo, Petitioners Memorandum, pp. 1314.

21 Id., at pp. 11 12.
22 Rollo, p. 75 Private respondents Memorandum, pp. 89.
23 Id., at pp. 7577 Id., at pp. 1216.
24 Flores v. Uy, G.R. No. 121492, October 26, 2001, 368 SCRA 347 Lim
v. People, G.R. No. 143231, October 26, 2001, 368 SCRA 436.
25 Section 1, Rule 45, Revised Rules of Civil Procedure.
659
VOL. 397, FEBRUARY 19, 2003 659

Court unless these findings

26
are not supported by the
evidence on record. There is no showing of any
misapprehension of facts on the part of the Court of
Appeals in the case at bar that would require this Court to
review and overturn the factual findings of that court,
especially since the conclusions of fact of the Court of
Appeals and the trial court are not only consistent but are
also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it
ruled that the transaction between private respondent and
Doronilla was a commodatum and not a mutuum. A
circumspect examination of the records reveals that the
transaction between them was a commodatum. Article
1933 of the Civil Code distinguishes between the two kinds
of loans in this wise:
By the contract of loan, one of the parties delivers to another,

either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract is
called a commodatum or money or other consumable thing, upon

the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or
mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay
interest.
In commodatum, the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of

the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some
instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the

purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of

exhibition, or when the intention of the parties is to lend
consumable
_______________
26 Baas, Jr. v. Court of Appeals, 325 SCRA 259 (2000) Philippine

National Construction Corporation v. Mars Construction Enterprises, Inc.,
325 SCRA 624 (2000).
660

goods and to have the very same goods returned at the end
of the period agreed upon, the loan is a commodatum and
not a mutuum.
The rule is that the intention of the parties thereto shall
be accorded primordial consideration 27
in determining the
actual character of a contract. In case of doubt, the
contemporaneous and subsequent acts 28
of the parties shall
be considered in such determination.
As correctly pointed out by both the Court of Appeals
and the trial court, the evidence shows that private
respondent agreed to deposit his money in the savings
account of Sterela specifically for the purpose of making it
appear that said firm had sufficient capitalization for
incorporation, with the promise that29 the amount shall be
returned within thirty (30) days. Private respondent
29
returned within thirty (30) days. Private respondent
merely accommodated Doronilla by lending his money
without consideration, as a favor to his good friend
Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from
Sterelas savings account and would be returned to private
respondent after thirty (30) days.
Doronillas attempts to return to private respondent the
amount of P200,000.00 which the latter deposited in
Sterelas account together with an additional P12,000.00,
allegedly representing interest on the mutuum, did not
convert the transaction from a commodatum into a
mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits
of the lending of the P200,000.00. Article 1935 of the Civil
Code expressly states that [t]he bailee in commodatum
acquires the use of the thing loaned but not its fruits.
Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latters money
deposited with petitioner.
Neither does the Court agree with petitioners
contention that it is not solidarily liable for the return of
private respondents money because it was not privy to the
transaction between Doronilla and private respondent. The
nature of said transaction, that is,
_______________
27 Tanguilig v. Court of Appeals, 266 SCRA 78, 8384 (1997), citing

Kasilag v. Rodriguez, 69 Phil. 217 (1939) 17A Am. Jur. 2d 27 Contracts,
5, citing Wallace Bank & Trust Co. v. First National Bank, 40 Idaho 712,
237 P 284, 50 ALR 316.
28 Tanguilig v. Court of Appeals, supra, p. 84.
29 Rollo, pp. 4041, 60.
661
VOL. 397, FEBRUARY 19, 2003 661

whether it is a mutuum or a commodatum, has no bearing

on the question of petitioners liability for the return of
private respondents money because the factual
circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible
for the loss of private respondents money and is liable for
its restitution.
Petitioners rules for savings deposits written on the

passbook it issued Mrs. Vives on behalf of Sterela for
Savings Account No. 101567 expressly states that
2. Deposits and withdrawals must be made by the depositor

personally or upon his written authority duly authenticated, and
neither a deposit nor a withdrawal will be permitted except upon
the production of the depositor savings bank book in which30 will be
entered by the Bank the amount deposited or withdrawn.
Said rule notwithstanding, Doronilla was permitted by

petitioner, through Atienza, the Assistant Branch Manager
for the Buendia Branch of petitioner, to withdraw
therefrom even without presenting the passbook (which
Atienza very well knew was in the possession of Mrs.
Vives), not just once, but several times. Both the Court of
Appeals and the trial court found that Atienza allowed said
withdrawals because he was party to Doronillas scheme
of defrauding private respondent:
xxx
But the scheme could not have been executed successfully
without the knowledge, help and cooperation of Rufo Atienza,
assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza
had not only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be done in
such manner as to make it appear that the transaction was in
accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia
branch precisely because Atienza was a key officer therein. The
records show that plaintiff had suggested that the P200,000.00 be
deposited in his bank, the Manila Banking Corporation, but
Doronilla and Dumagpi insisted that it must be in defendants
branch in Makati for it will be easier for them to get a
certification. In fact before he was introduced to plaintiff,
Doronilla had already prepared a letter addressed to the Buendia
branch manager authorizing Angeles B. Sanchez and company to
open a savings account
_______________
30 Exhibit B, Folder of Exhibits, p. 3, emphasis supplied.
662

for Sterela in the amount of P200,000.00, as per coordination

with Mr. Rufo Atienza, Assistant Manager of the Bank x x x
(Exh. 1). This is a clear manifestation that the other defendants
had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that
Atienza is the brotherinlaw of a certain Romeo Mirasol, a friend
and business associate of Doronilla.
Then there is the matter of the ownership of the fund. Because
of the coordination between Doronilla and Atienza, the latter
knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was
explicitly told by Inocencia Vives that the money belonged to her
and her husband and the deposit was merely to accommodate
Doronilla. Atienza even declared that the money came from Mrs.
Vives.
Although the savings account was in the name of Sterela, the
bank records disclose that the only ones empowered to withdraw
the same were Inocencia Vives and Angeles B. Sanchez. In the
signature card pertaining to this account (Exh. J), the
authorized signatories were Inocencia Vives &/or Angeles B.
Sanchez. Atienza stated that it is the usual banking procedure
that withdrawals of savings deposits could only be made by
persons whose authorized signatures are in the signature cards
on file with the bank. He, however, said that this procedure was
not followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the
money came from Vives and did not belong to Sterela. He was also
told by Mrs. Vives that they were only accommodating Doronilla
so that a certification can be issued to the effect that Sterela had a
deposit of so much amount to be sued in the incorporation of the
firm. In the second place, the signature of Doronilla was not
authorized in so far as that account is concerned inasmuch as he
had not signed the signature card provided by the bank whenever
a deposit is opened. In the third place, neither Mrs. Vives nor
Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook
having been presented. It is an accepted practice that whenever a
withdrawal is made in a savings deposit, the bank requires the
presentation of the passbook. In this case, such recognized
practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was
made to appear in a certification signed by Estrella Dumagpi that
a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati branch in view of a
loan accommodation assigning the savings account (Exh. C).
Atienza, who undoubtedly had a hand in the execution of this

certification, was aware that the contents of the same are not
true. He knew that the passbook was in the
663
VOL. 397, FEBRUARY 19, 2003 663

hands of Mrs. Vives for he was the one who gave it to her.
Besides, as assistant manager of the branch and the bank official
servicing the savings and current accounts in question, he also
was aware that the original passbook was never surrendered. He
was also cognizant that Estrella Dumagpi was not among those
authorized to withdraw so her certification had no effect
whatsoever.
The circumstance surrounding the opening of the current
account also demonstrate that Atienzas active participation in
the perpetration of the fraud and deception that caused the loss.
The records indicate that this account was opened three days
later after the P200,000.00 was deposited. In spite of his
disclaimer, the Court believes that Atienza was mindful and
posted regarding the opening of the current account considering
that Doronilla was all the while in coordination with him. That
it was he who facilitated the approval of the authority to debit the
savings account to cover any overdrawings in the current account
(Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful
31
acts that had resulted
to the loss subject of this case. x x x.
Under Article 2180 of the Civil Code, employers shall be

held primarily and solidarily liable for damages caused by
their employees acting within the scope of their assigned
tasks. To hold the employer liable under this provision, it
must be shown that an employeremployee relationship
exists, and that the employee was acting within the scope
of his assigned
32
task when the act complained of was
committed. Case law in the United States of America has
it that a corporation that entrusts a general duty to its
employee is responsible to the injured party for damages
flowing from the employees wrongful act done in the
course of his general authority, even though in doing such
act, the employee may have failed in its duty 33
to the
employer and disobeyed the latters instructions.
There is no dispute that Atienza was an employee of
petitioner. Furthermore, petitioner did not deny that
Atienza was acting within the scope of his authority as
Assistant Branch Manager
_______________
31 Rollo, pp. 4347, citing the Decision of the Regional Trial Court, pp.
58.
32 Castilex Industrial Corporation v. Vasquez, Jr., 321 SCRA 393
(1999).
33 18B Am. Jur. 2d, p. 947, Corporations 2125, citing Pittsburgh, C.C.
& S.L.R. Co. v. Sullivan, 40 NE 138.
664

when he assisted Doronilla in withdrawing funds from

Sterelas Savings Account No. 101567, in which account
private respondents money was deposited, and in
transferring the money withdrawn to Sterelas Current
Account with petitioner. Atienzas acts of helping Doronilla,
a customer of the petitioner, were 34
obviously done in
furtherance of petitioners interests even though in the
process, Atienza violated some of petitioners rules35such as
those stipulated in its savings account passbook. It was
established that the transfer of funds from Sterelas
savings account to its current account could not have been
accomplished by Doronilla without the invaluable
assistance of Atienza, and that it was their connivance
which was the cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly
held that under Article 2180 of the Civil Code, petitioner is
liable for private respondents loss and is solidarily liable
with Doronilla and Dumagpi for the return of the
P200,000.00 since it is clear that petitioner failed to prove
that it exercised due diligence to prevent the unauthorized
withdrawals from Sterelas savings account, and that it
was not negligent in the selection and supervision of
Atienza. Accordingly, no error was committed by the
appellate court in the award of actual, moral and
exemplary damages, attorneys fees and costs of suit to
private respondent.
WHEREFORE, the petition is hereby DENIED. The
assailed Decision and Resolution of the Court of Appeals
are AFFIRMED.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Quisumbing and

AustriaMartinez, JJ., concur.
Petition denied, judgment affirmed and resolution

affirmed.
Note.The liability of the registered owner of a public

service vehicle, like petitioner Philtranco, for damages
arising from the tortuous acts of the driver is primary,
direct, and joint and severally or solidary with the driver.
(Philtranco Service Enterprises, Inc. vs. CA, 273 SCRA 562
[1997])
o0o
_______________
34 See note 31.

35 Exhibit B, Folder of Exhibits, p. 3.
665
[No. 46240. November 3, 1939]
MARGARITA QUINTOS and ANGEL A. ANSALDO,

plaintiffs and appellants, vs. BECK, defendant and
appellee.
1. COMMODATUM OBLIGATION OF THE PARTIES.

The contract entered into between the parties is one of
commodatum, because under it the plaintiff gratuitously
granted the use of the furniture to the defendant,
reserving for herself the ownership thereof by this
contract the defendant bound himself to return the
furniture to the plaintiff, upon the latter's demand (Clause
7 of the contract, Exhibit "A" articles 1740, paragraph 1,
and 1741 of the Civil Code). The obligation voluntarily
assumed by the defendant to return the furniture upon
the plaintiff's demand, means that he should return all of
them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he
merely placed them at the disposal of
109
VOL. 69, NOVEMBER 3, 1939 109
Quintos and Ansaldo vs. Beck
the plaintiff, retaining for his benefit the three gas heaters
and the four electric lamps.
2. ID. ID. EXPENSES FOR DEPOSIT OF FURNITURE.

As the defendant had voluntarily undertaken to return all
the furniture to the plaintiff, upon the latter's demand,
the Court could not legally compel her to bear the
expenses occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not entitled
to place the furniture on deposit nor was the plaintiff
under a duty to accept the offer to return the furniture,
because the defendant wanted to retain the three gas
heaters and the four electric lamps.
http://central.com.ph/sfsreader/session/0000015cd9d35348dcbfb57d003600fb002c009e/t/?o=False 1/5
3. ID. ID. VALUE OF FURNITURE.As to the value of the

furniture. we do not believe that the plaintiff is entitled to
the payment thereof by the defendant in case of his
inability to return some of the furniture, because under
paragraph 6 of the stipulation of facts, the defendant has
neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the
furniture, the value thereof should be later determined by
the trial Court through evidence which the parties may
desire to present.
4. COSTS OF LITIGATION.The costs in both instances

should be borne by the defendant because the plaintiff is
the prevailing party (section 487 of the Code of Civil
Procedure). The defendant was the one who breached the
contract of Commodatum, and without any reason he
refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other judicial
costs which the plaintiff would not have otherwise
defrayed.

Manila. Vera, J.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to

return to her certain furniture which she lent him for his
use. She appealed from the judgment of the Court of First
Instance of Manila which ordered that the defendant
return to her the three gas heaters and the four electric
lamps found in the possession of the Sheriff of said city,
110

that she call for the other furniture from the said Sheriff of
Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid
pro rata by both parties, without pronouncement as to the
costs.
The defendant was a tenant of the plaintiff and as such

occupied the latter's house on M. H. del Pilar street, No.
1175. On January 14, 1936, upon the novation of the
contract of lease between the plaintiff and the defendant,
the former gratuitously granted to the latter the use of the
furniture described in the third paragraph of the
stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the
latter's demand. The plaintiff sold the property to Maria
Lopez and Rosario Lopez and on September 14, 1936, these
three notified the defendant of the conveyance, giving him
sixty days to vacate the premises under one of the clauses
of the contract of lease. There after the plaintiff required
the defendant to return all the furniture transferred to him
for his use. The defendant answered that she may call for
them in the house where they are found. On November 5,
1936, the defendant, through another person, wrote to the
plaintiff reiterating that she may call for the furniture in
the ground floor of the house. On the 7th of the same
month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas
heaters and the four electric lamps because he would use
them until the 15th of the same month when the lease is
due to expire. The plaintiff refused to get the furniture in
view of the fact that the defendant had declined to make
delivery of all of them. On November 15th, before vacating
the house, the defendant deposited with the Sheriff all the
furniture belonging to the plaintiff and they are now on
deposit in the warehouse situated at No. 1521, Rizal
Avenue. in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that
the trial court incorrectly applied the law: in holding that
they violated the contract by not calling for all the furni
111
VOL. 69, NOVEMBER 3, 1939 111

ture on November 5, 1936, when the defendant placed

them at their disposal in not ordering the defendant to pay
them the value of the furniture in case they are not
deilvered in holding that they should get all the furniture
from the Sheriff at their expenses in ordering them to pay
onehalf of the expenses claimed by the Sheriff for the
deposit of the furniture in ruling that both parties should
pay their respective legal expenses or the costs and in
denying the motions for reconsideration and new trial. To
dispose of the case, it is only necessary to decide whether

the defendant complied with his obligation to return the
furniture upon the plaintiff's demand whether the latter is
bound to bear the deposit fees thereof, and whether she is
entitled to the costs of litigation.
The contract entered into between the parties is one of
commodatum, because under it the plaintiff gratuitously
granted the use of the furniture to the defendant, reserving
for herself the ownership thereof by this contract the
defendant bound himself to return the furniture to the
plaintiff, upon the latter's demand (clause 7 of the contract,
Exhibit A articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluritarily assumed by the
defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the
plaintiff at the latter's residence or house. The defendant
did not comply with this obligation when he merely placed
them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four electric lamps.
The provisions of article 1169 of the Civil Code cited by
counsel for the parties are not squarely applicable. The
trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply /with her
obligation to get the furniture when they were offered to
her.
As the defendant had voluntarily undertaken to return
all the furniture to the plaintiff, upon the latter's demand,
the Court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the
defendant's behest. The latter, as bailee, was not entitled to
112

place the furniture on deposit nor was the plaintiff under a

duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the
four electric lamps.
As to the value of the furniture, we do not believe that
the plaintiff is entitled to the payment thereof by the
defendant in case of his inability to return some of the
furniture, because under paragraph 6 of the stipulation of
facts, the defendant has neither agreed to nor admitted the
correctness of the said value. Should the defendant fail to
deliver some of the furniture, the value thereof should be
later determined by the trial Court through evidence which

the parties may desire to present.
The costs in both instances should be borne by the
defendant because the plaintiff is the prevailing party
(section 487 of the Code of Civil Procedure). The defendant
was the one who breached the contract of commodatum,
and without any reason he refused to return and deliver all
the furniture upon the plaintiff's demand. In these
circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would
not have otherwise defrayed.
The appealed judgment is modified and the defendant is
ordered to return and deliver to the plaintiff, in the
residence or house of the latter, all the f urniture described
in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and
deposit of the furniture with the Sheriff shall be for the
account of the defendant. The defendant shall pay the costs
in both instances. So ordered.
Avancea, C. J., VillaReal, Diaz, Laurel, Concepcion,

and Moran, JJ., concur.
Judgment modified.
_______________
113
VOL. 69, NOVEMBER 4, 1939 113

Arnaldo vs. Locsin et al.
VOL. 518, MARCH 16, 2007 433

Garcia vs. Thio
*
G.R. No. 154878. March 16, 2007.
CAROLYN M. GARCIA, petitioner, vs. RICA MARIE S.

THIO, respondent.
Loans Contracts A loan is a real contract, not consensual,

and as such is perfected only upon the delivery of the object of the
contract.A loan is a real contract, not consensual, and as such is
perfected only upon the delivery of the object of the contract.
Same Same Upon delivery of the object of the contract of loan

(in this case the money received by the debtor when the checks were
encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount.Upon
delivery of the object of the contract of loan (in this case the
money received by the debtor when the checks were encashed) the
debtor acquires ownership of such money or loan proceeds and is
bound to pay the creditor an equal amount.
Same Same Words and Phrases Delivery is the act by which

the res or substance thereof is placed within the actual or
constructive
_______________
* FIRST DIVISION.
434
Garcia vs. Thio
possession or control of another.Delivery is the act by which the

res or substance thereof is placed within the actual or constructive
http://central.com.ph/sfsreader/session/0000015cd9d5302f7603f877003600fb002c009e/t/?o=False 1/12
possession or control of another. Although respondent did not

physically receive the proceeds of the checks, these instruments
were placed in her control and possession under an arrangement
whereby she actually relent the amounts to Santiago.
Evidence The presumption is that evidence willfully

suppressed would be adverse if produced.Respondent
inexplicably never presented Santiago as a witness to corroborate
her story. The presumption is that evidence willfully suppressed
would be adverse if produced. Respondent was not able to
overturn this presumption.
Loans Interests Article 1956 of the Civil Code provides that

no interest shall be due unless it has been expressly stipulated in
writing.We do not, however, agree that respondent is liable for
the 3% and 4% monthly interest for the US$100,000 and P500,000
loans respectively. There was no written proof of the interest
payable except for the verbal agreement that the loans would earn
3% and 4% interest per month. Article 1956 of the Civil Code
provides that [n]o interest shall be due unless it has been
expressly stipulated in writing.
Same Same While there can be no stipulated interest, there

can be legal interest pursuant to Article 2209 of the Civil Code.
Be that as it may, while there can be no stipulated interest, there
can be legal interest pursuant to Article 2209 of the Civil Code. It
is wellsettled that: When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.


Conrado R. Ayuyao and Associates for petitioner.
435
VOL. 518, MARCH 16, 2007 435

Garcia vs. Thio
Martinez and Perez Law Office for respondent.

CORONA, J.:
1
Assailed in this petition2
for review on certiorari are the
3
June 19, 2002 decision and August 20, 2002 resolution of
the Court of Appeals (CA) in CAG.R. CV No. 56577 which
set aside the February 28, 1997 decision of the Regional
Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S.
Thio received
4
from petitioner Carolyn M. Garcia a crossed
check dated February 24, 1995 in the amount of
US$100,0005
payable to the order of a certain Marilou
Santiago. Thereafter, petitioner received from respondent
every month (specifically, on March 24, April 26, June 6
26
and July7
26, all in8 1995) the amount of US$3,000 and
P76,500 on July 26, August 26, September 26 and October
26, 1995.
_______________
1 Under Rule 45 of the Rules of Court.

2 Penned by former Associate Justice Eubulo G. Verzola (deceased) and
concurred in by Associate Justices Bernardo P. Abesamis (retired) and
Josefina GuevaraSalonga of the Third Division of the Court of Appeals
Rollo, pp. 98102.
3 Id., pp. 104105.
4 This was Metrobank check no. 26910 Id., pp. 70, 224 and 368.
5 Id., pp. 60, 100101, 224.
6 Id., pp. 6061. According to respondent, she originally issued four
postdated checks each in the amount of P76,000 on the same dates
mentioned but these were not encashed and instead each check was
replaced by Santiago with US$3,000 in cash given by respondent to
petitioner Id., p. 224.
7 This was the peso equivalent of US$3,000 computed at the exchange
rate of P25.50 to $1.00 Id., pp. 17 and 88. These postdated checks were
deposited on their respective due dates and honored by the drawee bank
Id., p. 225.
8 According to respondent, this check was replaced by Santiago with
cash in the amount of US$3,000.
436

Garcia vs. Thio
In June 1995, 9respondent received from petitioner another

crossed check dated June 29, 1995 in the amount of 10
P500,000, also payable to the order of Marilou Santiago.
Consequently, petitioner received from respondent the
amount of P20,000 every month on 11

August 5, September 5,
October 5 and November 5, 1995.
According to petitioner, respondent failed to pay the
principal amounts of the loans (US$100,000 and P500,000)
when they fell due. Thus, on February 22, 1996, petitioner
filed a complaint for sum of money and damages in the
RTC of Makati City, Branch 58 against respondent,
seeking to collect the sums of US$100,000, with interest
thereon at 3% a month from October 26, 1995 and
P500,000, with interest thereon at 4% a month from
November12 5, 1995, plus attorneys fees and actual
damages.
Petitioner alleged that on February 24, 1995, respondent
borrowed from her the amount of US$100,000 with interest
thereon at the rate of 3% per 13
month, which loan would
mature on October 26, 1995. The amount of this loan was
covered by the first check. On June 29, 1995, respondent
again borrowed the amount of P500,000 at an agreed
monthly interest of144%, the maturity date of which was on
November 5, 1995. The amount of this loan was covered
by the second check. For both loans, no promissory note
was executed since petitioner
15
and respondent were close
friends at the time. Respondent paid the stipulated
monthly interest for both loans but on their maturity dates,
she failed16 to pay the principal amounts despite repeated
demands.
_______________
9 This was City Trust check no. 467257 Rollo, pp. 90 and 327.
10 Id., pp. 60, 101 and 225.
11 Id., p. 109.
12 Docketed as Civil Case No. 96266 Rollo, pp. 15, 60 and 364.
13 Id., p. 109.
14 Id., p. 110.
15 Id., p. 16.
16 Id., p. 110.
437
VOL. 518, MARCH 16, 2007 437

Garcia vs. Thio
Respondent denied that she contracted the two loans with

petitioner and countered that it was Marilou Santiago to
whom petitioner lent the money. She claimed she was
merely asked by petitioner to give the crossed checks to
17
Santiago. She issued the checks for P76,000
http://central.com.ph/sfsreader/session/0000015cd9d5302f7603f877003600fb002c009e/t/?o=False and P20,000 4/12
17
Santiago. She issued the checks for P76,000 and P20,000
not as payment of interest but to accommodate petitioners
request that18
respondent use her own checks instead of
Santiagos.
In a decision dated
19
February 28, 1997, the RTC ruled in
favor of petitioner. It found that respondent borrowed
from petitioner the amounts of US$100,000 with monthly 20
interest of 3% and P500,000 at a monthly interest of 4%:
WHEREFORE, finding preponderance of evidence to sustain the

instant complaint, judgment is hereby rendered in favor of
[petitioner], sentencing [respondent] to pay the former the
amount of:
1. [US$100,000.00] or its peso equivalent with interest

thereon at 3% per month from October 26, 1995 until fully
paid
2. P500,000.00 with interest thereon at 4% per month from
November 5, 1995 until fully paid.
3. P100,000.00 as and for attorneys fees and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce

dismissed.
With costs against [respondent].
21
IT IS SO ORDERED.
On appeal, the CA reversed the decision of the RTC and

ruled that there was no contract of loan between the
parties:
A perusal of the record of the case shows that [petitioner] failed

to substantiate her claim that [respondent] indeed borrowed
_______________
17 Id., p. 224.
18 Id.
19 Id., pp. 6095.
20 Id., pp. 79 and 89.
21 Id., pp. 9495.
438

Garcia vs. Thio
money from her. There is nothing in the record that shows

that [respondent] received money from [petitioner]. What
is evident is the fact that [respondent] received a MetroBank
[crossed] check dated February 24, 1995 in the sum of
US$100,000.00, payable to the order of Marilou Santiago and a
CityTrust [crossed] check dated June 29, 1995 in the amount of
P500,000.00, again payable to the order of Marilou Santiago, both
of which were issued by [petitioner]. The checks received by
[respondent], being crossed, may not be encashed but only
deposited in the bank by the payee thereof, that is, by
Marilou Santiago herself.
It must be noted that crossing a check has the following effects:
(a) the check may not be encashed but only deposited in the bank
(b) the check may be negotiated only onceto one who has an
account with the bank (c) and the act of crossing the check serves
as warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a holder in
due course.
Consequently, the receipt of the [crossed] check by [respondent]
is not the issuance and delivery to the payee in contemplation of
law since the latter is not the person who could take the checks as
a holder, i.e., as a payee or indorsee thereof, with intent to
transfer title thereto. Neither could she be deemed as an agent of
Marilou Santiago with respect to the checks because she was
merely facilitating the transactions between the former and
[petitioner].
With the foregoing circumstances, it may be fairly inferred that
there were really no contracts of 22loan that existed between the
parties. x x x (emphasis supplied)
23
Hence this petition.
_______________
22 Id., pp. 100101, citation omitted.

23 The issues submitted for resolution are the following:
(A) Is actual and physical delivery of the money loaned directly from
the lender to the borrower the only way to perfect a contract of
loan?
(B) Does the respondents admission that she paid interests to the
petitioner on the amounts represented by the two checks given to
her by said petitioner render said respondent in estoppel to ques
439
VOL. 518, MARCH 16, 2007 439
Garcia vs. Thio
As a rule, only questions of law may be raised in a petition

for review on certiorari under Rule 45 of the Rules of Court.
However, this case falls under one of the exceptions, i.e.,
when the factual findings of the CA (which held that there
were no contracts of loan between petitioner and
respondent) and the RTC (which 24held that there were
contracts of loan) are contradictory.
The petition is impressed with merit.
_______________
tion that there was no loan transaction between her and the
petitioner?
(C) Is respondents written manifestation in the trial court, through
counsel, that she interposes no objection to the admission of
petitioners documentary exhibits for the multiple purposes
specified in the latters Formal Offer of Documentary Exhibits a
judicial admission governed by Rule 129, Section 4, Rules of
Court?
(D) Is this Honorable Court bound by the conclusions of fact relied
upon by the [CA] in issuing its disputed Decision?
(E) Have the [RTCs] findings of fact on the lone issue on which
respondent litigated in the [RTC], viz. existence of privity of
contract between petitioner and respondent, been overturned or
set aside by the [CA]?
(F) May the respondent validly change the theory of her case from one
of privity of contract between her and the petitioner in the [RTC],
to one of not being a holder in due course of the crossed checks
payable to a third party in the [CA] and before this Honorable
Court?
(G) Is the petitioners entitlement to interest, despite absence of a
written stipulation on the payment thereof, justified?
(H) Is the deletion by the [CA] of the [RTCs] award of attorneys fees
and actual damages in favor pf the petitioner justified? Id., pp.
401402.
24 Philippine National Bank v. Andrada Electric & Engineering Co.,

G.R. No. 142936, 17 April 2002, 381 SCRA 244, 253, citing Fuentes v.
Court of Appeals, 335 Phil. 1163, 11671169 268 SCRA 703, 709 (1997).
440

Garcia vs. Thio
A loan is a real contract, not consensual, and as such is

perfected25 only upon the delivery of the object of the
contract. This is evident in Art. 1934 of the Civil Code
which provides:
An accepted promise to deliver something by way of

commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until
the delivery of the object of the contract. (Emphasis
supplied)
Upon delivery of the object of the contract of loan (in this

case the money received by the debtor when the checks
were encashed) the debtor acquires ownership of such
money or loan 26proceeds and is bound to pay the creditor an
equal amount.
It is undisputed that the checks were delivered to
respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a
certain Marilou Santiago. Thus the main question to be
answered is: who borrowed money from petitioner
respondent or Santiago?
Petitioner insists that it was upon respondents
instruction
27
that both checks were made payable to
Santiago. She maintains that it was also upon
respondents instruction that both checks were delivered to
her (respondent) so 28
that she could, in turn, deliver the
same to Santiago. Furthermore, she argues that once
respondent received the checks, the latter had possession
and control of them such that she had the choice to either
forward them to Santiago (who was already29 her debtor), to
retain them or to return them to petitioner.
_______________
25 Naguiat v. Court of Appeals, G.R. No. 118375, 3 October 2003, 412

SCRA 591, 597.
26 Article 1953 of the Civil Code states:
A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the
same kind and quality.
27 Rollo, p. 39.
28 Id.
29 Id., pp. 3940.
441
VOL. 518, MARCH 16, 2007 441

Garcia vs. Thio
We agree with petitioner. Delivery is the act by which the

res or substance thereof is placed within the30 actual or
constructive possession or control of another. Although
respondent did not physically receive the proceeds of the
checks, these instruments were placed in her control and
possession under an arrangement whereby she actually re
lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted
31
that petitioner did not
personally know Santiago. It was highly improbable that
petitioner would grant two loans to a complete stranger
without requiring as much as promissory notes or any
written acknowledgment of the debt considering that the
amounts involved were quite big. Respondent, on the other
hand,32 already had transactions with Santiago at that
time.
Second, Leticia Ruiz, a friend of both petitioner and
respondent (and whose name appeared in both parties list
of witnesses) testified that respondents plan was for
petitioner to lend her money at a monthly interest rate of
3%, after which respondent would lend the same amount to 33
Santiago at a higher rate of 5% and realize a profit of 2%.
This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not
shown any reason why Ruiz testimony should not be
believed.
Third, for the US$100,000 loan, respondent admitted
issuing her own checks in the amount of P76,000 each (peso
equivalent of US$3,000) for eight months to cover the
monthly interest. For the P500,000 loan, she also issued
her own34 checks in the amount of P20,000 each for four
months.
_______________
30 Buenaflor v. Court of Appeals, G.R. No. 142021, 29 November 2000,

346 SCRA 563, 569, citing Blacks Law Dictionary, 5th ed.
31 Rollo, p. 64.
32 Id., p. 70.
33 Id., pp. 76 and 85.
34 Id., pp. 1617, 224225, 411.
442
Garcia vs. Thio
According to respondent, she merely accommodated

petitioners request for her to issue her own checks to cover
the interest payments since35 petitioner was not personally
acquainted with Santiago. She claimed, however, 36
that
Santiago would replace the checks with cash. Her
explanation is simply incredible. It is difficult to believe
that respondent would put herself in a position where she
would be compelled to pay interest, from her own funds, for
loans she allegedly did not contract. We declared in one
case that:
In the assessment of the testimonies of witnesses, this Court is

guided by the rule that for evidence to be believed, it must not
only proceed from the mouth of a credible witness, but must be
credible in itself such as the common experience of mankind can
approve as probable under the circumstances. We have no test of
the truth of human testimony except its conformity to our
knowledge, observation, and experience. Whatever is repugnant
to these belongs
37
to the miraculous, and is outside of juridical
cognizance.
Fourth, in the petition for insolvency sworn to and filed by

Santiago, it was respondent, not petitioner,
38
who was listed
as one of her (Santiagos) creditors.
Last, respondent inexplicably never 39
presented Santiago
as a witness to corroborate her story. The presumption is
that evidence
40
willfully suppressed would be adverse if pro
duced. Respondent was not able to overturn this
presumption.
We hold that the CA committed reversible error when it
ruled that respondent did not borrow the amounts of
_______________
35 Id., p. 224.
36 Id., p. 70.
37 People v. Mala, G.R. No. 152351, 18 September 2003, 411 SCRA 327,
337, citing People v. Dayag, 155 Phil. 421, 431 56 SCRA 439, 449450
(1974).
38 Rollo, pp. 88 and 94.
39 Id., p. 93.
40 Sec. 3 (e), Rule 131, Rules of Court.
443
VOL. 518, MARCH 16, 2007 443
Garcia vs. Thio
US$100,000 and P500,000 from petitioner. We instead

agree with the ruling of the RTC making respondent liable
for the principal amounts of the loans.
We do not, however, agree that respondent is liable for
the 3% and 4% monthly interest for the US$100,000 and
P500,000 loans respectively. There was no written proof of
the interest payable except for the verbal agreement that
the loans would earn 3% and 4% interest per month.
Article 1956 of the Civil Code provides that [n]o interest
shall be due unless it has been expressly stipulated in
writing.
Be that as it may, while there can be no stipulated
interest, there can be legal interest pursuant to Article
2209 of the Civil Code. It is wellsettled that:
When the obligation is breached, and it consists in the payment

of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand
under 41and subject to the provisions of Article 1169 of the Civil
Code.
Hence, respondent is liable for the payment of legal

interest per annum to be computed from November 21,
1995, 42the date when she received petitioners demand
letter. From the finality of the decision until it is fully
paid, the amount due shall earn interest at 12% per
annum, the interim 43period being deemed equivalent to a
forbearance of credit.
_______________
41 EusebioCalderon v. People, G.R. No. 158495, 21 October 2004, 441

SCRA 137, 148149, citing Eastern Shipping Lines, Inc. v. Court of
Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95 Cabrera v.
People, G.R. No. 150618, 24 July 2003, 407 SCRA 247, 261.
42 Rollo, p. 65.
43 Cabrera v. People, supra.
444

Garcia vs. Thio
The award of actual damages in the amount of P50,000 and

P100,000 attorneys fees is deleted since the RTC decision
did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and
the June 19, 2002 decision and August 20, 2002 resolution
of the Court of Appeals in CAG.R. CV No. 56577 are
REVERSED and SET ASIDE. The February 28, 1997
decision of the Regional Trial Court in Civil Case No. 96
266 is AFFIRMED with the MODIFICATION that
respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from
November 21, 1995 until the finality of the decision. The
total amount due as of the date of finality will earn interest
of 12% per annum until fully paid. The award of actual
damages and attorneys fees is deleted.
SO ORDERED.
Puno (C.J., Chairperson), SandovalGutierrez,

Azcuna and Garcia, JJ., concur.
Petition granted, judgment and resolution reversed and

set aside.
Notes.A usurious loan transaction is not a complete

nullity but defective only with respect to the agreed
interest. (Carpo vs. Chua, 471 SCRA 471 [2005])
All contracts are subject to the overriding demands,
needs and interests of the greater number as the State may
determine in the legitimate exercise of its police power.
(Philippine Ports Authority vs. Cipres Stevedoring &
Arrastre, Inc., 463 SCRA 358 [2005])
o0o
445
G.R. Nos. 173654765. August 28, 2008.*
PEOPLE OF THE PHILIPPINES, petitioner, vs.

TERESITA PUIG and ROMEO PORRAS, respondents.
Criminal Law Theft Elements of theft under Article 308 of

the Revised Penal Code.Theft, as defined in Article 308 of the
Revised Penal Code, requires the physical taking of anothers
property without violence or intimidation against persons or force
upon things. The elements of the crime under this Article are: 1.
Intent to gain 2. Unlawful taking 3. Personal property belonging
to another 4. Absence of violence or intimidation against persons
or force upon things.
Same Same Qualified Theft Elements of qualified theft.To
fall under the crime of Qualified Theft, the following elements
must concur: 1. Taking of personal property 2. That the said
property belongs to another 3. That the said taking be done with
intent to gain 4. That it be done without the owners consent 5.
That it be accomplished without the use of violence or
intimidation against persons, nor of force upon things 6. That it
be done with grave abuse of confidence.
Same Same Same Banks, where monies are deposited, are
considered the owners thereof The relationship between banks and
depositors has been held to be that of creditor and debtor.It is
beyond doubt that tellers, Cashiers, Bookkeepers and other
employees of a Bank who come into possession of the monies
deposited therein enjoy the confidence reposed in them by their
employer. Banks, on the other hand, where monies are deposited,
are considered the owners thereof. This is very clear not only from
the express provisions of the law, but from established
jurisprudence. The relationship between banks and depositors has
been held to be that of creditor and debtor.
Criminal Procedure Actions Court has consistently considered the
allegations in the Information that such employees acted with
grave abuse of confidence, to the damage and prejudice of the
Bank, without particularly referring to it as owner of the money
deposits, as
_______________
http://central.com.ph/sfsreader/session/0000015cd9d66f164cc45b51003600fb002c009e/t/?o=False 1/14
*THIRD DIVISION.
565
VOL. 563, AUGUST 28, 2008 565
People vs. Puig
sufficient to make out a case of Qualified Theft.In a long line of

cases involving Qualified Theft, this Court has firmly established
the nature of possession by the Bank of the money deposits
therein, and the duties being performed by its employees who
have custody of the money or have come into possession of it. The
Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of
confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as
sufficient to make out a case of Qualified Theft.
Same Same When the defendant, with grave abuse of
confidence, removed the money and appropriated it to his own use
without the consent of the Bank, there was taking as contemplated
in the crime of Qualified Theft.People v. Locson, 57 Phil. 325
(1932), in addition to People v. Sison, described the nature of
possession by the Bank. The money in this case was in the
possession of the defendant as receiving teller of the bank, and
the possession of the defendant was the possession of the Bank.
The Court held therein that when the defendant, with grave
abuse of confidence, removed the money and appropriated it to his
own use without the consent of the Bank, there was taking as
contemplated in the crime of Qualified Theft.
Banks and Banking Criminal Law Qualified Theft The
Bank acquires ownership of the money deposited by its clients and
the employees of the Bank, who are entrusted with the possession
of money of the Bank due to the confidence reposed in them, occupy
positions of confidence.In summary, the Bank acquires
ownership of the money deposited by its clients and the
employees of the Bank, who are entrusted with the possession of
money of the Bank due to the confidence reposed in them, occupy
positions of confidence. The Informations, therefore, sufficiently
allege all the essential elements constituting the crime of
Qualified Theft.
PETITION for review on certiorari of the orders of the

Regional Trial Court6th Judicial Region, Dumangas,
Iloilo, Br. 68.
The Solicitor General for petitioner.
566

People vs. Puig
The Law Firm of Lauron, Delos Reyes & Partners and

Jose Gelacio Lira for respondents.
CHICONAZARIO, J.:
This is a Petition for Review under Rule 45 of the
Revised Rules of Court with petitioner People of the
Philippines, represented by the Office of the Solicitor
General, praying for the reversal of the Orders dated 30
January 2006 and 9 June 2006 of the Regional Trial Court
(RTC) of the 6th Judicial Region, Branch 68, Dumangas,
Iloilo, dismissing the 112 cases of Qualified Theft filed
against respondents Teresita Puig and Romeo Porras, and
denying petitioners Motion for Reconsideration, in
Criminal Cases No. 053054 to 053165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors
Office filed before Branch 68 of the RTC in Dumangas,
Iloilo, 112 cases of Qualified Theft against respondents
Teresita Puig (Puig) and Romeo Porras (Porras) who were
the Cashier and Bookkeeper, respectively, of private
complainant Rural Bank of Pototan, Inc. The cases were
docketed as Criminal Cases No. 053054 to 053165.
The allegations in the Informations1 filed before the
RTC were uniform and pro forma, except for the amounts,
date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality
of Pototan, Province of Iloilo, Philippines, and within the
jurisdiction of this Honorable Court, abovenamed [respondents],
conspiring, confederating, and helping one another, with grave
abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the
knowledge and/or consent of the management of the Bank and
with intent of gain, did then and there willfully, unlawfully and
feloniously take,
_______________
1Records, pp. 1, 170391.
567
VOL. 563, AUGUST 28, 2008 567

People vs. Puig
steal and carry away the sum of FIFTEEN THOUSAND PESOS

(P15,000.00), Philippine Currency, to the damage and prejudice of
the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial

court did not find the existence of probable cause that
would have necessitated the issuance of a warrant of arrest
based on the following grounds:
(1) the element of taking without the consent of the

owners was missing on the ground that it is the depositors
clients, and not the Bank, which filed the complaint in these
cases, who are the owners of the money allegedly taken by
respondents and hence, are the real partiesininterest and
(2) the Informations are bereft of the phrase alleging
dependence, guardianship or vigilance between the
respondents and the offended party that would have
created a high degree of confidence between them which
the respondents could have abused.
It added that allowing the 112 cases for Qualified Theft

filed against the respondents to push through would be
violative of the right of the respondents under Section
14(2), Article III of the 1987 Constitution which states that
in all criminal prosecutions, the accused shall enjoy the
right to be informed of the nature and cause of the
accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC
dismissed the cases on 30 January 2006 and refused to
issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April
2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioners Motion
for Reconsideration was issued by the RTC, finding as
follows:
Accordingly, the prosecutions Motion for Reconsideration

should be, as it hereby, DENIED. The Order dated January 30,
2006 STANDS in all respects.
_______________
2Records, pp. 490495.

3Id., at pp. 469470.
568

People vs. Puig
Petitioner went directly to this Court via Petition for

Review on Certiorari under Rule 45, raising the sole legal
issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR

QUALIFIED THEFT SUFFICIENTLY ALLEGE THE ELEMENT
OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND
THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF
CONFIDENCE.
Petitioner prays that judgment be rendered annulling

and setting aside the Orders dated 30 January 2006 and 9
June 2006 issued by the trial court, and that it be directed
to proceed with Criminal Cases No. 053054 to 053165.
Petitioner explains that under Article 1980 of the New
Civil Code, fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
provisions concerning simple loans. Corollary thereto,
Article 1953 of the same Code provides that a person who
receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality.
Thus, it posits that the depositors who place their money
with the bank are considered creditors of the bank. The
bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as
belonging to the bank.
Petitioner also insists that the Informations sufficiently
allege all the elements of the crime of qualified theft, citing
that a perusal of the Informations will show that they
specifically allege that the respondents were the Cashier
and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money
with grave abuse of confidence, and without the knowledge
and consent of the bank, to the damage and prejudice of the
bank.
Parenthetically, respondents raise procedural issues. They
challenge the petition on the ground that a Petition for
Review on Certiorari via Rule 45 is the wrong mode of
appeal because a finding of probable cause for the issuance
of a war
569
VOL. 563, AUGUST 28, 2008 569
People vs. Puig
rant of arrest presupposes evaluation of facts and

circumstances, which is not proper under said Rule.
Respondents further claim that the Department of
Justice (DOJ), through the Secretary of Justice, is the
principal party to file a Petition for Review on Certiorari,
considering that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was
allegedly due to insufficiency of the Informations and,
therefore, because of this defect, there is no basis for the
existence of probable cause which will justify the issuance
of the warrant of arrest. Petitioner assails the dismissal
contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying
circumstance of grave abuse of confidence and (b) the
element of taking, with intent to gain and without the
consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a
warrant of arrest, the RTC judge found the allegations in
the Information inadequate. He ruled that the Information
failed to state facts constituting the qualifying
circumstance of grave abuse of confidence and the element
of taking without the consent of the owner, since the owner
of the money is not the Bank, but the depositors therein.
He also cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a

relation, by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created
a high degree of confidence between them, which the respondents
abused.
At this point, it needs stressing that the RTC Judge based

his conclusion that there was no probable cause simply on
the insufficiency of the allegations in the Informations
concerning the facts constitutive of the elements of the
offense charged.
_______________
463 Phil. 369, 371 (1936).
570

People vs. Puig
This, therefore, makes the issue of sufficiency of the

allegations in the Informations the focal point of
discussion.
Qualified Theft, as defined and punished under Article
310 of the Revised Penal Code, is committed as follows,
viz.:
ART. 310. Qualified Theft.The crime of theft shall be

punished by the penalties next higher by two degrees than those
respectively specified in the next preceding article, if committed
by a domestic servant, or with grave abuse of confidence, or if
the property stolen is motor vehicle, mail matter or large cattle or
consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the
occasion of fire, earthquake, typhoon, volcanic eruption, or any
other calamity, vehicular accident or civil disturbance.
(Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal

Code, requires the physical taking of anothers property
without violence or intimidation against persons or force
upon things. The elements of the crime under this Article
are:
1. Intent to gain
2. Unlawful taking
3. Personal property belonging to another
4. Absence of violence or intimidation against persons or force
upon things.
To fall under the crime of Qualified Theft, the following

elements must concur:
1. Taking of personal property

2. That the said property belongs to another
3. That the said taking be done with intent to gain
4. That it be done without the owners consent
5. That it be accomplished without the use of violence or
intimidation against persons, nor of force upon things
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of

the Rules of Court requires, inter alia, that the information
571
VOL. 563, AUGUST 28, 2008 571

People vs. Puig
must state the acts or omissions complained of as

constitutive of the offense.
On the manner of how the Information should be
worded, Section 9, Rule 110 of the Rules of Court, is
enlightening:
Section 9. Cause of the accusation.The acts or omissions

complained of as constituting the offense and the qualifying and
aggravating circumstances must be stated in ordinary and concise
language and not necessarily in the language used in the statute
but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as
its qualifying and aggravating circumstances and for the court to
pronounce judgment.
It is evident that the Information need not use the exact

language of the statute in alleging the acts or omissions
complained of as constituting the offense. The test is
whether it enables a person of common understanding to
know the charge against him, and the court to render
judgment properly.5
The portion of the Information relevant to this
discussion reads:
[A]bovenamed [respondents], conspiring, confederating, and

helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the
management of the Bank xxx.
It is beyond doubt that tellers, Cashiers, Bookkeepers

and other employees of a Bank who come into possession of
the monies deposited therein enjoy the confidence reposed
in them by their employer. Banks, on the other hand,
where monies are deposited, are considered the owners
thereof. This is very clear not only from the express
provisions of the law,
_______________
5People v. Labeo, 424 Phil. 482, 495 373 SCRA 461, 473 (2002).
572

People vs. Puig
but from established jurisprudence. The relationship

between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New

Civil Code, as appropriately pointed out by petitioner,
provide as follows:
Article 1953. A person who receives a loan of money or any

other fungible thing acquires the ownership thereof, and is bound
to pay to the creditor an equal amount of the same kind and
quality.
Article 1980. Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the
provisions concerning loan.
In a long line of cases involving Qualified Theft, this

Court has firmly established the nature of possession by
the Bank of the money deposits therein, and the duties
being performed by its employees who have custody of the
money or have come into possession of it. The Court has
consistently considered the allegations in the Information
that such employees acted with grave abuse of confidence,
to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits,
as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the
accused teller was convicted for Qualified Theft based on
this Information:
That on or about the 16th day of November, 1989, in the

municipality of Floridablanca, province of Pampanga, Philippines
and within the jurisdiction of his Honorable Court, the above
named accused ASUNCION GALANG ROQUE, being then
employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base,
Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital
contributions from its member/contributors of said corporation,
and having collected and received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND PESOS (P10,000.00), said
accused, with intent of gain, with grave abuse of confidence
and without the knowledge
_______________
6G.R. No. 138954, 25 November 2004, 444 SCRA 98, 100101.
573
VOL. 563, AUGUST 28, 2008 573

People vs. Puig
and consent of said corporation, did then and there willfully,

unlawfully and feloniously take, steal and carry away the amount
of P10,000.00, Philippine currency, by making it appear that a
certain depositor by the name of Antonio Salazar withdrew from
his Savings Account No. 1359, when in truth and in fact said
Antonio Salazar did not withdr[a]w the said amount of P10,000.00
to the damage and prejudice of BABSLA in the total amount of
P10,000.00, Philippine currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank

places money in the tellers possession due to the confidence
reposed on the teller, the felony of qualified theft would be
committed.7
Also in People v. Sison,8 the Branch Operations Officer

was convicted of the crime of Qualified Theft based on the
Information as herein cited:
That in or about and during the period compressed between

January 24, 1992 and February 13, 1992, both dates inclusive, in
the City of Manila, Philippines, the said accused did then and
there wilfully, unlawfully and feloniously, with intent of gain and
without the knowledge and consent of the owner thereof, take,
steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different
denominations belonging to the PHILIPPINE COMMERCIAL
INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch,
Manila represented by its Branch Manager, HELEN U. FARGAS,
to the damage and prejudice of the said owner in the aforesaid
amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused
acted with grave abuse of confidence and unfaithfulness, he being
the Branch Operation Officer of the said complainant and as
such he had free access to the place where the said amount of
money was kept.
_______________
7Id., at p. 119.
8379 Phil. 363, 366367 322 SCRA 345, 346347 (2000).
574

People vs. Puig
The judgment of conviction elaborated thus:

The crime perpetuated by appellant against his employer, the

Philippine Commercial and Industrial Bank (PCIB), is Qualified
Theft. Appellant could not have committed the crime had he not
been holding the position of Luneta Branch Operation Officer
which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the
appellant as its Luneta Branch Operation Officer, and it was this
trust and confidence which he exploited to enrich himself to the
damage and prejudice of PCIB xxx.9
From another end, People v. Locson,10 in addition to

People v. Sison, described the nature of possession by the
Bank. The money in this case was in the possession of the
defendant as receiving teller of the bank, and the
possession of the defendant was the possession of the Bank.
The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and
appropriated it to his own use without the consent of the
Bank, there was taking as contemplated in the crime of
Qualified Theft.11
Conspicuously, in all of the foregoing cases, where the
Informations merely alleged the positions of the
respondents that the crime was committed with grave
abuse of confidence, with intent to gain and without the
knowledge and consent of the Bank, without necessarily
stating the phrase being assiduously insisted upon by
respondents, of a relation by reason of dependence,
guardianship or vigilance, between the respondents
and the offended party that has created a high degree
of confidence between them, which respondents
abused,12 and without employing the word owner in lieu
of the Bank were considered to have satisfied the test of
sufficiency of allegations.
_______________
9 Id., at p. 385.
1057 Phil. 325 (1932).
11Id.
12Rollo, p. 158.
575
VOL. 563, AUGUST 28, 2008 575

People vs. Puig
As regards the respondents who were employed as

Cashier and Bookkeeper of the Bank in this case, there is
even no reason to quibble on the allegation in the

Informations that they acted with grave abuse of
confidence. In fact, the Information which alleged grave
abuse of confidence by accused herein is even more precise,
as this is exactly the requirement of the law in qualifying
the crime of Theft.
In summary, the Bank acquires ownership of the money
deposited by its clients and the employees of the Bank,
who are entrusted with the possession of money of the
Bank due to the confidence reposed in them, occupy
positions of confidence. The Informations, therefore,
sufficiently allege all the essential elements constituting
the crime of Qualified Theft.
On the theory of the defense that the DOJ is the
principal party who may file the instant petition, the ruling
in Mobilia Products, Inc. v. Hajime Umezawa13 is
instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the

interest of the private complainant or the offended party is
limited to the civil liability arising therefrom. Hence, if a criminal
case is dismissed by the trial court or if there is an acquittal, a
reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal
aspect thereof is concerned and may be made only by the public
prosecutor or in the case of an appeal, by the State only, through
the OSG. xxx.
On the alleged wrong mode of appeal by petitioner,

suffice it to state that the rule is wellsettled that in
appeals by certiorari under Rule 45 of the Rules of Court,
only errors of law may be raised,14 and herein petitioner
certainly raised a question of law.
_______________
13G.R. No. 149357, 4 March 2005, 452 SCRA 736, 757.

14Reas v. Bonife, G.R. Nos. 5434849, 17 October 1990, 190 SCRA 493,
501.
576

People vs. Puig
As an aside, even if we go beyond the allegations of the

Informations in these cases, a closer look at the records of
the preliminary investigation conducted will show that,
indeed, probable cause exists for the indictment of herein

respondents. Pursuant to Section 6, Rule 112 of the Rules
of Court, the judge shall issue a warrant of arrest only
upon a finding of probable cause after personally
evaluating the resolution of the prosecutor and its
supporting evidence. Soliven v. Makasiar,15 as reiterated in
Allado v. Diokno,16 explained that probable cause for the
issuance of a warrant of arrest is the existence of such facts
and circumstances that would lead a reasonably discreet
and prudent person to believe that an offense has been
committed by the person sought to be arrested.17 The
records reasonably indicate that the respondents may have,
indeed, committed the offense charged.
Before closing, let it be stated that while it is truly
imperative upon the fiscal or the judge, as the case may be,
to relieve the respondents from the pain of going through a
trial once it is ascertained that no probable cause exists to
form a sufficient belief as to the guilt of the respondents,
conversely, it is also equally imperative upon the judge to
proceed with the case upon a showing that there is a prima
facie case against the respondents.
WHEREFORE, premises considered, the Petition for
Review on Certiorari is hereby GRANTED. The Orders
dated 30 January 2006 and 9 June 2006 of the RTC
dismissing Criminal Cases No. 053054 to 053165 are
REVERSED and SET ASIDE. Let the corresponding
Warrants of Arrest issue against herein respondents
TERESITA PUIG and ROMEO PORRAS. The RTC Judge
of Branch 68, in Dumangas, Iloilo, is directed to proceed
with the trial of Criminal Cases No. 053054 to 053165,
inclusive, with reasonable dispatch. No pronouncement as
to costs.
_______________
15G.R. No. L82585, 14 November 1988, 167 SCRA 394.

16G.R. No. 113630, 5 May 1994, 232 SCRA 192, 201.
17Id.

BPI Family Bank vs. Franco
*
G.R. No. 123498. November 23, 2007.
BPI FAMILY BANK, petitioner, vs. AMADO FRANCO and

COURT OF APPEALS, respondents.
Civil Law Property The movable property mentioned in

Article 559 of the Civil Code pertains to a specific or determinate
thinga determinate or specific thing is one that is individualized
and can be identified or distinguished from others of the same
kind.BPIFBs argument is unsound. To begin with, the
movable property mentioned in Article 559 of the Civil Code
pertains to a specific or determinate thing. A determinate or
specific thing is one that is individualized and can be identified or
distinguished from others of the same kind.
_______________
* THIRD DIVISION.
185
VOL. 538, NOVEMBER 23, 2007 185
Same Same In this case, the deposit in Francos accounts

consists of money which, albeit characterized as a movable, is
generic and fungible.In this case, the deposit in Francos
accounts consists of money which, albeit characterized as a
movable, is generic and fungible. The quality of being fungible
depends upon the possibility of the property, because of its nature
or the will of the parties, being substituted by others of the same
kind, not having a distinct individuality.
Mercantile Law Banking Laws Money as a Medium of

Exchange Money, which had passed through various transactions
http://central.com.ph/sfsreader/session/0000015cd9d7d4842b683380003600fb002c009e/t/?o=False 1/23
in the general course of banking business, even if of traceable

origin, bears no earmarks of peculiar ownership.It bears
emphasizing that money bears no earmarks of peculiar
ownership, and this characteristic is all the more manifest in the
instant case which involves money in a banking transaction gone
awry. Its primary function is to pass from hand to hand as a
medium of exchange, without other evidence of its title. Money,
which had passed through various transactions in the general
course of banking business, even if of traceable origin, bears no
earmarks of peculiar ownership.
Same Same Nature of a Bank As a business affected with

public interest and because of the nature of its functions, the bank
is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of the
relationship.In every case, the depositor expects the bank to
treat his account with the utmost fidelity, whether such account
consists only of a few hundred pesos or of millions. The bank must
record every single transaction accurately, down to the last
centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever directs. A blunder on the part of the
bank, such as the dishonor of the check without good reason, can
cause the depositor not a little embarrassment if not also financial
loss and perhaps even civil and criminal litigation. The point is
that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship. x x x.
186
Remedial Law Civil Procedure Amendment to Conform to

Evidence When issues not raised by the pleadings are tried with
the express or implied consent of the parties, they shall be treated
in all respects as if they had been raised in the pleadingssuch
amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made
upon motion of any party at anytime, even after judgment, but
failure to amend does not affect the result of the trial of these
issues.Section 5. Amendment to conform to or authorize
presentation of evidence.When issues not raised by the
pleadings are tried with the express or implied consent of the

parties, they shall be treated in all respects as if they had been
raised in the pleadings. Such amendment of the pleadings as may
be necessary to cause them to conform to the evidence and to raise
these issues may be made upon motion of any party at any time,
even after judgment but failure to amend does not affect the
result of the trial of these issues. If evidence is objected to at the
trial on the ground that it is now within the issues made by the
pleadings, the court may allow the pleadings to be amended and
shall do so with liberality if the presentation of the merits of the
action and the ends of substantial justice will be subserved
thereby. The court may grant a continuance to enable the
amendment to be made.
Service of Court Papers It should be noted that the strict

requirement on the service of papers upon the parties affected is
designed to comply with the elementary requisite of due process.
In this argument, we perceive BPIFBs clever but transparent
ploy to circumvent Section 4, Rule 13 of the Rules of Court. It
should be noted that the strict requirement on service of court
papers upon the parties affected is designed to comply with the
elementary requisites of due process. Franco was entitled, as a
matter of right, to notice, if the requirements of due process are to
be observed. Yet, he received a copy of the Notice of Garnishment
only on September 27, 1989, several days after the two checks he
issued were dishonored by BPIFB on September 20 and 21, 1989.
Verily, it was premature for BPIFB to freeze Francos accounts
without even awaiting service of the Makati RTCs Notice of
Garnishment on Franco.
Civil Law Damages Moral Damages In the absence of fraud

or bad faith, moral damages cannot be awarded and that the
adverse result of an action does not per se make the action
wrongful, or the party liable for it. One may err, but error alone is
not a ground for
187
VOL. 538, NOVEMBER 23, 2007 187
granting such damages.We have had occasion to hold that in

the absence of fraud or bad faith, moral damages cannot be
awarded and that the adverse result of an action does not per se
make the action wrongful, or the party liable for it. One may err,
but error alone is not a ground for granting such damages.
Same Exemplary Damages As there is no basis for the award

of moral damages, neither can exemplary damages be granted.
We also deny the claim for exemplary damages. Franco should
show that he is entitled to moral, temperate, or compensatory
damages before the court may even consider the question of
whether exemplary damages should be awarded to him. As there
is no basis for the award of moral damages, neither can
exemplary damages be granted.
PETITION for review on certiorari of a decision of the

Court of Appeals.

Ramirez, Bargas, Benedicto & Associates for
petitioner.
Lawrence P. Villanueva for private respondent.
NACHURA, J.:
Banks are exhorted to treat the accounts of their depositors

with meticulous care and utmost fidelity. We reiterate this
exhortation in the case at bench.
Before us is a Petition for Review on Certiorari 1seeking
the reversal of the Court of Appeals (CA) Decision in CA
G.R. CV No.
2
43424 which affirmed with modification the
judgment of the Regional Trial Court, Branch 55, Manila
(Manila RTC), in Civil Case No. 9053295.
_______________
1 Penned by Associate Justice Eugenio S. Labitoria, with Associate

Justices Cancio C. Garcia (retired Associate Justice of the Supreme Court)
and Portia AlinoHormachuelos, concurring Rollo, pp. 4055.
2 CA Rollo, pp. 7079.
188

This case has its genesis in an ostensible fraud perpetrated

on the petitioner BPI Family Bank (BPIFB) allegedly by
respondent Amado 3
Franco (Franco) in conspiracy with
other individuals, some of whom opened and maintained
separate accounts with BPIFB, San Francisco del Monte
(SFDM) branch, in a series of transactions.
On August 15, 1989, Tevesteco ArrastreStevedoring
Co., Inc. (Tevesteco) opened a savings and current account
with BPIFB. Soon thereafter, or on August 25, 1989, First

Metro Investment Corporation (FMIC) also opened a time
deposit account with the same branch of BPIFB with a
deposit of P100,000,000.00, to mature one year thence.
Subsequently, on August 31,4
1989, Franco
5
opened three6
accounts, namely, a current, savings, and time deposit,
with BPIFB. The current and savings accounts were
respectively funded with an initial deposit of P500,000.00
each, while the time deposit account had P1,000,000.00
with a maturity date of August 31, 1990. The total amount
of P2,000,000.00 used to open these accounts is traceable to
a check issued by Tevesteco allegedly7
in consideration of
Francos introduction of Eladio Teves, who was looking for
a conduit bank to facilitate Tevestecos business
transactions, to Jaime Sebastian, who was then BPIFB
SFDMs Branch Manager. In turn, the funding for the
P2,000,000.00 check was part of the P80,000,000.00 debited
by BPIFB from FMICs time deposit account and credited
to Tevestecos current account pursuant to an Authority to
Debit purportedly signed by FMICs officers.
_______________
3 Antonio T. Ong, Manuel Bienvenida, Jr., Milagros Nayve, Jaime

Sebastian, Ador de Asis, and Eladio Teves. Rollo, pp. 160207. RTC,
Quezon City, Branch 85, Decision in Crim. Case No. Q9122386.
4 Account No. 8401074837.
5 Account No. 16682381.
6 Account No. 08523412.
7 President of Tevesteco.
189
VOL. 538, NOVEMBER 23, 2007 189

It appears, however, that the signatures8 of FMICs officers

on the Authority to9 Debit were forged. On September 4,
1989, Antonio Ong, upon being shown the Authority to
Debit, personally declared his signature therein to be a
forgery. Unfortunately, Tevesteco had already effected
several withdrawals from its current account (to which had
been credited the P80,000,000.00 covered by the forged
Authority to Debit) amounting to P37,455,410.54, including
the P2,000,000.00 paid to Franco.
On September 8, 1989, impelled by the need to protect
its interests in light of FMICs forgery claim, BPIFB, thru
its Senior VicePresident, Severino Coronacion, instructed
10
Jesus Arangorin to debit Francos savings
http://central.com.ph/sfsreader/session/0000015cd9d7d4842b683380003600fb002c009e/t/?o=False and current 5/23
10
Jesus Arangorin to debit Francos savings and 11
current
accounts for the amounts remaining therein. However,
Francos time deposit account could not be debited
12
due to
the capacity limitations of BPIFBs
13
computer.
In the meantime, two checks drawn by Franco against
his BPIFB current account were dishonored upon
presentment for payment, and stamped with a notation
account under garnishment. Apparently, Francos current
account was garnished by virtue of an Order of Attachment
issued by the Regional Trial Court of Makati (Makati RTC)
in Civil Case No. 894996 (Makati Case),14 which had been
filed by BPIFB against Franco et al., to recover the
P37,455,410.54 representing Tevestecos total withdrawals
from its account.
_______________
8 BPIFBs Memorandum, Rollo, pp. 104105.

9 Executive VicePresident of FMIC.
10 The new BPIFB SFDM branch manager who replaced Jaime
Sebastian.
11 BPIFBs Memorandum, Rollo, p. 105.
12 Id.
13 Respectively dated September 11 and 18, 1989. The first check dated
August 31, 1989 Franco issued in the amount of P50,000.00 was honored
by BPIFB.
14 Supra note 3. The names of other defendants in Crim. Case No. 091
22386.
190

Notably, the dishonored checks were issued by Franco and

presented for payment at BPIFB prior to Francos receipt
15
of notice that his accounts were under garnishment. In
fact, at the time the Notice of Garnishment dated
September 27, 1989 was served on BPIFB, Franco had yet
to be impleaded in the Makati case where the writ of
attachment was issued.
It was only on May 15, 1990, through the service of a
copy of the Second Amended Complaint in Civil Case No. 16
894996, that Franco was impleaded in the Makati case.
Immediately, upon receipt of such copy, Franco filed a
Motion to Discharge Attachment which the Makati RTC
granted on May 16, 1990. The Order Lifting the Order of
Attachment was served on BPIFB on even date, with
Franco demanding the release to him of the funds in his

savings and current accounts. Jesus Arangorin, BPIFBs
new manager, could not forthwith comply with the demand
as the funds, as previously stated, had already been
debited because of FMICs forgery claim. As such, BPIFBs
computer at the SFDM Branch indicated that the current
account record was not on file.
With respect to Francos savings account, it appears that
Franco agreed to an arrangement, as a favor to Sebastian,
whereby P400,000.00 from his savings account was
temporarily transferred to Domingo Quiaoits savings
account, subject to its immediate return upon issuance of a
certificate of deposit which Quiaoit needed in connection
with his visa application at the Taiwan Embassy. As part
of the arrangement, Sebastian retained custody of Quiaoits
savings account passbook to ensure that no withdrawal
would be effected therefrom, and to preserve Francos
deposits.
On May 17, 1990, Franco preterminated his time
deposit account. BPIFB deducted the amount of
P63,189.00 from the
_______________
15 Franco received the Notice of Garnishment on September 27, 1989,

but the 2 checks he had issued were presented for payment at BPIFB on
September 20 & 21, 1989, respectively.
16 Francos Memorandum, Rollo, p. 137.
191
VOL. 538, NOVEMBER 23, 2007 191

remaining balance of the time deposit account representing

advance interest paid to him.
These transactions spawned a number of cases, some of
which we had already resolved.
FMIC filed a complaint against BPIFB for the recovery17
of the amount of P80,000,000.00 debited from its account.
The case eventually reached this Court, and in BPI Family 18
Savings Bank, Inc. v. First Metro Investment Corporation,
we upheld the finding of the courts below that BPIFB
failed to exercise the degree of diligence required by the
nature of its obligation to treat the accounts of its
depositors with meticulous care. Thus, BPIFB was found
liable to FMIC for the debited amount in its time deposit. It
was ordered to pay P65,332,321.99 plus interest at 17% per
annum from August 29, 1989 until fully restored. In turn,

the 17% shall itself earn interest at 12% from October 4,
1989 until fully paid.
In a related case, Edgardo Buenaventura, Myrna 19
Lizardo and Yolanda Tica (Buenaventura, et al.),
recipients of a P500,000.00 check proceeding from the
P80,000,000.00 mistakenly credited to Tevesteco, likewise
filed suit. Buenaventura et al., as in the case20 of Franco,
were also prevented from effecting withdrawals from their
current account with BPIFB, Bonifacio Market, Edsa,
Caloocan City Branch. Likewise, when the case was
elevated to this
21
Court docketed as BPI Family Bank v.
Buenaventura, we ruled that BPIFB had no right to
freeze Buenaventura, et al.s accounts and adjudged BPI
FB liable therefor, in addition to damages.
_______________
17 Docketed as Civil Case No. 895280 and entitled First Metro

Investment Corporation v. BPI Family Bank.
18 G.R. No. 132390, May 21, 2004, 429 SCRA 30.
19 Officers of the International Baptist Church and International
Baptist Academy in Malabon, Metro Manila.
20 The checks issued by Buenaventura, et al. were dishonored upon
presentment for payment.
21 G.R. No. 148196, September 30, 2005, 471 SCRA 431.
192

Meanwhile, BPIFB filed separate civil and criminal cases

against those believed 22to be the perpetrators of the
multimillion peso scam. In the criminal case, Franco,
along with the other accused, except for Manuel
Bienvenida who was still at large, were acquitted of the
crime of Estafa as defined and penalized 23
under Article 351,
par. 242(a) of the Revised Penal Code. However, the civil
case remains under litigation and the respective rights
and liabilities of the parties have yet to be adjudicated.
Consequently, in light of BPIFBs refusal to heed
Francos demands to unfreeze his accounts and release his
deposits therein, the latter filed on June 4, 1990 with the
Manila RTC the subject suit. In his complaint, Franco
prayed for the following 25
reliefs: (1) the interest on the
remaining balance of his current account which was
eventually released to him on October 31, 1991 (2) the
26
balance on his savings account, plus interest thereon (3)
26
balance on his savings27
account, plus interest thereon (3)
the advance interest paid to him which had been deducted
when he preterminated his time deposit account and (4)
the payment of actual, moral and exemplary damages, as
well as attorneys fees.
BPIFB traversed this complaint, insisting that it was
correct in freezing the accounts of Franco and refusing to
release his deposits, claiming that it had a better right to
the amounts which consisted of part of the money allegedly
fraudulently withdrawn from it by Tevesteco and ending up
_______________
22 Supra note 3.
23 Rollo, pp. 160208.
24 The Makati Case for recovery of the P37,455,410.54 representing
Tevestecos total withdrawals wherein Franco was belatedly impleaded,
and a Writ of Garnishment was issued on Francos accounts.
25 P450,000.00.
26 The reflected amount of P98,973.23 plus P400,000.00 representing
what was transferred to Quiaoits account under their arrangement.
27 P63,189.00.
193
VOL. 538, NOVEMBER 23, 2007 193

in Francos accounts. BPIFB asseverated that the claimed

consideration of P2,000,000.00 for the introduction
facilitated by Franco between George Daantos and Eladio
Teves, on the one hand, and Jaime Sebastian, on the other,
spoke volumes of Francos participation in the fraudulent
transaction.
On August 4, 1993, the Manila RTC rendered judgment,
the dispositive portion of which reads as follows:
WHEREFORE, in view of all the foregoing, judgment is hereby

rendered in favor of [Franco] and against [BPIFB], ordering the
latter to pay to the former the following sums:
1. P76,500.00 representing the legal rate of interest on the

amount of P450,000.00 from May 18, 1990 to October 31,
1991
2. P498,973.23 representing the balance on [Francos]
savings account as of May 18, 1990, together with the
interest thereon in accordance with the banks guidelines
on the payment therefor
3. P30,000.00 by way of attorneys fees and

4. P10,000.00 as nominal damages.
The counterclaim of the defendant is DISMISSED for lack of

factual and legal anchor.
28
Costs against [BPIFB].
SO ORDERED.
Unsatisfied with the decision, both parties filed their

respective appeals before the CA. Franco confined his
appeal to the Manila RTCs denial of his claim for moral
and exemplary damages, and the diminutive award of
attorneys fees. In affirming with modification the lower
courts decision, the appellate court decreed, to wit:
WHEREFORE, foregoing considered, the appealed decision is

hereby AFFIRMED with modification ordering [BPIFB] to pay
[Franco] P63,189.00 representing the interest deducted from the
time deposit of plaintiffappellant. P200,000.00 as moral damages
and P100,000.00 as exemplary damages, deleting the award of
_______________
28 CA Rollo, p. 79.
194

nominal damages (in view of the award of moral and exemplary

damages) and increasing the award of attorneys fees from
P30,000.00 to P75,000.00.
Cost against [BPIFB].
29
SO ORDERED.
In this recourse, BPIFB ascribes error to the CA when it

ruled that: (1) Franco had a better right to the deposits in
the subject accounts which are part of the proceeds of a
forged Authority to Debit (2) Franco is entitled to interest
on his current account (3) Franco can recover the
P400,000.00 deposit in Quiaoits savings account (4) the
dishonor of Francos checks was not legally in order (5)
BPIFB is liable for interest on Francos time deposit, and
for moral and exemplary damages and (6) BPIFBs
counterclaim has no factual and legal anchor.
The petition is partly meritorious.
We are in full accord with the common ruling of the
lower courts that BPIFB cannot unilaterally freeze
Francos accounts and preclude him from withdrawing his

deposits. However, contrary to the appellate courts ruling,
we hold that Franco is not entitled to unearned interest on
the time deposit as well as to moral and exemplary
damages.
First. On the issue of who has a better right to the
deposits in Francos accounts, BPIFB urges us that the
legal consequence of FMICs forgery claim is that the
money transferred by BPIFB to Tevesteco is its own, and
considering that it was able to recover possession of the
same when the money was redeposited by Franco, it had
the right to set up its ownership thereon and freeze
Francos accounts.
BPIFB contends that its position is not unlike that of
an owner of personal property who regains possession after
it is stolen, and to illustrate this point, BPIFB gives the
following example: where Xs television set is stolen by Y
who thereaf
_______________
29 Rollo, p. 54.
195
VOL. 538, NOVEMBER 23, 2007 195

ter sells it to Z, and where Z unwittingly entrusts

possession of the TV set to X, the latter would have the
right to keep possession of the property and preclude Z
from recovering possession thereof. To bolster its position,
BPIFB cites Article 559 of the Civil Code, which provides:
Article 559. The possession of movable property acquired in good

faith is equivalent to a title. Nevertheless, one who has lost any
movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefor.
BPIFBs argument is unsound. To begin with, the movable

property mentioned in Article 559 of 30 the Civil Code
pertains to a specific or determinate thing. A determinate
or specific thing is one that is individualized and can31be
identified or distinguished from others of the same kind.
In this case, the deposit in Francos accounts consists of

money which,32 albeit characterized as a movable, is generic
and fungible. The quality of being fungible depends upon
the possibility of the property, because of its nature or the
will of the parties, being substituted by 33others of the same
kind, not having a distinct individuality.
Significantly, while Article 559 permits an owner who
has lost or has been unlawfully deprived of a movable to
recover
_______________
30 See Article 1460, paragraph 1 of the Civil Code. A thing is

determinate when it is particularly designated or physically segregated
from all others of the same class.
31 Tolentino, Civil Code of the Philippines Commentaries and
Jurisprudence, Vol. IV, 1985, p. 90.
32 See Article 418 of the Civil Code, taken from Article 337 of the Old
Civil Code which used the words fungible or nonfungible.
33 Tolentino, Civil Code of the Philippines Commentaries and
Jurisprudence, Vol. II, 1983, p. 26.
196

the exact same thing from the current possessor, BPIFB

simply claims ownership of the equivalent amount of
money, i.e., the value thereof, which it had mistakenly
debited from FMICs account and credited to Tevestecos,
and subsequently traced to Francos account. In fact, this is
what BPIFB did in filing the Makati Case against Franco,
et al. It staked its claim on the money itself which passed
from one account to another, commencing with the forged
Authority to Debit.
It bears emphasizing
34
that money bears no earmarks of
peculiar ownership, and this characteristic is all the more
manifest in the instant case which involves money in a
banking transaction gone awry. Its primary function is to
pass from hand to hand as a35medium of exchange, without
other evidence of its title. Money, which had passed
through various transactions in the general course of
banking business, even if of traceable origin, is no
exception.
Thus, inasmuch as what is involved is not a specific or
determinate personal property, BPIFBs illustrative
example, ostensibly based on Article 559, is inapplicable to

the instant case.
There is no doubt that BPIFB owns the deposited
monies in the accounts of Franco, but not as a legal
consequence of its unauthorized transfer of FMICs
deposits to Tevestecos account. BPIFB conveniently
forgets that the deposit of money in banks is governed 36
by
the Civil Code provisions on simple loan or mutuum. As
there is a debtorcreditor relationship between a bank and
its depositor, BPIFB ultimately acquired ownership of
Francos deposits, but such ownership is coupled with a
corresponding obligation to pay him an equal amount
_______________
34 United States v. Sotelo, 28 Phil. 147, 158 (1914).

35 Id.
36 Article 1980 of the Civil Code: Fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the
provisions concerning loan. See Article 1933 of the Civil Code.
197
VOL. 538, NOVEMBER 23, 2007 197

37
on demand. Although BPIFB owns the deposits in
Francos accounts, it cannot prevent him from demanding
payment of BPIFBs obligation by drawing checks against
his current account, or asking for the release of the funds
in his savings account. Thus, when Franco issued checks
drawn against his current account, he had every right as
creditor to expect that those checks would be honored by
BPIFB as debtor.
More importantly, BPIFB does not have a unilateral
right to freeze the accounts of Franco based on its mere
suspicion that the funds therein were proceeds of the multi
million peso scam Franco was allegedly involved in. To
grant BPIFB, or any bank for that matter, the right to
take whatever action it pleases on deposits which it
supposes are derived from shady transactions, would open
the floodgates of public distrust in the banking industry.
Our pronouncement 38in Simex International (Manila),
Inc. v. Court of Appeals continues to resonate, thus:
The banking system is an indispensable institution in the

modern world and plays a vital role in the economic life of every
civilized nation. Whether as mere passive entities for the
safekeeping and saving of money or as active instruments of

business and commerce, banks have become an ubiquitous
presence among the people, who have come to regard them with
respect and even gratitude and, most of all, confidence. Thus,
even the humble wageearner has not hesitated to entrust his
lifes savings to the bank of his choice, knowing that they will be
safe in its custody and will even earn some interest for him. The
ordinary person, with equal faith, usually maintains a modest
checking account for security and convenience in the settling of
his monthly bills and the payment of ordinary expenses. x x x.
_______________
37 Article 1953 of the Civil Code: A person who receives a loan of money
or any other fungible thing acquires the ownership thereof, and is bound
to pay the creditor an equal amount of the same kind and quality.
38 G.R. No. 88013, March 19, 1990, 183 SCRA 360, 366367.
198

In every case, the depositor expects the bank to treat his account
with the utmost fidelity, whether such account consists only of a
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and as
promptly as possible. This has to be done if the account is to
reflect at any given time the amount of money the depositor can
dispose of as he sees fit, confident that the bank will deliver it as
and to whomever directs. A blunder on the part of the bank, such
as the dishonor of the check without good reason, can cause the
depositor not a little embarrassment if not also financial loss and
perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation
to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.
x x x.
Ineluctably, BPIFB, as the trustee in the fiduciary

relationship, is duty bound to know the signatures of its
customers. Having failed to detect the forgery in the
Authority to Debit and in the process inadvertently
facilitate the FMICTevesteco transfer, BPIFB cannot now
shift liability thereon to Franco and the other payees of
checks issued by Tevesteco, or prevent withdrawals from
their respective accounts without the appropriate court

writ or a favorable final judgment.
Further, it boggles the mind why BPIFB, even without
delving into the authenticity of the signature in the
Authority to Debit, effected the transfer of P80,000,000.00
from FMICs to Tevestecos account, when FMICs account
was a time deposit and it had already paid advance interest
to FMIC. Considering that there is as yet no indubitable
evidence establishing Francos participation in the forgery,
he remains an innocent party. As between him and BPI
FB, the latter, which made possible the present
predicament, must bear the resulting loss or inconvenience.
Second. With respect to its liability for interest on
Francos current account, BPIFB argues that its
noncompliance with the Makati RTCs Order Lifting the
Order of
199
VOL. 538, NOVEMBER 23, 2007 199

Attachment and the legal consequences thereof, is a matter

that ought to be taken up in that court.
The argument is tenuous. We agree with the succinct
holding of the appellate court in this respect. The Manila
RTCs order to pay interests on Francos current account
arose from BPIFBs unjustified refusal to comply with its
obligation to pay Franco pursuant to their contract of
mutuum. In other words, from the time BPIFB refused
Francos demand for the release of the deposits in his
current account, specifically, from May 17,
39
1990, interest at
the rate of 12% began to accrue thereon.
Undeniably, the Makati RTC is vested with the
authority to determine the legal consequences of BPIFBs
noncompliance with the Order Lifting the Order of
Attachment. However, such authority does not preclude the
Manila RTC from ruling on BPIFBs liability to Franco for
payment of interest based on its continued and unjustified
refusal to perform a contractual obligation upon demand.
After all, this was the core issue raised by Franco in his
complaint before the Manila RTC.
Third. As to the award to Franco of the deposits in
Quiaoits account, we find no reason to depart from the
factual findings of both the Manila RTC and the CA.
Noteworthy is the fact that Quiaoit himself testified that
the deposits in his account are actually owned by Franco
who simply accommodated Jaime Sebastians request to
temporarily transfer P400,000.00

40
from Francos savings
account to Quiaoits account. His testimony cannot be
characterized as hearsay as the records reveal that he had
personal knowledge of the arrangement
41
made between
Franco, Sebastian and himself.
_______________
39 See Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412,
July 12, 1994, 234 SCRA 78, 95.
40 TSN, July 30, 1991, p. 5.
41 Id., at pp. 511.
200

BPIFB makes capital of Francos belated allegation

relative to this particular arrangement. It insists that the
transaction with Quiaoit was not specifically alleged in
Francos complaint before the Manila RTC. However, it
appears that BPIFB had impliedly consented to the trial of
this issue given its extensive crossexamination of Quiaoit.
Section 5, Rule 10 of the Rules of Court provides:
Section 5. Amendment to conform to or authorize presentation of

evidence.When issues not raised by the pleadings are tried
with the express or implied consent of the parties, they
shall be treated in all respects as if they had been raised in
the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to
raise these issues may be made upon motion of any party
at any time, even after judgment but failure to amend
does not affect the result of the trial of these issues. If
evidence is objected to at the trial on the ground that it is now
within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so with liberality if the
presentation of the merits of the action and the ends of
substantial justice will be subserved thereby. The court may
grant a continuance to enable the amendment to be made.
(Emphasis supplied)
In all, BPIFBs argument that this case is not the right

forum for Franco to recover the P400,000.00 begs the issue.
To reiterate, Quiaoit, testifying during the trial,
unequivocally disclaimed ownership of the funds in his
account, and pointed to Franco as the actual owner thereof.
Clearly, Francos action for the recovery of his deposits

appropriately covers the deposits in Quiaoits account.
Fourth. Notwithstanding all the foregoing, BPIFB
continues to insist that the dishonor of Francos checks
respectively dated September 11 and 18, 1989 was legally
in order in view of the Makati RTCs supplemental writ of
attachment issued on September 14, 1989. It posits that as
the party that applied for the writ of attachment before the
Makati RTC, it
201
VOL. 538, NOVEMBER 23, 2007 201

need not be served with the Notice of Garnishment before

it could place Francos accounts under garnishment.
The argument is specious. In this argument, we perceive
BPIFBs
42
clever but transparent ploy to circumvent Section
4, Rule 13 of the Rules of Court. It should be noted that
the strict requirement on service of court papers upon the
parties affected is designed to comply with the elementary
requisites of due process. Franco was entitled, as a matter
of right, to notice, if the requirements of due process are to
be observed. Yet, he received a copy of the Notice of
Garnishment only on September 27, 1989, several days
after the two checks he issued were dishonored by BPIFB
on September 20 and 21, 1989. Verily, it was premature for
BPIFB to freeze Francos accounts without even awaiting
service of the Makati RTCs Notice of Garnishment on
Franco.
Additionally, it should be remembered that the
enforcement of a writ of attachment cannot be made
without including in the main suit the owner of the
property attached by virtue thereof. Section 5, Rule 13 of
the Rules of Court specifically provides that no levy or
attachment pursuant to the writ issued x x x shall be
enforced unless it is preceded, or contemporaneously
accompanied, by service of summons, together with a copy
of the complaint, the application for attachment, on the
defendant within the Philippines.
Franco was impleaded as partydefendant only on May
15, 1990. The Makati RTC had yet to acquire jurisdiction
over the 43person of Franco when BPIFB garnished his
accounts. Effectively, therefore, the Makati RTC had no
authority yet to bind the deposits of Franco through the
writ of attachment,
_______________
42 SEC. 4. Papers required to be filed and served.Every judgment,

resolution, order, pleading subsequent to the complaint, written motion,
notice, appearance, demand, offer of judgment or similar papers shall be
filed with the court, and served upon the parties affected.
43 See Sievert v. Court of Appeals, G.R. No. L84034, December 22,
1988, 168 SCRA 692, 696.
202

and consequently, there was no legal basis for BPIFB to

dishonor the checks issued by Franco.
Fifth. Anent the CAs finding that BPIFB was in bad
faith and as such liable for the advance interest it deducted
from Francos time deposit account, and for moral as well
as exemplary damages, we find it proper to reinstate the
ruling of the trial court, and allow only the recovery of
nominal damages in the amount of P10,000.00. However,
we retain the CAs award of P75,000.00 as attorneys fees.
In granting Francos prayer for interest on his time
deposit account and for moral and exemplary damages, the
CA attributed bad faith to BPIFB because it (1) completely
disregarded its obligation to Franco (2) misleadingly
claimed that Francos deposits were under garnishment (3)
misrepresented that Francos current account was not on
file and (4) refused to return the P400,000.00 despite the
fact that the ostensible owner, Quiaoit, wanted the amount
returned to Franco.
In this regard, we are guided by Article 2201 of the Civil
Code which provides:
Article 2201. In contracts and quasicontracts, the damages for

which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach of
the obligation, and which the parties have foreseen or could have
reasonable foreseen at the time the obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude,
the obligor shall be responsible for all damages which may
be reasonably attributed to the nonperformance of the
obligation. (Emphasis supplied.)
We find, as the trial court did, that BPIFB acted out of the
impetus of selfprotection and not out of malevolence or ill
will. BPIFB was not in the corrupt state of mind
contemplated in Article 2201 and should not be held liable

for all damages now being imputed to it for its breach of
obligation.
203
VOL. 538, NOVEMBER 23, 2007 203

For the same reason, it is not liable for the unearned

interest on the time deposit.
Bad faith does not simply connote bad judgment or
negligence it imports a dishonest purpose or some moral
obliquity and conscious
44
doing of wrong it partakes of the
nature of fraud. We have held that it is a breach of 45
a
known duty through some motive of interest or ill will. In
the instant case, we cannot attribute to BPIFB fraud or
even a motive of selfenrichment. As the trial court found,
there was no denial whatsoever by BPIFB of the existence
of the accounts. The computergenerated document which
indicated that the current account was not on file
resulted from the prior debit by BPIFB of the deposits.
The remedy of freezing the account, or the garnishment, or
even the outright refusal to honor any transaction thereon
was resorted to solely for the purpose of holding46 on to the
funds as a security for its intended court action, and with
no other goal but to ensure the integrity of the accounts.
We have had occasion
47
to hold that in the absence of
fraud or bad faith, moral damages cannot be awarded and
that the adverse result of an action does not per se make
the action wrongful, or the party liable for it. One may err,
48
but error alone is not a ground for granting such damages.
An award of moral damages contemplates the existence
of the following requisites: (1) there must be an injury
clearly sustained by the claimant, whether physical,
mental or psy
_______________
44 Board of Liquidators v. Heirs of Maximo Kalaw, et al., 127 Phil. 399,

421 20 SCRA 987, 1007 (1967).
45 Lopez, et al. v. Pan American World Airways, 123 Phil. 256, 264265
16 SCRA 431, 438 (1966).
46 CA Rollo, p. 74.
47 Suario v. Bank of the Philippine Islands, G.R. No. 50459, August 25,
1989, 176 SCRA 688, 696 citing Guita v. Court of Appeals, 139 SCRA 576,
580 (1985).
48 Bank of the Philippine Islands v. Casa Montessori Internationale,

G.R. No. 149454, May 28, 2004, 430 SCRA 261, 293294.
204

chological (2) there must be a culpable act or omission

factually established (3) the wrongful act or omission of
the defendant is the proximate cause of the injury
sustained by the claimant and (4) the award for damages
is predicated on49
any of the cases stated in Article 2219 of
the Civil Code.
Franco could not point to, or identify any 50
particular
circumstance in Article 2219 of the Civil Code, upon which
to base his claim for moral damages.
Thus, not having acted in bad faith, BPIFB cannot be
held liable for moral damages under51
Article 2220 of the
Civil Code for breach of contract.
_______________
49 United Coconut Planters Bank v. Ramos, 461 Phil. 277, 298 415
SCRA 596, 612 (2003) citing Cathay Pacific Airways, Ltd. v. Spouses
Vazquez, 447 Phil. 306 399 SCRA 207 (2003).
50 Art. 2219. Moral damages may be recovered in the following and
analogous cases:
(1) A criminal offense resulting in physical injuries

(2) Quasidelicts causing physical injuries
(3) Seduction, abduction, rape, or other lascivious acts
(4) Adultery or concubinage
(5) Illegal or arbitrary detention or arrest
(6) Illegal search
(7) Libel, slander or any other form of defamation
(8) Malicious prosecution
(9) Acts mentioned in Article 309
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32,
34, and 35.
The parents of the female seduced, abducted, raped, or abused, referred

to in No. 3 of this article, may also recover moral damages.
The spouse, descendants, ascendants, and brother and sisters may
bring the action mentioned in No. 9 of this article, in the order named.
51 Art. 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad
faith.
205
VOL. 538, NOVEMBER 23, 2007 205

We also deny the claim for exemplary damages. Franco

should show that he is entitled to moral, temperate, or
compensatory damages before the court may even consider
the question of 52whether exemplary damages should be
awarded to him. As there is no basis for the award of
moral damages, neither can exemplary damages be
granted.
While it is a 53sound policy not to set a premium on the
right to litigate, we, however, find that Franco is entitled
to reasonable attorneys fees for having been compelled to
go to court in order to assert his right. Thus, we affirm the
CAs grant of P75,000.00 as attorneys fees.
Attorneys fees may be awarded when a party is
compelled54
to litigate or incur expenses to protect his 55
interest, or when the court deems it just and equitable.
In the case at bench, BPIFB refused to unfreeze the
deposits of Franco despite the Makati RTCs Order Lifting
the Order of Attachment and Quiaoits unwavering
assertion that the P400,000.00 was part of Francos savings
account. This refusal constrained Franco to incur expenses
and litigate for almost two (2) decades in order to protect
his interests and recover his deposits. There
_______________
Art. 2234. While the amount of the exemplary damages need not be proved, the
plaintiff must show that he is entitled to moral, temperate or compensatory
damages before the court may consider the question of whether or not exemplary
damages should be awarded. In case liquidated damages have been agreed upon,
although no proof of loss is necessary in order that such liquidated damages may
be recovered, nevertheless, before the court may consider the question of granting
exemplary in addition to the liquidated damages, the plaintiff must show that he
would be entitled to moral, temperate or compensatory damages were it not for the
stipulation for liquidated damages.
53 Bank of the Philippine Islands v. Casa Montessori Internationale,

supra note 48, at p. 296.
54 CIVIL CODE, Art. 2208, par. (2).
55 CIVIL CODE, Art. 2208, par. (11).
206

fore, this Court deems it just and equitable to grant Franco

P75,000.00 as attorneys fees. The award is reasonable in
view of the complexity of the issues56
and the time it has
taken for this case to be resolved.
Sixth. As for the dismissal of BPIFBs counterclaim, we
uphold the Manila RTCs ruling, as affirmed by the CA,
that BPIFB is not entitled to recover P3,800,000.00 as
actual damages. BPIFBs alleged loss of profit as a result
of Francos suit is, as already pointed out, of its own
making. Accordingly, the denial of its counterclaim is in
order.
WHEREFORE, the petition is PARTIALLY GRANTED.
The Court of Appeals Decision dated November 29, 1995 is
AFFIRMED with the MODIFICATION that the award of
unearned interest on the time deposit and of moral and
exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.
YnaresSantiago (Chairperson), AustriaMartinez,

ChicoNazario and Reyes, JJ., concur.
Petition partially granted, judgment affirmed with

modification.
Note.The business of a bank is one affected with

public interest, for which reason the bank should guard
against loss due to negligence or bad faith. (United Coconut
Planters Bank vs. Ramos, 415 SCRA 596 [2003])
o0o
_______________
56 Ching Sen Ben v. Court of Appeals, 373 Phil. 544, 555 314 SCRA
762, 773 (1999).
207
VOL. 15, DECEMBER 31, 1965 681

Republic vs. Grijaldo
No. L20240. December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiffappellee, vs.

JOSE GRIJALDO, defendantappellant.
Obligations and contracts Crop loans obtained from the Bank

of Taiwan, Ltd. Right of Philippine Government to collect the
loans.In 1943, appellant obtained crop loans from the Bank of
Taiwan, Ltd., Bacolod City Branch, evidenced by promissory
notes. To secure payment of the loans, appellant executed a
chattel mortgage over the standing crops on his land. After the
war, the Republic of the Philippines brought the present action to
collect from appellant the unpaid account. Held: It is true that the
Bank of Taiwan, Ltd. was the original creditor and the
transaction between the appellant and the Bank of Taiwan was a
private contract of loans. However, pursuant to the Trading with
the Enemy Act, as amended, and Executive Order No. 9095 of the
United States and under Vesting Order No. P4, dated January
21, 1946, the properties of the Bank of Taiwan, Ltd., were vested
in the United States Government. Pursuant, further, to the
Philippine Property Act of 1946 and Transfer Agreements dated
July 20, 1954 and June 15, 1957, between the United States
Government and the Republic of the Philippines, the assets of the
Bank of Taiwan, Ltd. were transferred to and vested in the
Republic of the Philippines. The successive transfers of the rights
over the loans in question from the Bank of Taiwan, Ltd. to the
United States Government, and from the United States
Government to the government of the Republic of the Philippines,
made the
682
http://central.com.ph/sfsreader/session/0000015cd9da7dfeb8121989003600fb002c009e/t/?o=False 1/10
Republic of the Philippines the successor of the rights, title and

interests in said loans, thereby creating a privity of contract
between the appellee and the appellant.
Same Same Same Destruction of crop through enemy action
Effect on the obligation.Appellant maintains, in support of his
contention that the appellee has no cause of action, that because
the loans were secured by a chattel mortgage on the standing
crops on the land owned by him and those crops were lost or
destroyed through enemy action his obligation to pay the loans
was thereby extinguished. Held: This argu ment is untenable. The
obligation of the appellant under the promissory notes was not to
deliver a determinate thing. namely, the crops to be harvested
from his land, but to pay a generic thingthe amount of money
representing the total sum of his loans, with interest. The chattel
mortgage on the crops simply stood as a security for the
fulfillment of appellant's obligation covered by the, promissory
notes, and the loss of the crops did not 'extinguish his obligation
to pay, because the ac count could still be paid from other sources
aside from the mortgaged crops.
Same Same Same Prescription of actions Prescription does
not run against the government. The complaint in the present
case was brought by the Republic of the Philippines not as a
nominal party but in the exercise of its sovereign functions, to
protect the interests of the State ever a public property. This
Court has held that the statute of limitations does not run against
the right of action of the Government of the Philippines
(Government of the Philippine Islands vs. Monte de Piedad, etc.,
35 Phil. 738751).
Same Same Same Same Effect of moratorium laws.
Moreover, the running of the period of prescription . of the action
to collect the loan from the appellant was interrupted by the
moratorium laws (Executive Orders Nos. 25, dated November 18.
1944 Executive Order No. 32, dated March 10, 1945 and
Republic Act No. 432, approved on July 26, 1948). Computed
accordingly, the prescriptive period was suspended for 8 years
and 6 months. Hence, appellee's action had not yet prescribed.
Same Same Same Payment in Japanese war notes
Application of Ballantyne scale of values.Contracts stipulating
for payments presumably in Japanese war notes may be enforced
after the liberation to the extent of the just obligation of the
contracting parties and, as said notes have become worthless, in
order that justice may be done and the party entitled to be paid
can recover their actual value in Philippine Currency, what the
debtor or defendant bank should return or pay is the value of the
Japanese military notes in relation to the peso in Philippine
Currency obtaining on the date when and
683
VOL. 15, DECEMBER 31, 1965 683
at the place where the obligation was incurred unless the parties
had agreed otherwise. (Hilado vs. De la Costa L150 April 30.
1049, 46 Off. Gaz. 5472.)

Negros Occidental Querubin, J.
Solicitor General for plaintiffappellee.
Isabelo P. Samson for defendantappellant.
ZALDIVAR, J.:
In the year 1943 appellant Jose Grijaldo obtained five loans

from the branch office of the Bank of Taiwan, Ltd. in
Bacolod City, in the total sum of P1,281.97 with interest at
the rate of 6% per annum, compounded quarterly. These
loans are evidenced by five promissory noteexecuted by the
appellant in favor of the Bank of Taiwan, Ltd., as follows:
On June 1, 1943, P600.00 on June 3, 1948, P159.11 on
June 18, 1943. P22.86 on August 9, 1943, P300.00 on
August 13, 1943, P200.00, all notes without due dates, but
because the loans were crop loans it was considered that
'the loans were due one year after they were incurred. To
secure the payment of the loans the appellant executed a
chattel mortgage on the standing crops on his land, Lot No.
1494 known as Hacienda Campugas in Hinigaran. Negros
Occidental.
By virtue of Vesting Order No. P4, dated January 21,
1946, and under the authority provided for in the Trading
with the Enemy Act, as amended, the assets in the
Philippines of the Bank of Taiwan, Ltd. were vested in the
Government of the United States. Pursuant to the
Philippine Property Act of 1946 of the United States, these
assets, including the loans in question, were subsequently
transferred to the Republic of the Philippines by the
Government of the United States under Transfer
Agreement dated July 20, 1954. These assets were among
the properties that were placed under the administration of
the Board of Liquidators created under Executive Order
No. 372, dated November 24, 1950, and in accordance with
Republic Acts Nos. 8 and 477 and other pertinent laws.
684

On September 29, 1954 the appellee, Republic of the

Philippines, represented by the Chairman of the Board of
Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The
record shows that the appellant had actually received the
written demand for payment, but he failed to pay..
The aggregate amount due as principal of the five loans
in question, computed under the Ballantyne scale of values
as of the time that the loans were incurred in 1943, was
P889.64 and the interest due thereon at the rate of 6% per
annum compounded quarterly, computed as of December
31, 1959. was P 1,457.39 so that the total account as of
December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in
the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account
in question. The Justice of the Peace of Hinigaran, after
hearing, dismissed the case on the ground that the action
had prescribed. The appellee appealed to the Court of First
Instance of Negros Occidental and on March 26, 1982 the
court a quo rendered a decision ordering the appellant to
pay the appellee the sum of P2,377.23 as of December 31,
1959, plus interest at the rate of 6% per annum
compounded quarterly from the date of the filing of the
complaint until full payment was made. The appellant was
also ordered to pay the sum equivalent to 10% of the
amount due as attorney's fees and the costs.
The appellant appealed directly to this Court. During
the pendency of this appeal the appellant Jose Grijaldo
died. Upon motion by the Solicitor General this Court, in a
resolution of May 13, 1963, required Manuel Lagtapon,
Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar,
who are the legal heirs of Jose Grijaldo, to appear and be
substituted as appellants in accordance with Section 17 of
Rule 3 of the Rules of Court.
In the present appeal the appellant contends: (1) that
the appellee has no cause of action against the appellant
(2) that if the appellee has a cause of action at all, that
action had prescribed and (3) that the lower court erred in
ordering the appellant to pay the amount of P2,377.23.
685
VOL. 15, DECEMBER 31, 1965 685

In discussing the first point of contention, the appellant

maintains that the appellee has no privity of contract with
the appellant. It is claimed that the transaction involved in
this case was a private transaction between the Taiwan
Bank, Ltd, and the appellant, so that the appellee,
Republic of the Philippines, could not legally bring action
against the appellant for the enforcement of the obligation
involved in said transaction. This contention has no merit,
It is true that the Bank of Taiwan, Ltd. was the original
creditor and the transaction between the appellant and the
Bank of Taiwan was a private contract of loan. However,
pursuant to the Trading with the Enemy Act, as amended,
and Executive Order No. 9095 of the United States and
under Vesting Order No. P4, dated January 21, 1946, the
properties of the Bank of Taiwan, Ltd., an entity which was
declared to be under the jurisdiction of the enemy country
(Japan), were vested in the United States Government,
Pursuant, further, to the Philippine Property Act of 1946
and Transfer Agreements dated July 20, 1954 and June 15,
1957, between the United States Government and the
Republic of the Philippines, the assets of the Bank of
Taiwan, Ltd, were transferred to and vested in the
Republic of the Philippines. The successive transfer of the
rights over the loans in question from the Bank of Taiwan,
Ltd. to the United States Government, and from the United
States Government to the government of the Republic of
the Philippines, made the Republic of the Philippines the
successor of the rights, title and interest in said loans,
thereby creating a privity of contract between the appellee
and the appellant. In defining the word "privy" this Court,
in a case, said:
"The word 'privy' denotes the idea of succession x x x hence an

assignee of a credit, and one subrogated to it, etc. will be privies
in short, he who by succession is placed in the position of one of
those who contracted the judicial relation and executed the
private document and appears to be substituting him in the
personal rights and obligation is a privy" (Alpuerto vs. Perez, 38
Phil. 785, 790).
The United States of America acting as a belligerent

sovereign power seized the assets of the Bank of Taiwan,
Ltd, which belonged to an enemy country, The confisca
686

tion of the assets of the Bank of Taiwan, Ltd being an

involuntary act of war, and sanctioned by international
law, the United States succeeded to the rights and
interests of said Bank of Taiwan, Ltd, over the assets of
said bank. As successor in interest in, and transferee of,
the property rights of the United States of America over
the loans in question, the Republic of the Philippines had
thereby become a privy to the original contracts of loan
between the Bank of Taiwan, Ltd. and the appellant. It
follows, therefore, that the Republic of the Philippines has
a legal right to bring the present action against the
appellant Jose Grijaldo.
The appellant likewise maintains, in support 01 his
contention that the appellee has no cause of action, that
because the loans were secured by a chattel mortgage on
the standing crops 011 a land owned by him and these
crops were lost or destroyed through enemy action his
obligation to pay the loans was thereby extinguished. This
argument is untenable. The terms of the promissory notes
and the chattel mortgage that the appellant executed in
favor of the Bank of Taiwan, Ltd. do not support the claim
of appellant. The obligation of the appellant under the five
promissory notes was not to deliver a determinate thing
namely, the crops to be harvested from his land, or the
value of the crops that would be harvested from his land,
Rather, his obligation was to pay a generic thingthe
amount of money representing the total sum of the five
loans, with interest. The transaction between the appellant
and the Bank of Taiwan, Ltd. was a series of five contracts
of simple loan of sums of money. "By a contract of (simple)
loan, one of the parties delivers to another x x x money or
other consumable thing upon the condition that the same
amount of the same kind and quality shall be paid,"
(Article 1933, CiviI Code) The obligation of the appellant
under the five promissory notes evidencing the loans in
questions is to pay the value thereof that is, to deliver a
sum of moneya clear case of an obligation to deliver a
generic thing. Article 1263 of the Civil Code provides:
687
VOL. 15, DECEMBER 31, 1965 687

"In an obligation to deliver a generic thing, the loss or destruction

of anything of the same kind does not extinguish the obligation,"
The chattel mortgage 011 the crops growing on appellant's

land simply stood as a security for the f ulfillment of
appellant's obligation covered by the five promissory notes,
and the loss of the crops did not extinguish his obligation to
pay, because the account could still be paid from other
sources aside from the mortgaged crops.
In his second point of contention, the appellant
maintains that the action of the appellee had prescribed.
The appellant points out that the loans became due on
June 1, 1944 and when the complaint was filed on January
17, 1961 a period of more than 16 years had already
elapsedfar beyond the period of ten years when an action
based on a written contract should be brought to court.
This contention of the appellant has no merit. Firstly, it
should be considered that the complaint in the present case
was brought by the Republic of the Philippines not as a
nominal party but in the exercise of its sovereign functions,
to protect the interests of the State over a public property.
Under paragraph 4 of Article 1108 of the Civil Code
prescription, both acquisitive and extinctive, does not run
against the State. This Court has held that the statute of
limitations does not run against the right of action of the
Government of the Philippines (Government of the
Philippine Islands vs. Monte de Piedad, etc., 35 Phil. 738
751). Secondly, the running of the period of prescription of
the action to collect the loan from the appellant was
interrupted by the moratorium laws (Executive Orders No.
25, dated November 18, 1944 Executive Order No. 32,
dated March 10, 1945 and Republic Act No. 342, approved
on July 26, 1948). The loan in question, as evidenced by the
five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the
Philippines, This case is squarely covered by Executive
Order No. 25, which became effective on November 18,
1944, providing for the suspension of payments of debts
incurred after December 31, 1941. The period of
prescription was, therefore, suspended beginning
November 18, 1944. This Court, in the case of Rutter vs.
Esteban
688

(L3708, May 18, 1953, 93 Phil. 68), declared on May 18,

1953 that the Moratorium Laws, R.A. No. 342 and
Executive Orders Nos, 25 and 32, are unconstitutional but
in that case this Court ruled that the moratorium laws had
suspended the prescriptive period until May 18, 1953. This
ruling was categorically reiterated in the decision in the
case of Manila Motors vs. Flores, L9396, August 16, 1956.
It follows, therefore, that the prescriptive period in the case
now before Us was suspended from November 18, 1944,
when Executive Order No. 25 took effect, until May 18,
1953 when R.A. 342 along with Executive Orders Nos. 25
and 32 were declared unconstitutional by this Court.
Computed accordingly, the prescriptive period was
suspended for 8 years and 6 months, By the appellant's
own admission, the cause of action 011 the five promissory
notes in question arose on June 1, 1944. The complaint in
the present case was filed on January 17, 1961, or after a
period of 16 years, 6 months and 16 days when the cause of
action arose. If the prescriptive period was not interrupted
by the moratorium laws, the action would have prescribed
already but, as We have stated, the prescriptive period
was suspended by the moratorium laws for a period of 8
years and 6 months. If we deduct the period of suspension
(8 years and 6 months) from the period that elapsed from
the time the cause of action arose to the time when the
complaint was filed (16 years, 6 months and 16 days) there
remains a period of 8 years and 16 days, In other words,
the prescriptive period ran for only 8 years and 16 days,
There still remained a period of one year, 11 months and 14
days of the prescriptive period when the complaint was
filed.
In his third point of contention the appellant maintains
that the lower court erred in ordering him to pay the
amount of P2,377.23. It is claimed by the appellant that it
was error 011 the part of the lower court to apply the
Ballantyne Scale of values in evaluating the Japanese war
notes as of June 1943 when the loans were incurred,
because what should be done is to evaluate the loans on the
basis of the Ballantyne Scale as of the time the loans
became due, and that was in June 1944. This contention of
the appellant is also without merit.
689
VOL. 15, DECEMBER 31, 1965 689

The decision of the court a quo ordered the appellant to pay

the sum of P2,377.23 as of December 31, 1959, plus interest
at the rate of 6% per annum compounded quarterly from
the date of the filing of the complaint. The sum total of the
five loans obtained by the appellant from the Bank of
Taiwan, Ltd. was P1 ,281.97 in Japanese war notes.
Computed under the Ballantyne Scale of values as of June
1943, this sum of P1 ,281.97 in Japanese war notes in June
1943 is equivalent to P889.64 in genuine Philippine
currency. It is this amount of P889.64 in genuine
Philippine currency which was considered the aggregate
amount due as principal of the five loans, ,and the amount
of P2,377.23. as of December 31, 1959 was arrived at after
computing the interest on the principal sum of P889.64
compounded quarterly from the time the obligations were
incurred in 1943.
It is the stand of the appellee that the Ballantyne scale
of values should be applied as of the time the obligation
was incurred, and that was in June 1943. This stand of the
appellee was upheld by the lower court and the decision of
the lower court is supported by the ruling of this Court in
the case of Hilado vs. De la Costa (G.R. No. L150, April 30.
1949:46 O.G. 5472), which states:
"x x x Contracts stipulating for payments presumably in Japanese

war notes may be enforced in our Courts after the liberation to
the extent of the just obligation of the contracting parties and, as
said notes have become worthless, in order that justice may be
done and the party entitled to be paid can recover their actual
value in Philippine Currency, what the debtor or defendant bank
should return or pay is the value of the Japanese military notes in
relation to the peso in Philippine Currency obtaining on the date
when and at the place. where the obligation was incurred unless
the parties had agreed otherwise. x x x." (italics supplied)
IN VIEW OF THE FOREGOING, the decision appealed

from is affirmed, with costs against the appellant
Inasmuch as the appellant Jose Grijaldo died during the
pendency of this appeal, his estate must answer in the
execution of the judgment in the present case.
690

Manaloto vs. Santos
Bengzon, C.J., Concepcion, Barrera, Regala,

Bautista Angelo, Reyes, J.B.L., Dizon, Makalintal and
Bengzon. J.P., JJ., concur.
Decision affirmed.
________________
G.R. No. 183360. September 8, 2014.*

ROLANDO C. DE LA PAZ,** petitioner, vs. L & J
DEVELOPMENT COMPANY, INC., respondent.
Civil Law Interest Rates Jurisprudence holds that for

interest to be due and payable, two conditions must concur: a)
express stipulation for the payment of interest and b) the
agreement to pay interest is reduced in writing.Under Article
1956 of the Civil Code, no interest shall be due unless it has been
expressly stipulated in writing. Jurisprudence on the matter also
holds that for interest to be due and payable, two conditions must
concur: a) express stipulation for the payment of interest and b)
the agreement to pay interest is reduced in writing.
Same Same Usury Law At present, usury has been legally
nonexistent in view of the suspension of the Usury Law by Central
Bank Circular No. 905 S. 1982. Even so, not all interest rates
levied upon loans are permitted by the courts as they have the
power to equitably reduce unreasonable interest rates.Indeed at
present, usury has been legally nonexistent in view of the
suspension of the Usury Law by Central Bank Circular No. 905 S.
1982. Even so, not all interest rates levied upon loans are
permitted by the courts as they have the power to equitably
reduce unreasonable interest rates. In Trade & Investment
Development Corporation of the Philippines v. Roblett Industrial
Construction Corporation, 490 SCRA 1 (2006), we said: While the
Court recognizes the right of the parties to enter into contracts
and who are expected to comply with their terms and obligations,
this rule is not absolute. Stipulated interest rates are illegal if
they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to
determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous
and unconscionable in one case, may be just in another.
_______________
* SECOND DIVISION.
* * Also spelled as Dela Paz in some parts of the records.
365
VOL. 734, SEPTEMBER 8, 2014

http://central.com.ph/sfsreader/session/0000015cd9db9cebb240b209003600fb002c009e/t/?o=False 365 1/15
VOL. 734, SEPTEMBER 8, 2014 365
De la Paz vs. L ###amp### J Development Company, Inc.
Same Same Time and again, it has been ruled in a plethora

of cases that stipulated interest rates of 3% per month and higher,
are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against
the law.Time and again, it has been ruled in a plethora of cases
that stipulated interest rates of 3% per month and higher, are
excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against
the law. The Court, however, stresses that these rates shall be
invalidated and shall be reduced only in cases where the terms of
the loans are openended, and where the interest rates are
applied for an indefinite period. Hence, the imposition of a specific
sum of P40,000.00 a month for six months on a P1,000,000.00
loan is not considered unconscionable. In the case at bench, there
is no specified period as to the payment of the loan. Hence,
levying 6% monthly or 72% interest per annum is definitely
outrageous and inordinate.
Same Same Central Bank Circular No. 799 Pursuant to
Central Bank Circular No. 799 S. 2013 which took effect on July 1,
2013, the interest imposed by the Court of Appeals (CA) must be
accordingly modified. The P226,000.00 which Rolando is ordered
to pay L&J shall earn an interest of 6% per annum from the
finality of this Decision.Pursuant to Central Bank Circular No.
799 S. 2013 which took effect on July 1, 2013, the interest
imposed by the CA must be accordingly modified. The
P226,000.00 which Rolando is ordered to pay L&J shall earn an
interest of 6% per annum from the finality of this Decision.

Cabeza & Partners Law Offices for petitioner.
Salonga, Hernandez & Mendoza for respondent.
366

DEL CASTILLO, J.:

No interest shall be due unless it has been expressly
stipulated in writing.1
This is a Petition for Review on Certiorari2

http://central.com.ph/sfsreader/session/0000015cd9db9cebb240b209003600fb002c009e/t/?o=False assailing the 2/15
This is a Petition for Review on Certiorari2 assailing the

February 27, 2008 Decision3 of the Court of Appeals (CA)
in C.A.G.R. S.P. No. 100094, which reversed and set aside
the Decision4 dated April 19, 2007 of the Regional Trial
Court (RTC), Branch 192, Marikina City in Civil Case No.
061145MK. The said RTC Decision affirmed in all
respects the Decision5 dated June 30, 2006 of the
Metropolitan Trial Court (MeTC), Branch 75, Marikina
City in Civil Case No.
057755, which ordered respondent L & J Development
Company (L&J) to pay petitioner Architect Rolando C. De
La Paz (Rolando) its principal obligation of P350,000.00,
plus 12% interest per annum reckoned from the filing of
the Complaint until full payment of the obligation.
Likewise assailed is the CAs June 6, 2008 Resolution6
which denied Rolandos Motion for Reconsideration.
Factual Antecedents
On December 27, 2000, Rolando lent P350,000.00
without any security to L&J, a property developer with
Atty. Esteban Salonga (Atty. Salonga) as its President and
General Manager. The loan, with no specified maturity
date, carried a 6% monthly interest, i.e., P21,000.00. From
December 2000 to
_______________
1 Civil Code, Article 1956.

2 Rollo, pp. 1018.
3 CA Rollo, pp. 8289 penned by Associate Justice Lucas P. Bersamin
(now a member of this Court) and concurred in by Associate Justices
Portia AlioHormachuelos and Estela M. PerlasBernabe (now also a
member of this Court).
4 Id., at pp. 1826 penned by Judge Geraldine C. FielMacaraig.
5 Id., at pp. 3943 penned by Judge Alex E. Ruiz.
6 Id., at p. 106.
367
VOL. 734, SEPTEMBER 8, 2014 367

August 2003, L&J paid Rolando a total of P576,000.007

representing interest charges.
As L&J failed to pay despite repeated demands, Rolando
filed a Complaint8 for Collection of Sum of Money with
Damages against L&J and Atty. Salonga in his personal
capacity
http://central.com.ph/sfsreader/session/0000015cd9db9cebb240b209003600fb002c009e/t/?o=False 3/15
_______________
7 Id., at pp. 4546. A total of 30 payments, L & J paid the following:

Date Check No. Amount
12/27/2000 SB 302190 P21,000.00
1/29/2001 MBTC 435175 21,000.00
3/01/2001 SB 302232 21,000.00
4/30/2001 SB 302296 21,000.00
5/29/2001 SB 302341 21,000.00
6/30/2001 SB 302369 21,000.00
7/30/2001 MBTC 3160280305 21,000.00
8/29/2001 MBTC 3160280332 21,000.00
9/27/2001 MBTC 3160280349 21,000.00
10/29/2001 MBTC 3160280387 21,000.00
11/29/2001 MBTC 3160280421 21,000.00
12/18/2001 MBTC 3160280430 21,000.00
1/29/2002 MBTC 3160280474 21,000.00
2/28/2002 MBTC 3160280501 21,000.00
3/25/2002 MBTC 3160280517 21,000.00
4/29/2002 MBTC 3160280552 21,000.00
5/31/2002 MBTC 3160280588 21,000.00
7/02/2002 MBTC 3160280600 21,000.00
8/06/2002 MBTC 3160280627 21,000.00
8/29/2002 MBTC 3160280648 21,000.00
10/02/2002 MBTC 3160280666 21,000.00
11/12/2002 MBTC 3160280683 21,000.00
1/06/03 21,000.00
1/31/03 21,000.00
3/06/2003 ATB 435323 21,000.00
4/15/2003 16,000.00
5/14/2003 5,000.00
7/04/2003 MBTC 435345 5,000.00
8/04/2003 10,000.00
8/14/2003 15,000.00
Total P576,000.00
8 Id., at pp. 2834.
368

before the MeTC, docketed as Civil Case No. 057755.

Rolando alleged, among others, that L&Js debt as of
January 2005, inclusive of the monthly interest, stood at
P772,000.00 that the 6% monthly interest was upon Atty.
Salongas suggestion and, that the latter tricked him into
parting with his money without the loan transaction being

reduced into writing.
In their Answer,9 L&J and Atty. Salonga denied
Rolandos allegations. While they acknowledged the loan as
a corporate debt, they claimed that the failure to pay the
same was due to a fortuitous event, that is, the financial
difficulties brought about by the economic crisis. They
further argued that Rolando cannot enforce the 6%
monthly interest for being unconscionable and shocking to
the morals. Hence, the payments already made should be
applied to the P350,000.00 principal loan.
During trial, Rolando testified that he had no
communication with Atty. Salonga prior to the loan
transaction but knew him as a lawyer, a son of a former
Senator, and the owner of L&J which developed Brentwood
Subdivision in Antipolo where his associate Nilo Velasco
(Nilo) lives. When Nilo told him that Atty. Salonga and
L&J needed money to finish their projects, he agreed to
lend them money. He personally met with Atty. Salonga
and their meeting was cordial.
He narrated that when L&J was in the process of
borrowing the P350,000.00 from him, it was Arlene San
Juan (Arlene), the secretary/treasurer of L&J, who
negotiated the terms and conditions thereof. She said that
the money was to finance L&Js housing project. Rolando
claimed that it was not he who demanded for the 6%
monthly interest. It was L&J and Atty. Salonga, through
Arlene, who insisted on paying the said interest as they
asserted that the loan was only a shortterm one.
_______________
9 Id., at pp. 3538.
369
VOL. 734, SEPTEMBER 8, 2014 369

Ruling of the Metropolitan Trial Court

The MeTC, in its Decision10 of June 30, 2006, upheld the
6% monthly interest. In so ruling, it ratiocinated that since
L&J agreed thereto and voluntarily paid the interest at
such rate from 2000 to 2003, it is already estopped from
impugning the same. Nonetheless, for reasons of equity,
the said court reduced the interest rate to 12% per annum
on the remaining principal obligation of P350,000.00. With
regard to Rolandos prayer for moral damages, the MeTC
denied the same as it found no malice or bad faith on the

part of L&J in not paying the obligation. It likewise
relieved Atty. Salonga of any liability as it found that he
merely acted in his official capacity in obtaining the loan.
The MeTC disposed of the case as follows:

rendered in favor of the plaintiff, Arch. Rolando C. Dela Paz, and
against the defendant, L & J Development Co., Inc., as follows:
a) ordering the defendant L & J Development Co., Inc. to pay
plaintiff the amount of Three Hundred Fifty Thousand Pesos
(P350,000.00) representing the principal obligation, plus interest
at the legal rate of 12% per annum to be computed from January
20, 2005, the date of the filing of the complaint, until the whole
obligation is fully paid
b) ordering the defendant L & J Development Co., Inc. to pay
plaintiff the amount of Five Thousand Pesos (P5,000.00) as and
for attorneys fees and
c) to pay the costs of this suit.
SO ORDERED.11
_______________
10 Id., at pp. 3943.

11 Id., at p. 43.
370

Ruling of the Regional Trial Court

L&J appealed to the RTC. It asserted in its appeal
memorandum12 that from December 2000 to March 2003, it
paid monthly interest of P21,000.00 based on the agreed
upon interest rate of 6% monthly and from April 2003 to
August 2003, interest payments in various amounts.13 The
total of interest payments made amounts to P576,000.00
an amount which is even more than the principal
obligation of P350,000.00
L&J insisted that the 6% monthly interest rate is
unconscionable and immoral. Hence, the 12% per annum
legal interest should have been applied from the time of the
constitution of the obligation. At 12% per annum interest
rate, it asserted that the amount of interest it ought to pay
from December 2000 to March 2003 and from April 2003 to
August 2003, only amounts to P105,000.00. If this amount
is deducted from the total interest payments already made,
which is P576,000.00, the amount of P471,000.00 appears

to have been paid over and above what is due. Applying the
rule on compensation, the principal loan of P350,000.00
should be setoff against the P471,000.00, resulting in the
complete payment of the principal loan.
Unconvinced, the RTC, in its April 19, 2007 Decision,14
affirmed the MeTC Decision, viz.:
WHEREFORE, premises considered, the Decision appealed

from is hereby AFFIRMED in all respects, with costs against the
appellant.
SO ORDERED.15
_______________
12 Id., at pp. 4453.

13 Supra note 7.
14 CA Rollo, pp. 1826.
15 Id., at p. 26.
371
VOL. 734, SEPTEMBER 8, 2014 371

Ruling of the Court of Appeals

Undaunted, L&J went to the CA and echoed its
arguments and proposed computation as proffered before
the RTC.
In a Decision16 dated February 27, 2008, the CA
reversed and set aside the RTC Decision.
The CA stressed that the parties failed to stipulate in
writing the imposition of interest on the loan. Hence, no
interest shall be due thereon pursuant to Article 1956 of
the Civil Code.17 And even if payment of interest has been
stipulated in writing, the 6% monthly interest is still
outrightly illegal and unconscionable because it is contrary
to morals, if not against the law. Being void, this cannot be
ratified and may be set up by the debtor as defense. For
these reasons, Rolando cannot collect any interest even if
L&J offered to pay interest. Consequently, he has to return
all the interest payments of P576,000.00 to L&J.
Considering further that Rolando and L&J thereby
became creditor and debtor of each other, the CA applied
the principle of legal compensation under Article 1279 of
the Civil Code.18
_______________
16 Id., at pp. 8289.

17 Article 1956. No interest shall be due unless it has been expressly
stipulated in writing.
18 Article 1279. In order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated
(3) That the two debts be due
(4) That they be liquidated and demandable
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
372

Accordingly, it set off the principal loan of P350,000.00

against the P576,000.00 total interest payments made,
leaving an excess of P226,000.00, which the CA ordered
Rolando to pay L&J plus interest. Thus:
WHEREFORE, the DECISION DATED APRIL 19, 2007 is

REVERSED and SET ASIDE.
CONSEQUENT TO THE FOREGOING, respondent Rolando
C. Dela Paz is ordered to pay to the petitioner the amount of
P226,000.00, plus interest of 12% per annum from the finality of
this decision.
Costs of suit to be paid by respondent Dela Paz.
SO ORDERED.19
In his Motion for Reconsideration,20 Rolando argued

that the circumstances exempt both the application of
Article 1956 and of jurisprudence holding that a 6%
monthly interest is unconscionable, unreasonable, and
exorbitant. He alleged that Atty. Salonga, a lawyer, should
have taken it upon himself to have the loan and the
stipulated rate of interest documented but, by way of legal
maneuver, Atty. Salonga, whom he fully trusted and relied
upon, tricked him into believing that the undocumented
and uncollateralized loan was within legal bounds. Had
Atty. Salonga told him that the stipulated interest should
be in writing, he would have readily assented.
Furthermore, Rolando insisted that the 6% monthly
interest rate could not be unconscionable as in the first
place, the interest was not imposed by the creditor but was
in fact offered by the borrower, who also dictated all the
terms of the loan. He stressed that in cases where interest
rates were declared unconscionable, those meant to be
protected by such declaration are helpless borrowers which
is not the case here.
_______________
19 CA Rollo, p. 88.
20 Id., at pp. 9399.
373
VOL. 734, SEPTEMBER 8, 2014 373

Still, the CA denied Rolandos motion in its Resolution21

of June 6, 2008.
Hence, this Petition.
The Parties Arguments
Rolando argues that the 6% monthly interest rate
should not have been invalidated because Atty. Salonga
took advantage of his legal knowledge to hoodwink him
into believing that no document was necessary to reflect
the interest rate. Moreover, the cases anent unconscionable
interest rates that the CA relied upon involve lenders who
imposed the excessive rates, which are totally different
from the case at bench where it is the borrower who
decided on the high interest rate. This case does not fall
under a scenario that enslaves the borrower or that leads
to the hemorrhaging of his assets that the courts seek to
prevent.
L&J, in controverting Rolandos arguments, contends
that the interest rate is subject of negotiation and is agreed
upon by both parties, not by the borrower alone.
Furthermore, jurisprudence has nullified interest rates on
loans of 3% per month and higher as these rates are
contrary to morals and public interest. And while Rolando
raises bad faith on Atty. Salongas part, L&J avers that
such issue is a question of fact, a matter that cannot be
raised under Rule 45.
Issue
The Courts determination of whether to uphold the
judgment of the CA that the principal loan is deemed paid
is dependent on the validity of the monthly interest rate
imposed. And in determining such validity, the Court must
necessarily delve into matters regarding a) the form of the
agreement of interest under the law and b) the alleged

unconscionability of the interest rate.
_______________
21 Id., at p. 106.
374

Our Ruling
The Petition is devoid of merit.
The lack of a written stipulation
to pay interest on the loaned amount
disallows a creditor from charging
monetary interest.
Under Article 1956 of the Civil Code, no interest shall be
due unless it has been expressly stipulated in writing.
Jurisprudence on the matter also holds that for interest to
be due and payable, two conditions must concur: a) express
stipulation for the payment of interest and b) the
agreement to pay interest is reduced in writing.
Here, it is undisputed that the parties did not put down
in writing their agreement. Thus, no interest is due. The
collection of interest without any stipulation in writing is
prohibited by law.22
But Rolando asserts that his situation deserves an
exception to the application of Article 1956. He blames
Atty. Salonga for the lack of a written document, claiming
that said lawyer used his legal knowledge to dupe him.
Rolando thus imputes bad faith on the part of L&J and
Atty. Salonga. The Court, however, finds no deception on
the part of L&J and Atty. Salonga. For one, despite the
lack of a document stipulating the payment of interest,
L&J nevertheless devotedly paid interests on the loan. It
only stopped when it suffered from financial difficulties
that prevented it from continuously paying the 6% monthly
rate. For another, regardless of Atty. Salongas profession,
Rolando who is an architect and an educated man himself
could have been a more reasonably prudent person under
the circumstances. To top it all, he
_______________
22 Sigaan v. Villanueva, 596 Phil. 760, 769 576 SCRA 696, 704705
(2009).
375
VOL. 734, SEPTEMBER 8, 2014 375

admitted that he had no prior communication with Atty.

Salonga. Despite Atty. Salonga being a complete stranger,
he immediately trusted him and lent his company
P350,000.00, a significant amount. Moreover, as the
creditor, he could have requested or required that all the
terms and conditions of the loan agreement, which include
the payment of interest, be put down in writing to ensure
that he and L&J are on the same page. Rolando had a
choice of not acceding and to insist that their contract be
put in written form as this will favor and safeguard him as
a lender. Unfortunately, he did not. It must be stressed
that [c]ourts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unwise
investments, relieve him from onesided contracts, or annul
the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally
incompetent.23
It may be raised that L&J is estopped from questioning
the interest rate considering that it has been paying
Rolando interest at such rate for more than two and a half
years. In fact, in its pleadings before the MeTC and the
RTC, L&J merely prayed for the reduction of interest from
6% monthly to 1% monthly or 12% per annum. However, in
Ching v. Nicdao,24 the daily payments of the debtor to the
lender were considered as payment of the principal amount
of the loan because Article 1956 was not complied with.
This was notwithstanding the debtors admission that the
payments made were for the interests due. The Court
categorically stated therein that [e]stoppel cannot give
validity to an act that is prohibited by law or one that is
against public policy.
_______________
23 Vales v. Villa, 35 Phil. 769, 788 (1916).

24 G.R. No. 141181, April 27, 2007, 522 SCRA 316, 361.
376

Even if the payment of interest has

been reduced in writing, a 6% monthly
interest rate on a loan is unconscionable,
regardless of who between the parties
proposed the rate.
Indeed at present, usury has been legally nonexistent in
view of the suspension of the Usury Law25 by Central Bank
Circular No. 905 S. 1982.26 Even so, not all interest rates
levied upon loans are permitted by the courts as they have
the power to equitably reduce unreasonable interest rates.
In Trade & Investment Development Corporation of the
Philippines v. Roblett Industrial Construction
27
Corporation, we said:
While the Court recognizes the right of the parties to enter into
contracts and who are expected to comply with their terms and
obligations, this rule is not absolute. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary. In exercising this vested
power to determine what is iniquitous and unconscionable, the
Court must consider the circumstances of each case. What may be
iniquitous and unconscionable in one case, may be just in another.
x x x28
Time and again, it has been ruled in a plethora of cases

that stipulated interest rates of 3% per month and higher,
are excessive, iniquitous, unconscionable and exorbitant.
Such
_______________
25 Act No. 2655 as amended by Presidential Decree 116.

26 Section 1 states: The rate of interest, including commissions,
premiums, fees and other charges, on a loan or forbearance of any money,
goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charged or collected by any person, whether
natural or juridical, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.
27 523 Phil. 360 490 SCRA 1 (2006).
28 Id., at p. 366 p. 6.
377
VOL. 734, SEPTEMBER 8, 2014 377

stipulations are void for being contrary to morals, if not

against the law.29 The Court, however, stresses that these
rates shall be invalidated and shall be reduced only in
cases where the terms of the loans are openended, and
where the interest rates are applied for an indefinite
period. Hence, the imposition of a specific sum of
P40,000.00 a month for six months on a P1,000,000.00 loan
is not considered unconscionable.30 In the case at bench,
there is no specified period as to the payment of the loan.
Hence, levying 6% monthly or 72% interest per annum is
definitely outrageous and inordinate.31
The situation that it was the debtor who insisted on the
interest rate will not exempt Rolando from a ruling that
the rate is void. As this Court cited in Asian Cathay
Finance and Leasing Corporation v. Gravador,32 [t]he
imposition of an unconscionable rate of interest on a money
debt, even if knowingly and voluntarily assumed, is
immoral and unjust. It is tantamount to a repugnant
spoliation and an iniquitous deprivation of property,
repulsive to the common sense of man.33 Indeed,
voluntariness does not make the stipulation on [an
unconscionable] interest valid.34
As exhaustibly discussed, no monetary interest is due
Rolando pursuant to Article 1956. The CA thus correctly
adjudged that the excess interest payments made by L&J
should be applied to its principal loan. As computed by the
CA, Ro
_______________
29 Macalinao v. Bank of the Philippine Islands, G.R. No. 175490,

September 17, 2009, 600 SCRA 67, 77, citing Chua v. Timan, G.R. No.
170452, August 13, 2008, 562 SCRA 146, 149150.
30 Prisma Construction & Development Corporation v. Menchavez,
G.R. No. 160545, March 9, 2010, 614 SCRA 590, 599.
31 Spouses Solangon v. Salazar, 412 Phil. 816, 823 360 SCRA 379,
385 (2001).
32 G.R. No. 186550, July 5, 2010, 623 SCRA 517.
33 Id., at p. 524.
34 Menchavez v. Bermudez, G.R. No. 185368, October 11, 2012, 684
SCRA 168, 178.
378

lando is bound to return the excess payment of P226,000.00

to L&J following the principle of solutio indebiti.35
However, pursuant to Central Bank Circular No. 799 S.
2013 which took effect on July 1, 2013,36 the interest
imposed by the CA must be accordingly modified. The
P226,000.00 which Rolando is ordered to pay L&J shall
earn an interest of 6% per annum from the finality of this
Decision.
WHEREFORE, the Decision dated February 27, 2008 of
the Court of Appeals in C.A.G.R. S.P. No. 100094 is hereby
AFFIRMED with MODIFICATION that petitioner
Rolando C. De La Paz is ordered to pay respondent L & J
Development Company the amount of P226,000.00, plus
interest of 6% per annum from the finality of this Decision
until fully paid.
SO ORDERED.
Carpio*** (Chairperson), Brion, Villarama, Jr.**** and

Leonen, JJ., concur.
Judgment affirmed with modification.
Notes.Stipulated interest rates are illegal if they are

unconscionable and courts are allowed to temper interest
rates when necessary. (RGM Industries, Inc. vs. United
Pacific Capital Corporation, 675 SCRA 400 [2012])
_______________
35 Civil Code, Article 2154. If something is received when there is no

right to demand it, and it was unduly delivered through mistake, the
obligation to return it arises.
36 Issued on June 21, 2013 It provides that the rate of interest for the
loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.
* **Designated Acting Chief Justice per Special Order No. 1770 dated
August 28, 2014.
* *** Designated acting member per Special Order No. 1767 dated
August 27, 2014.
379
VOL. 734, SEPTEMBER 8, 2014 379

Central Bank (CB) Circular No. 905 did not repeal nor
in anyway amend the Usury Law but simply suspended the
latters effectivity that a Central Bank (CB) Circular

cannot repeal a law, for only a law can repeal another law
that by virtue of CB Circular No. 905, the Usury Law has
been rendered ineffective and Usury Law has been legally
nonexistent in our jurisdiction. (Advocates for Truth in
Lending, Inc. vs. Bangko Sentral Monetary Board, 688
SCRA 530 [2013])
o0o
G.R. No. 189871. August 13, 2013.*
DARIO NACAR, petitioner, vs. GALLERY FRAMES and/or

FELIPE BORDEY, JR., respondents.
Labor Law Termination of Employment Illegal Dismissals

By the nature of an illegal dismissal case, the reliefs continue to
add up until full satisfaction, as expressed under Article 279 of the
Labor Code.No essential change is made by a recomputation as
this step is a necessary consequence that flows from the nature of
the illegality of dismissal declared by the Labor Arbiter in that
decision. A recomputation (or an original computation, if no
previous computation has been made) is a part of the law
specifically, Article 279 of the Labor Code and the established
jurisprudence on this provision that is read into the decision.
By the nature of an illegal dismissal case, the reliefs continue to
add up until full satisfaction, as expressed under Article 279 of
the Labor Code. The recomputation of
_______________
*EN BANC.
440
Nacar vs. Gallery Frames
the consequences of illegal dismissal upon execution of the

decision does not constitute an alteration or amendment of the
final decision being implemented. The illegal dismissal ruling
stands only the computation of monetary consequences of this
dismissal is affected, and this is not a violation of the principle of
immutability of final judgments.
Same Same Same Article 279 of the Labor Code provides for
the consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of when
separation pay in lieu of reinstatement is allowed.That the
amount respondents shall now pay has greatly increased is a
http://central.com.ph/sfsreader/session/0000015cd9dd438c5b5ecbee003600fb002c009e/t/?o=False 1/20
consequence that it cannot avoid as it is the risk that it ran when

it continued to seek recourses against the Labor Arbiters
decision. Article 279 provides for the consequences of illegal
dismissal in no uncertain terms, qualified only by jurisprudence
in its interpretation of when separation pay in lieu of
reinstatement is allowed. When that happens, the finality of the
illegal dismissal decision becomes the reckoning point instead of
the reinstatement that the law decrees. In allowing separation
pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to
be computed up to that point.
Interest Rates In the absence of an express stipulation as to
the rate of interest that would govern the parties, the rate of legal
interest for loans or forbearance of any money, goods or credits and
the rate allowed in judgments shall no longer be twelve percent
(12%) per annum as reflected in the case of Eastern Shipping
Lines vs. Court of Appeals, 234 SCRA 78 (1994), and Subsection
X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
NonBank Financial Institutions, before its amendment by BSP
MB Circular No. 799 but will now be six percent (6%) per
annum effective July 1, 2013.In the absence of an express
stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any
money, goods or credits and the rate allowed in judgments shall
no longer be twelve percent (12%) per annum as reflected in
the case of Eastern Shipping Lines, Inc. v. Court of Appeals, 234
SCRA 78 (1994) and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for NonBank Financial
Institutions, before its
441
VOL. 703, AUGUST 13, 2013 441
amendment by BSPMB Circular No. 799 but will now be six

percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively
and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come
July 1, 2013 the new rate of six percent (6%) per annum shall be
the prevailing rate of interest when applicable.
Same Monetary Board The Bangko Sentral ng Pilipinas
Monetary Board may prescribe the maximum rate or rates of
interest for all loans or renewals thereof or the forbearance of any

money, goods or credits, including those for loans of low priority
such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions.In
the recent case of Advocates for Truth in Lending, Inc. and
Eduardo B. Olaguer v. Bangko Sentral Monetary Board, 688
SCRA 530 (2013), this Court affirmed the authority of the BSP
MB to set interest rates and to issue and enforce Circulars when
it ruled that the BSPMB may prescribe the maximum rate or
rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for
loans of low priority such as consumer loans, as well as such loans
made by pawnshops, finance companies and similar credit
institutions. It even authorizes the BSPMB to prescribe different
maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial
intermediaries.
Same When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in
writing In the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall
be 6% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
442
Same When an obligation, not constituting a loan or

forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum.When an obligation, not constituting a
loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall
be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code), but
when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which time
the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
Same When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest, shall
be 6% per annum from such finality until its satisfaction.When
the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

Carlo A. Domingo for petitioner.
Cabio Law Office and Associates for respondent.
443
VOL. 703, AUGUST 13, 2013 443

PERALTA, J.:
This is a petition for review on certiorari assailing the
Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CAG.R. SP No. 98591, and the Resolution2 dated
October 9, 2009 denying petitioners motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive
dismissal before the Arbitration Branch of the National
Labor Relations Commission (NLRC) against respondents
Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as
NLRC NCR Case No. 010051997.
On October 15, 1998, the Labor Arbiter rendered a
Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause.
Thus, petitioner was awarded backwages and separation
pay in lieu of reinstatement in the amount of P158,919.92.

The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed

to discharge the burden of showing that complainant was
dismissed from employment for a just or valid cause. All the more,
it is clear from the records that complainant was never afforded
due process before he was terminated. As such, we are perforce
constrained to grant complainants prayer for the payments of
separation pay in lieu of reinstatement to his former position,
considering the strained relationship between the parties, and his
apparent reluctance to be reinstated, computed only up to
promulgation of this decision as follows:
_______________
1 Penned by Associate Justice Vicente S. E. Veloso, with Associate
Justices Rebecca De GuiaSalvador and Ricardo R. Rosario, concurring
Rollo, pp. 3348.
2Id., at p. 32.
3Id., at pp. 7984.
444

SEPARATION PAY
Date Hired = August 1990
Rate = P198/day
Date of Decision = Aug. 18, 1998
Length of Service = 8 yrs. & 1 month
P198.00 x 26 days x 8 months = P41,184.00
BACKWAGES
Date Dismissed = January 24, 1997
Rate per day = P196.00
Date of Decisions = Aug. 18, 1998
a) 1/24/97 to 2/5/98 = 12.36 mos.
P196.00/day x 12.36 mos. = P62,986.56
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = P62,986.00
P198.00 x 26 days x 6.4 mos. = P32,947.20
T O T A L = P95.933.76
xxxx
rendered finding respondents guilty of constructive dismissal and
are therefore, ordered:
1. To pay jointly and severally the complainant the amount of
sixtytwo thousand nine hundred eightysix pesos and
56/100 (P62,986.56) Pesos representing his separation pay

2. To pay jointly and severally the complainant the amount of
nine (sic) five thousand nine hundred thirtythree and
36/100 (P95,933.36) representing his backwages and
3. All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
_______________
4Id., at pp. 8284. (Emphasis supplied.)
445
VOL. 703, AUGUST 13, 2013 445

Respondents appealed to the NLRC, but it was

dismissed for lack of merit in the Resolution5 dated
February 29, 2000. Accordingly, the NLRC sustained the
decision of the Labor Arbiter. Respondents filed a motion
for reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on
Certiorari before the CA. On August 24, 2000, the CA
issued a Resolution dismissing the petition. Respondents
filed a Motion for Reconsideration, but it was likewise
denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme
Court, docketed as G.R. No. 151332. Finding no reversible
error on the part of the CA, this Court denied the petition
in the Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that
the resolution became final and executory on May 27,
2002.9 The case was, thereafter, referred back to the Labor
Arbiter. A preexecution conference was consequently
scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for
Correct Computation, praying that his backwages be
computed from the date of his dismissal on January 24,
1997 up to the finality of the Resolution of the Supreme
Court on May 27, 2002.11 Upon recomputation, the
Computation and Examination Unit of the NLRC arrived
at an updated amount in the sum of P471,320.31.12
_______________
5 Id., at pp. 8593.
6 Resolution dated July 24, 2000, id., at pp. 9496.
7 Rollo, p. 35.
8 Id., at pp. 3536.
9 Id., at p. 36.
10Id., at p. 100.
11Id.
12Id., at p. 101.
446

On December 2, 2002, a Writ of Execution13 was issued

by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of P471,320.31. Respondents
filed a Motion to Quash Writ of Execution, arguing, among
other things, that since the Labor Arbiter awarded
separation pay of P62,986.56 and limited backwages of
P95,933.36, no more recomputation is required to be made
of the said awards. They claimed that after the decision
becomes final and executory, the same cannot be altered or
amended anymore.14 On January 13, 2003, the Labor
Arbiter issued an Order15 denying the motion. Thus, an
Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on
June 30, 2003 issued a Resolution17 granting the appeal in
favor of the respondents and ordered the recomputation of
the judgment award.
On August 20, 2003, an Entry of Judgment was issued
declaring the Resolution of the NLRC to be final and
executory. Consequently, another preexecution conference
was held, but respondents failed to appear on time.
Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed
judgment award in the sum of P471,320.31.18
The records of the case were again forwarded to the
Computation and Examination Unit for recomputation,
where the judgment award of petitioner was reassessed to
be in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued
ordering respondents to pay him the original amount as de
_______________
13Id., at pp. 97102.
14Id., at p. 37.
15Id., at pp. 103108.
16Id., at pp. 109113.
17Id., at pp. 114117.
18Id., at p. 101.
447
VOL. 703, AUGUST 13, 2013 447

termined by the Labor Arbiter in his Decision dated

October 15, 1998, pending the final computation of his
backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias
Writ of Execution to satisfy the judgment award that was
due to petitioner in the amount of P147,560.19, which
petitioner eventually received.
Petitioner then filed a Manifestation and Motion
praying for the recomputation of the monetary award to
include the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20
granting the motion, but only up to the amount of
P11,459.73. The Labor Arbiter reasoned that it is the
October 15, 1998 Decision that should be enforced
considering that it was the one that became final and
executory. However, the Labor Arbiter reasoned that since
the decision states that the separation pay and backwages
are computed only up to the promulgation of the said
decision, it is the amount of P158,919.92 that should be
executed. Thus, since petitioner already received
P147,560.19, he is only entitled to the balance of
P11,459.73.
Petitioner then appealed before the NLRC,21 which
appeal was denied by the NLRC in its Resolution22 dated
September 27, 2006. Petitioner filed a Motion for
Reconsideration, but it was likewise denied in the
Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the
CA, docketed as CAG.R. SP No. 98591.
_______________
19Id., at p. 40.
20Id., at pp. 6569.
21Id., at pp. 7074.
22Id., at pp. 6064.
23Id., at pp. 5859.
448

On September 23, 2008, the CA rendered

http://central.com.ph/sfsreader/session/0000015cd9dd438c5b5ecbee003600fb002c009e/t/?o=False a Decision24 8/20
On September 23, 2008, the CA rendered a Decision24

denying the petition. The CA opined that since petitioner
no longer appealed the October 15, 1998 Decision of the
Labor Arbiter, which already became final and executory, a
belated correction thereof is no longer allowed. The CA
stated that there is nothing left to be done except to enforce
the said judgment. Consequently, it can no longer be
modified in any respect, except to correct clerical errors or
mistakes. Petitioner filed a Motion for Reconsideration, but
it was denied in the Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED, COMMITTED GRAVE ABUSE
OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE
NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998
DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO
AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
Petitioner argues that notwithstanding the fact that

there was a computation of backwages in the Labor
Arbiters decision, the same is not final until reinstatement
is made or until finality of the decision, in case of an award
of separation pay. Petitioner maintains that considering
that the October 15, 1998 decision of the Labor Arbiter did
not become final and executory until the April 17, 2002
Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the
reckoning point for the compu
_______________
24Id., at pp. 3348.
25Id., at p. 32.
26Id., at p. 27.
449
VOL. 703, AUGUST 13, 2013 449

tation of the backwages and separation pay should be on

May 27, 2002 and not when the decision of the Labor
Arbiter was rendered on October 15, 1998. Further,
petitioner posits that he is also entitled to the payment of

interest from the finality of the decision until full payment
by the respondents.
On their part, respondents assert that since only
separation pay and limited backwages were awarded to
petitioner by the October 15, 1998 decision of the Labor
Arbiter, no more recomputation is required to be made of
said awards. Respondents insist that since the decision
clearly stated that the separation pay and backwages are
computed only up to [the] promulgation of this decision,
and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of
P158,919.92. Respondents added that it was only during
the execution proceedings that the petitioner questioned
the award, long after the decision had become final and
executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner
at this point of the proceedings would substantially vary
the decision of the Labor Arbiter as it violates the rule on
immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session
Delights Ice Cream and Fast Foods v. Court of Appeals
(Sixth Division),27 wherein the issue submitted to the Court
for resolution was the propriety of the computation of the
awards made, and whether this violated the principle of
immutability of judgment. Like in the present case, it was
a distinct feature of the judgment of the Labor Arbiter in
the abovecited case that the decision already provided for
the computation of the payable separation pay and
backwages due and did not further order the computation
of the monetary awards up to the time of the finality of the
judgment. Also in Session Delights, the
_______________
27G.R. No. 172149, February 8, 2010, 612 SCRA 10.
450

dismissed employee failed to appeal the decision of the

labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re

computation in the course of execution of the labor arbiters
original computation of the awards made, pegged as of the

time the decision was rendered and confirmed with
modification by a final CA decision, is legally proper. The
question is posed, given that the petitioner did not
immediately pay the awards stated in the original labor
arbiters decision it delayed payment because it continued
with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final
decision in this case proceeds from the way the original
labor arbiter framed his decision. The decision consists
essentially of two parts.
The first is that part of the decision that cannot now be
disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards
of separation pay in lieu of reinstatement, backwages,
attorneys fees, and legal interests.
The second part is the computation of the awards made.
On its face, the computation the labor arbiter made shows
that it was timebound as can be seen from the figures used
in the computation. This part, being merely a computation
of what the first part of the decision established and
declared, can, by its nature, be recomputed. This is the
part, too, that the petitioner now posits should no longer be
recomputed because the computation is already in the
labor arbiters decision that the CA had affirmed. The public
and private respondents, on the other hand, posit that a re
computation is necessary because the relief in an illegal
dismissal decision goes all the way up to reinstatement if
reinstatement is to be made, or up to the finality of the
decision, if separation pay is to be given in lieu
reinstatement.
That the labor arbiters decision, at the same time that it
found that an illegal dismissal had taken place, also made a
computation of the award, is understandable
451
VOL. 703, AUGUST 13, 2013 451

in light of Section 3, Rule VIII of the then NLRC Rules of

Procedure which requires that a computation be made. This
Section in part states:
[T]he Labor Arbiter of origin, in cases involving
monetary awards and at all events, as far as
practicable, shall embody in any such decision or
order the detailed and full amount awarded.
Clearly implied from this original computation is its

currency up to the finality of the labor arbiters decision. As
we noted above, this implication is apparent from the terms
of the computation itself, and no question would have arisen
had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor
arbiters findings on all counts i.e., on the finding of
illegality as well as on all the consequent awards made.
Hence, the petitioner appealed the case to the NLRC which,
in turn, affirmed the labor arbiters decision. By law, the
NLRC decision is final, reviewable only by the CA on
jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC
decision on jurisdictional grounds through a timely filed
Rule 65 petition for certiorari. The CA decision, finding that
NLRC exceeded its authority in affirming the payment of
13th month pay and indemnity, lapsed to finality and was
subsequently returned to the labor arbiter of origin for
execution.
It was at this point that the present case arose. Focusing
on the core illegal dismissal portion of the original labor
arbiters decision, the implementing labor arbiter ordered
the award recomputed he apparently read the figures
originally ordered to be paid to be the computation due had
the case been terminated and implemented at the labor
arbiters level. Thus, the labor arbiter recomputed the
award to include the separation pay and the backwages due
up to the finality of the CA decision that fully terminated
the case on the merits. Unfortunately, the labor arbiters
approved computation went beyond the finality of the CA
decision (July 29, 2003) and
452

included as well the payment for awards the final CA

decision had deleted specifically, the proportionate 13th
month pay and the indemnity awards. Hence, the CA issued
the decision now questioned in the present petition.
We see no error in the CA decision confirming that a
recomputation is necessary as it essentially considered the
labor arbiters original decision in accordance with its basic
component parts as we discussed above. To reiterate, the
first part contains the finding of illegality and its monetary
consequences the second part is the computation of the
awards or monetary consequences of the illegal dismissal,

computed as of the time of the labor arbiters original
decision.28
Consequently, from the above disquisitions, under the

terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation
as this step is a necessary consequence that flows from the
nature of the illegality of dismissal declared by the Labor
Arbiter in that decision.29 A recomputation (or an original
computation, if no previous computation has been made) is
a part of the law specifically, Article 279 of the Labor
Code and the established jurisprudence on this provision
that is read into the decision. By the nature of an illegal
dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor
Code. The recomputation of the consequences of illegal
dismissal upon execution of the decision does not constitute
an alteration or amendment of the final decision being
implemented. The illegal dismissal ruling stands only the
computation of monetary consequences of this dismissal is
affected, and this is not a violation of the principle of
immutability of final judgments.30
_______________
28 Session Delights Ice Cream and Fast Foods v. Court of Appeals
(Sixth Division), supra, at pp. 2123.
29Id., at p. 25.
30Id., at pp. 2526.
453
VOL. 703, AUGUST 13, 2013 453

That the amount respondents shall now pay has greatly

increased is a consequence that it cannot avoid as it is the
risk that it ran when it continued to seek recourses against
the Labor Arbiters decision. Article 279 provides for the
consequences of illegal dismissal in no uncertain terms,
qualified only by jurisprudence in its interpretation of
when separation pay in lieu of reinstatement is allowed.
When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the
reinstatement that the law decrees. In allowing separation
pay, the final decision effectively declares that the
employment relationship ended so that separation pay and

backwages are to be computed up to that point.31
Finally, anent the payment of legal interest. In the
landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the
manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the

concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money, i.e., a loan
or forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil
Code.
_______________
31Id., at p. 26.
32G.R. No. 97412, July 12, 1994, 234 SCRA 78.
454

2. When an obligation, not constituting a loan or

forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand
can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to
run only from the date the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest

shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph
1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a
forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas

Monetary Board (BSPMB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 234 of
Circular No.
_______________
33Eastern Shipping Lines, Inc. v. Court of Appeals, supra, at pp. 9597.
(Citations omitted italics in the original).
34 SECTION 2. The rate of interest for the loan or forbearance of
any money, goods or credits and the rate allowed in judg
455
VOL. 703, AUGUST 13, 2013 455

905, Series of 1982 and, accordingly, issued Circular No.

799,35 Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16

May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan
contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:
Section 1. The rate of interest for the loan or
forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection
X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338
_______________
ments, in the absence of express contract as to such rate of interest, shall
continue to be twelve percent (12%) per annum.
35Rate of interest in the absence of stipulation Dated June 21, 2013.
36 X305.1 Rate of interest in the absence of stipulation. The rate of

interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of expressed contract as to such rate of
interest, shall be twelve percent (12%) per annum.
37 The Section is under Q Regulations or Regulations Governing NonBank
Financial Institutions Performing QuasiBanking Functions. It reads:
4305Q.1 (2008 4307Q.6) Rate of interest in the absence of stipulation.
The rate of interest for the loan or forbearance of any money, goods or credit and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve percent (12%) per annum.
38 The Section is under S Regulations or Regulations Governing NonStock
Savings and Loan Associations. It reads:
4305S.3 Interest in the absence of contract. In the absence of express
contract, the rate of interest for the loan or forbear
456

and 4303P.139 of the Manual of Regulations for Non

Bank Financial Institutions are hereby amended
accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express

stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of
any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per
annum as reflected in the case of Eastern Shipping
Lines40 and Subsection X305.1 of the Manual of
Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for NonBank
Financial Institutions, before its amendment by BSPMB
Circular No. 799 but will now be six percent (6%) per
annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the
twelve percent (12%) per annum legal interest shall apply
only until June 30, 2013. Come July 1, 2013 the new rate of
six percent (6%) per annum shall be the prevailing rate of
interest when applicable.
Corollarily, in the recent case of Advocates for Truth in
Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the
BSPMB to set interest rates and to issue and enforce
Circu
_______________
ance of any money, goods or credit and the rate allowed in judgment shall
be twelve percent (12%) per annum.
39 The Section is under P Regulations or Regulations Governing

Pawnshops. It reads:
4303P.1 Rate of interest in the absence of stipulation. The rate
of interest for a loan or forbearance of money in the absence of an
expressed contract as to such rate of interest, shall be twelve percent
(12%) per annum. (Circular No. 656 dated 02 June 2009)
40Supra note 32, at pp. 9597.
41G.R. No. 192986, January 15, 2013, 688 SCRA 530, 547.
457
VOL. 703, AUGUST 13, 2013 457

lars when it ruled that the BSPMB may prescribe the

maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer
loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even
authorizes the BSPMB to prescribe different maximum
rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial
intermediaries.
Nonetheless, with regard to those judgments that have
become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the
guidelines laid down in the case of Eastern Shipping
Lines42 are accordingly modified to embody BSPMB
Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasicontracts, delicts or quasidelicts is
breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on Damages of the Civil
Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists in

the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that
which may have been stipulated in writing.
the absence of stipulation, the rate of interest shall
_______________
42Supra note 32.
458

be 6% per annum to be computed from default, i.e.,

from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil
Code.
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages, except when or until the demand
can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to
run only from the date the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance
of credit.
And, in addition to the above, judgments that have
become final and executory prior to July 1, 2013, shall not
be disturbed and shall continue to be implemented

applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision
dated September 23, 2008 of the Court of Appeals in CA
G.R. SP
459
VOL. 703, AUGUST 13, 2013 459

No. 98591, and the Resolution dated October 9, 2009 are

REVERSED and SET ASIDE. Respondents are
ORDERED to PAY petitioner:
(1) backwages computed from the time petitioner was
illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No. 151332
became final and executory
(2) separation pay computed from August 1990 up to
May 27, 2002 at the rate of one month pay per year of
service and
(3) interest of twelve percent (12%) per annum of the
total monetary awards, computed from May 27, 2002 to
June 30, 2013 and six percent (6%) per annum from July 1,
2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make
another recomputation of the total monetary benefits
awarded and due to petitioner in accordance with this
Decision.
SO ORDERED.
Sereno (CJ.), Carpio, Velasco, Jr., LeonardoDe Castro,

Brion, Bersamin, Del Castillo, Abad, Villarama, Jr., Perez,
Mendoza, Reyes, PerlasBernabe and Leonen, JJ., concur.
Judgment and resolution reversed and set aside.
Notes.There is nothing in Republic Act No. 7653 or in

Republic Act No. 8791 which explicitly allows an appeal of
the decisions of the Bangko Sentral ng Pilipinas (BSP)
Monetary Board to the Court of Appeals. (United Coconut
Planters Bank vs. E. Ganzon, Inc., 591 SCRA 321 [2009])
Court is of the view that the Monetary Board approval is
not required for Philippine Deposit Insurance Corporation
(PDIC) to conduct an investigation on the Banks.
(Philippine Deposit Insurance Corporation [PDIC] vs.
Philippine Countryside Rural Bank, Inc., 640 SCRA 322
[2011])
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FIRST DIVISION t<:~c: -~~-----~-4 -----
TERESITA I. BUENAVENTURA, G.R. No. 167082

Petitioner,
Present:
SERENO, CJ,
LEONARDO-DE CASTRO,
- versus - BERSAMIN,
PERLAS-BERNABE, and
CAGUIOA, JJ
METROPOLITAN BANK AND Promulgated:

TRUST COMPANY,
Respondent. AU503 2016
x------------------------------------------------------------~--------------
DECISION
BERSAMIN, J.:
A duly executed contract is the law between the parties, and, as such,
commands them to comply fully and not selectively with its terms. A
contract of adhesion, of itself, does not exempt the parties from compliance
with what was mutually agreed upon by them.
The Case
In this appeal, the petitioner seeks the reversal of the decision

promulgated on April 23, 2004, 1 whereby the Court of Appeals (CA)
affirmed with modification the judgment2 rendered on July 11, 2002 by the
Regional Trial Court (RTC), Branch 61, in Makati City. Also being appealed
is the resolution3 promulgated on February 9, 2005, whereby the CA denied
her motion for reconsideration.
Rollo, pp. 174-182; penned by Associate Justice Edgardo P. Cruz (retired), with the concurrence of
Associate Justice Delilah Vidallon-Magtolis (retired) and Associate Justice Noel G. Tijam.
2
CA rollo, pp. 62-69; penned by Judge Marissa Macaraig-Guillen
Rollo, p. I 93.
~
Decision 2 G.R. No. 167082
Antecedents
The following factual and procedural antecedents are narrated by the

,'\...
~:cA irl its assailed decision, to wit:
On January 20, 1997 and April 17, 1997, Teresita Buenaventura

(or "appellant") executed Promissory Note (or "PN") Nos. 232663 and
232711, respectively, each in the amount of Pl,500,000.00 and payable to
Metropolitan Bank and Trust Company (or "appellee"). PN No. 232663
was to mature on July 1, 1997, with interest and credit evaluation and
supervision fee (or "CESF") at the rate of 17.532% per annum, while PN
No. 232711 was to mature on April 7, 1998, with interest and CESF at the
rate of 14.239% per annum. Both PNs provide for penalty of 18% per
annum on the unpaid principal from date of default until full payment of
the obligation.
Despite demands, there remained unpaid on PN Nos. 232663 and

232711 the amounts of P2,061,208.08 and Pl ,492,236.37, respectively, as
of July 15, 1998, inclusive of interest and penalty. Consequently, appellee
filed an action against appellant for recovery of said amounts, interest,
penalty and attorney's fees before the Regional Trial Court of Makati City
(Branch 61).
In answer, appellant averred that in 1997, she received from her

nephew, Rene Imperial (Or "Imperial"), three postdated checks drawn
against appellee (Tabaco Branch), i.e., Check No. TA 1270484889PA
dated January 5, 1998 in the amount of Pl ,200,000.00, Check No.
1270482455PA dated March 31, 1998 in the amount of Pl,197,000.00 and
Check No. TA1270482451PA dated March 31, 1998 in the amount of
P500,000.00 (or "subject checks"), as partial payments for the purchase of
her properties; that she rediscounted the subject checks with appellee
(Timog Branch), for which she was required to execute the PNs to secure
payment thereof; and that she is a mere guarantor and cannot be compelled
to pay unless and until appellee shall have exhausted all the properties of
Imperial. 4
On July 11, 2002, the RTC rendered itsjudgment, 5 viz.:
WHEREFORE, in view of the foregoing, the Court finds in favor

of plaintiff METRO POLITAN BANK AND TRUST COMP ANY and
against defendant TERESITA BUENAVENTURA.
As a consequence of this judgment, defendant Buenaventura is

directed to pay plaintiff bank the amount of P3,553,444.45 plus all interest
and penalties due as stipulated in Promissory Notes Nos. 232663 and
232711 beginning July 15, 1998 until the amount is fully paid and 10% of
the total amount due as attorney's fees.
SO ORDERED.
Rollo, pp. 174-175.

CA rollo, p. 69.
~
~
Dissatisfied, the petitioner appealed, assigning the following as errors,

namely:
I
THE TRIAL COURT ERRED IN HOLDING THAT THE
REDISCOUNTING TRANSACTION BETWEEN APPELLANT AND
METRO BANK RES UL TED TO A LOAN OBLIGATION SECURED
BY THE SUBJECT CHECKS AND PROMISSORY NOTES.
A. Rediscounting transactions do not create loan obligations

between the parties.
B. By the rediscounting, Metrobank subrogated appellant as

creditor of Rene Imperial, the issuer of the checks.
C. Legal subrogation was presumed when Metrobank paid

the obligation of Mr. Imperial with the latter's knowledge and
consent.
II
THE TRIAL COURT ERRED IN GRANTING METROBANK'S
CLAIMS ON THE BASIS OF THE PROMISSORY NOTES.
A. The promissory notes are null and void for being

simulated and fictitious.
B. Assuming that the promissory notes are valid, these only

serve as guaranty to secure the payment of the rediscounted
checks.
..
III
THE TRIAL COURT ERRED IN NOT RULING THAT APPELLANT IS
ENTITLED TO HER COUNTERCLAIMS FOR EXEMPLARY
DAMAGES, ATTTORNEY'S FEES, LITIGATION EXPENSES AND
COSTS OF SUIT. 6
On April 23, 2004, the CA promulgated the assailed decision

affirming the decision of the RTC with modification,7 as follows:
WHEREFORE, the appealed decision is AFFIRMED with

MODIFICATION of the second paragraph of its dispositive portion,
which should now read:
"As a consequence of this judgment, defendant

Buenaventura is directed to pay plaintiff bank the amount of
ll3,553,444.45 plus interest and penalty therein at 14.239% per
annum and 18% per annum, respectively, from July 15, 1998
until fully paid and 10% of said amount as attorney's fees."
SO ORDERED. 8
Id. at 23-24.
Supra note l.
Id. at 181.
~
0
On May 21, 2004, the petitioner moved for the reconsideration of the
decision, but the CA denied her motion for that purpose on February 9,
2005. 9
Hence, this appeal by the petitioner.
Issues
The petitioner ascribes the following errors to the CA, to wit:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER IS LIABLE UNDER THE PROMISSORY NOTES.
A. The promissory notes executed by petitioner are null and

void for being simulated and fictitious.
B. Even assuming that the promissory notes are valid, these

are intended as mere guaranty to secure Rene Imperial's
payment of the rediscounted checks. Hence, being a mere
guarantor, the action against petitioner under the said
promissory notes is premature.
C. Metrobank is deemed to have subrogated petitioner as

creditor of Mr. Imperial (the issuer of the checks). Hence,
Metrobank's recourse as creditor, is against Mr. Imperial.
II
THE COURT OF APPEALS ERRED IN NOT RULING THAT
PETITIONER IS ENTITLED TO HER COUNTER-CLAIM FOR
EXEMPLARY DAMAGES, ATTORNEY'S FEES, LITIGATION
EXPENSES AND COSTS OF SUIT. Io
Ruling
The appeal lacks merit.
First of all, the petitioner claims that the promissory notes she
executed were contracts of adhesion because her only participation in their
execution was affixing her signature; I I and that the terms of the promissory
0
notes should consequently be strictly construed against the respondent as the
party responsible for their preparation. 12 In contrast, the respondent counters
that the terms and conditions of the promissory notes were clear and
unambiguous; hence, there was no room or need for interpretation thereof. 13
CA rollo, p. 194.
10
Rollo, pp. 13-14.
11
Id. at 16.
12
Id. at 17.
13
ld.at211-212.
~
The respondent is correct.
The promissory notes were written as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to

pay Metropolitan Bank and Trust Company, at its office x x x the principal
sum of PESOS xx x, Philippine currency, together with interest and credit
evaluation and supervision fee (CESF) thereon at the effective rate of
x x x per centum x x x per annum, inclusive, from date hereof and until
fully paid. 14
What the petitioner advocates is for the Court to now read into the
promissory notes terms and conditions that would contradict their clear and
unambiguous terms in the guise of such promissory notes being contracts of
adhesion. This cannot be permitted, for, even assuming that the promissory
notes were contracts of adhesion, such circumstance alone did not
necessarily entitle her to bar their literal enforcement against her if their
terms were unequivocal. It is preposterous on her part to disparage the
promissory notes for being contracts of adhesion, for she thereby seems to
forget that the validity and enforceability of contracts of adhesion were the
same as those of other valid contracts. The Court has made this plain in Avon
Cosmetics, Inc. v. Luna, 15 stating:
A contract of adhesion is so-called because its terms are prepared

by only one party while the other party merely affixes his signature
signifying his adhesion thereto. Such contract is just as binding as ordinary
contracts.
It is true that we have, on occasion, struck down such contracts as

void when the weaker party is imposed upon in dealing with the dominant
bargaining party and is reduced to the alternative of taking it or leaving it,
completely deprived of the opportunity to bargain on equal footing.
Nevertheless, contracts of adhesion are not invalid per se and they are not
entirely prohibited. The one who adheres to the contract is in reality free to
reject it entirely, if he adheres, he gives his consent.
xx xx
Accordingly, a contract duly executed is the law between the

parties, and they are obliged to comply fully and not selectively with its
terms. A contract of adhesion is no exception.
As a rule, indeed, the contract of adhesion is no different from any

other contract. Its interpretation still aligns with the literal meaning of its
terms and conditions absent any ambiguity, or with the intention of the
14
Id. at 37.
15
G.R. No. 153674, December 20, 2006, 511 SCRA 376, 396-397.

parties. 16 The terms and conditions of the promissory notes involved herein,
being clear and beyond doubt, should then be enforced accordingly. In this
regard, we approve of the observation by the CA, citing Cruz v. Court of
Appeals, 17 that the intention of the parties should be "deciphered not from
the unilateral post facto assertions of one of the parties, but from the
language used in the contract." 18 As fittingly declared in The Insular Life
Assurance Company, Ltd. vs. Court of Appeals and Sun Brothers &
Company, 19 "[w]hen the language of the contract is explicit leaving no doubt
as to the intention of the drafters thereof, the courts may not read into it any
other intention that would contradict its plain import." Accordingly, no
court, even this Court, can "make new contracts for the parties or ignore
those already made by them, simply to avoid seeming hardships. Neither
0
abstract justice nor the rule of liberal construction justifies the creation of a
contract for the parties which they did not make themselves or the
imposition upon one party to a contract of an obligation not assumed." 20
Secondly, the petitioner submits that the promissory notes were null
and void for being simulated and fictitious; hence, the CA erred in enforcing
them against her.
The submission contradicts the records and the law pertinent to

simulated contracts.
Based on Article 1345 21 of the Civil Code, simulation of contracts is of

two kinds, namely: ( 1) absolute; and (2) relative. Simulation is absolute
when there is color of contract but without any substance, the parties not
intending to be bound thereby. 22 It is relative when the parties come to an
agreement that they hide or conceal in the guise of another contract. 23
The effects of simulated contracts are dealt with in Article 1346 of the
Civil Code, to wit:
Art. 1346. An absolutely simulated or fictitious contract is void. A

relative simulation, when it does not prejudice a third person and is not
intended for any purpose contrary to law, morals, good customs, public
16
The Civil Code says:
Art. 1370. 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.
Ifthe words appear to be contrary to the evident intention of the parties, the latter shall prevail
over the former.
17
G.R. No. 126713, July 27, 1998, 293 SCRA 239, 252.
18
Rollo, p. 177.
19
G.R. No. 126850, April 28, 2004, 428 SCRA 79, 92.
zo Id.
21
Art. 1345. Simulation of a contract may be absolute or relative. The fonner takes place when the
parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.
22
IV Tolentino, Civil Code of the Philippines, 1991, p. 516.
23 Id.
~
order or public policy binds the parties to their real agreement.

The burden of showing that a contract is simulated rests on the party
impugning the contract. This is because of the presumed validity of the
contract that has been duly executed. 24 The proof required to overcome the
presumption of validity must be convincing and preponderant. Without such
proof, therefore, the petitioner's allegation that she had been made to believe
that the promissory notes would be guaranties for the rediscounted checks,
not evidence of her primary and direct liability under loan agreements, 25
could not stand.
Moreover, the issue of simulation of contract was not brought up in

the RTC. It was raised for the first time only in the CA. 26 Such belatedness
forbids the consideration of simulation of contracts as an issue. Indeed, the
appellate courts, including this Court, should adhere to the rule that issues
not raised below should not be raised for the first time on appeal. Basic
considerations of due process and fairness impel this adherence, for it would
be violative of the right to be heard as well as unfair to the parties and to the
administration of justice if the points of law, theories, issues and arguments
not brought to the attention of the lower courts should be considered and
passed upon by the reviewing courts for the first time.
Thirdly, the petitioner insists that the promissory notes, even if valid,
were meant as guaranties to secure payment of the checks by the issuer,
Rene Imperial; hence, her liability was that of a guarantor, and would take
effect only upon exhaustion of all properties and after resort to all legal
remedies against Imperial. 27
The insistence of the petitioner is bereft of merit.

The CA rejected this insistence, expounding as follows:
A guaranty is not presumed; it must be expressed (Art. 2055, New

Civil Code). The PNs provide, in clear language, that appellant is
primarily liable thereunder. On the other hand, said PNs do not state that
Imperial, who is not even privy thereto, is the one primarily liable and that
appellant is merely a guarantor. Parenthetically, the disclosure statement
(Exh. "D") executed by appellant states that PN No. 232711 is "secured by
postdated checks". In other words, it does not appear that the PNs were
executed as guaranty for the payment of the subject checks.
Nevertheless, appellant insists that she did not obtain a short-term

loan from appellee but rediscounted the subject checks, with the PNs as
guaranty. The contention is untenable.
24
Ramos v. Heirs of Honoria Ramos, Sr., G.R. No. 140848, April 25, 2002, 381 SCRA 594, 602.
25
Rollo, p. 18.
26
CA rollo, pp. 44-55.
27
Rollo, pp. 22-24.
~
In Great Asian Sales Center Corporation vs. Court of Appeals

(381 SCRA 557), which was cited in support of appellant's claim, the
Supreme Court explained the meaning of "discounting line", thus:
0
"In the financing industry, the term 'discounting

line' means a credit facility with a financing company or
bank which allows a business entity to sell, on a continuing
basis, its accounts receivable at a discount. The term
'discount' means the sale of a receivable at less than its face
value. The purpose of a discounting line is to enable a
business entity to generate instant cash out of its
receivables which are still to mature at future dates. The
financing company or bank which buys the receivables
makes its profit out of the difference between the face value
of the receivable and the discounted price."
A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the
conditions (Art. 2054, id.). Curiously, the face amounts of the PN s
(totaling P.3,000,000.00) are more than those of the subject checks
(totaling 1!2,897,000.00). And unlike the subject checks, the PNs provide
for interest, CESF and penalty.
Moreover, the maturity date (July 1, 1997) of PN No. 232663 is

ahead of the dates (January 5, 1998 and March 31, 1998) of the subject
checks. In other words, appellant, as "guarantor", was supposed to make
good her "guaranty", i.e. PNs in question, even before the "principal"
obligations, i.e. subject checks, became due. It is also noted that the
rediscounting of the subject checks (in January 1997) occurred months
ahead of the execution of PN No. 232711 (on April 17, 1997) even as the
PNs were supposedly a precondition to said rediscounting.
xx xx
Stated differently, appellant is primarily liable under the subject

checks. She is a principal debtor and not a guarantor. Consequently, the
benefit of excussion may not be interposed as a defense in an action to
enforce appellant's warranty as indorser of the subject checks.
Moreover, it is absurd that appellant (as maker of the PN s) may act

as guarantor of her own obligations (as indorser of the subject checks).
Thus, Art. 2047 of the New Civil Code provides that "(b)y guaranty, a
person called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so."28
(Emphasis supplied)
The CA was correct. A contract of guaranty is one where a person, the

guarantor, binds himself or herself to another, the creditor, to fulfill the
28
Rollo, pp. 177-180.
0
~
obligation of the principal debtor in case of failure of the latter to do so. 29 It

cannot be presumed, but must be express and in writing to be enforceable, 30
especially as it is considered a special promise to answer for the debt,
default or miscarriage of another. 31 It being clear that the promissory notes
were entirely silent about the supposed guaranty in favor of Imperial, we
must read the promissory notes literally due to the absence of any
ambiguities about their language and meaning. In other words, the petitioner
could not validly insist on the guaranty. In addition, the disclosure
statements32 and the statements of loan release33 undeniably identified her,
and no other, as the borrower in the transactions. Under such established
circumstances, she was directly and personally liable for the obligations
under the promissory notes.
Fourth, the petitioner argues that the respondent was immediately

subrogated as the creditor of the accounts by its purchase of the checks from
her through its rediscounting facility; 34 and that legal subrogation should be
presumed because the petitioner, a third person not interested in the
obligation, paid the debt with the express or tacit approval of the debtor. 35
The argument is barren of factual and legal support.
Legal subrogration finds no application because there is no evidence

showing that Imperial, the issuer of the checks, had consented to the
subrogation, expressly or impliedly. 36 This circumstance was pointed out by
the RTC itself. 37 Also, as the CA emphatically observed, 38 the argument was
off-tangent because the suit was not for the recovery of money by virtue of
the checks of Imperial but for the enforcement of her obligation as the maker
of the promissory notes.
29
Art. 2047, Civil Code, provides:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.
(1822a)
30
Art. 2055, Civil Code, declares that: "A guaranty is not presumed; it must be express and cannot
extend to more than what is stipulated therein."
31
Art. 1403, Civil Code, requires that a special promise to answer for the debt, default or miscarriage
of another, among others, must be in writing to be enforceable unless ratified; see also Aglibot v. Santia,
G.R. No. 185945, December 5, 2012, 687 SCRA 283, 294-295.
32
Rollo, pp. 38, 40.
33
Records, pp. 126-127.
34
Rollo, p. 26.
35
Id. at 27.
36
According to Art. 1302, Civil Code, there is legal subrogation when: (I) a creditor pays another
creditor who is preferred, even without the debtor's knowledge; (2) a third person, not interested in the
obligation, pays with the express or tacit approval of the debtor; or (3) even without the knowledge of
the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of
confusion as to the latter's share.
37
Rollo, p. 65.
38
Id. at 180.
J1
Fifth, the petitioner posits that she was made to believe by the
manager of the respondent's Timog Avenue, Quezon City Branch that the
promissory notes would be mere guaranties for the rediscounted checks; 39
that despite the finding of the R TC and the CA that she was a seasoned
businesswoman presumed to have read and understood all the documents
given to her for signature, she remained a layman faced with and puzzled by
complex banking terms; and that her acceding to signing the promissory
notes should not be taken against her as to conclude her. 40
'O)
The petitioner's position is unworthy of serious consideration.
After having determined that the terms and conditions of the

promissory notes were clear and unambiguous, and thus should be given
their literal meaning and not be interpreted differently, we insist and hold
that she should be bound by such terms and conditions. Verily, the
promissory notes as contracts should bind both contracting parties; hence,
the validity or compliance therewith should not be left to the will of the
petitioner. 41 Otherwise, she would contravene and violate the principles of
mutuality and of the obligatory force of contracts. A respected commentator
on civil law has written in this respect:
The binding effect of the contract on both parties is based on the

principles (1) that obligations arising from contracts have the force of law
between the contracting parties; and (2) that there must be mutuality
between the parties based on their essential equality, to which is repugnant
to have one party bound by the contract leaving the other free therefrom.
xx xx
Just as nobody can be forced to enter into a contract, in the same

manner once a contract is entered into, no party can renounce it
unilaterally or without the consent of the other. It is a general principle of
law that no one may be permitted to change his mind or disavow and go
back upon his own acts, or to proceed contrary thereto, to the prejudice of
the other party.
If, after a perfect and binding contract has been executed between
the parties, it occurs to one of them to allege some defect therein as a
reason for annulling it, the alleged defect must be conclusively proven,
since the validity and fulfillment of contracts cannot be left to the will of
one of the contracting parties. The fact that a party may not have fully
understood the legal effect of the contract is no ground for setting it
aside. 42
39
Id. at 18.
40
Id. at 20.
41
Art. 1308, Civil Code.
42
IV Tolentino, op. cit., at 424-425.
~
And, lastly, there is need to revise the monetary awards by the CA.
Although no issue is raised by the petitioner concerning the monetary
awards, the Court feels bound to make this revision as a matter of law in
order to arrive at a just resolution of the controversy.
Involved here are two loans of the petitioner from the respondent,
specifically.: (1) the principal amount of Pl,500,000.00 covered by
Promissory Note No. 232663 to be paid on or before July 1, 1997 with
interest and credit evaluation and supervision fee (CESF) at the rate of
17.532o/o per annum and penalty charge of 18% per annum based on the
unpaid principal to be computed from the date of default until full payment
of the obligation; and (2) the principal amount of Pl,500,000.00 covered by
Promissory Note No. 232711 to be paid on or before April 7, 1998 with
interest and CESF at the rate of 14.239% per annum and penalty charge of
18% per annum based on the unpaid principal to be computed from the date
of default until full payment of the obligation.
The RTC adjudged the petitioner liable to pay to the respondent the
total of P3,553,444.45 representing her outstanding obligation, including
accrued interests and penalty charges under the promissory notes, plus
attorney's fees. 43 On appeal, the CA ruled that she was liable to the
respondent for the sum of P3,553,444.45 with interest and penalties at
14.239% per annum and 18% per annum, respectively, from July 15,\'-1998
until fully paid. 44
The bases of the amounts being claimed from the petitioner were
apparently the two statements ofpast due interest and penalty charges as of
July 15, 1998, one corresponding to Promissory Note No. 232711, 45 and the
other to Promissory Note No. 232663. 46 Respondent's witness Patrick N.
Miranda, testifying on the obligation and the computation thereof, 47 attested
as follows:
1. What is the amount of her loan obligation?
-Under Promissory Note No. 232663, her loan obligation is Pl,492,236.37

inclusive of interest and penalty charges as of July 15, 1998. Under
Promissory Note No. 232711, her loan obligation is P2,061,208.08,
inclusive of interest and penalty charges as of July 15, 1998. Thus, the
total is P3,553,444.45 as of July 15, 1998. Two (2) Statements of Account
were prepared to show the computation and penalty charges.
2. Do you have these Statements ofAccount?
43
Rollo, p. 67.
44
Id. at 181.
45
Record, p. I 04.
46
Id. at 105.
47
Id. at 95.
.t:i
~ Decision 12 G.R. No. 167082
-Yes, sir. (Copies are hereto attached as Exhibits "H" and "!. ") 48
The two statements ofpast due interest and penalty charges as of July
15, 1998 explained how the respondent had arrived at the petitioner's
outstanding liabilities as of July 15, 1998, thusly:
Promissory Note No. 232711 49
PRINCIPAL AMOUNT .............................................. P 1,500,000.00
PAST DUE INTEREST-334 days@34.991%

fr. Aug. 15, 1997 to July 15, 1998 ....................P= 486,958.08
PENALTY CHARGES-99 days@18.0%

fr. April 07, 1998 to July 15, 1998 .................... P 74,250.00
TOTAL OUTSTANDING LOAN

AS OF JULY 15, 1998 .................................................. P 2,061,208.08
Promissory Note No. 232663 50
PRINCIPAL AMOUNT. ............................................ P 1,200,000.00
PAST DUE INTEREST-191 days @27.901 %

fr. [J]an. 05, 1998 to [J]uly 15, 1998 ............... P= 177,636.37
PENALTY CHARGES-191 days@l8.0%

fr. [J]an. 05, 1998 to [J]uly 15, 1998 ............... P 114,600.00
TOTAL OUTSTANDING LOAN

AS OF JULY 15, 1998 ............................................... P 1,492,236.37
The total of 1!3,553,444.45 was the final sum of the computations

contained in the statements of past due interest and penalty charges as of
July 15, 1998, and was inclusive of interest at the rate of 34.991 % (on the
principal of Pl,500,000.00) and 27.901 % (on the principal of
Pl ,200,000.00). Yet, such interest rates were different from the interest rates
stipulated in the promissory notes, namely: 14.239% for Promissory Note
No. 232711 and 17.532% for Promissory Note No. 232663. As a result, the
~1!3,553,444.45 claimed by the respondent as the petitioner's aggregate
outstanding loan obligation included interests of almost double the rates
stipulated by the parties.
48
Id. at 96.
49
Supra note 44.
50
Id. at 105.
~
We hold that the respondent had no legal basis for imposing rates far
higher than those agreed upon and stipulated in the promissory notes. It did
not suitably justify the imposition of the increased rates of 34.991 % and
27.901 o/o, as borne out by the statements of past due interest and penalty
charges as of July 15, 1998, although it certainly was its burden to sh~w the
legal and factual support for the imposition. We need not remind that the
burden of proof is the duty of any party to present evidence to establish its
claim or defense by the amount of evidence required by law, which in civil
cases is preponderance of evidence. 51 Consequently, we have to strike down
the imposition.
Parenthetically, we observe that the stipulation in the promissory

notes on the automatic increase of the interest rate to the prevailing rate 52 did
not justify the increase of the interest rates because the respondent did not
adduce evidence about the prevailing rates at the time material to this case.
On May 16, 2013, the Monetary Board of the Bangko Sentral ng

Pilipinas, in the exercise of its statutory authority to review and fix interest
rates, issued Circular No. 799, Series of 2013 to lower to 6% per annum the
rate of interest for loan or forbearance of any money, goods or credits, and
the rate allowed in judgment. 53 The revised rate applies only in the absence
of stipulation in loan contracts. Hence, the contractual stipulations on the
rates of interest contained in the promissory notes remained applicable.
Considering that, as mentioned, the P3,553,444.45 was an aggregate

inclusive of the interest (i.e., at the rates of 34.991 % and 27.901 % per
annum); and that the penalty charges contravened the express provisions of
the promissory notes, the RTC and the CA both erred on a matter of law, and
we should correct their error as a matter of law in the interest of justice.
It is further held that the CA could not validly apply the lower interest
rate of 14.239% per annum to the whole amount of P3,553,444.45 in
contravention of the stipulation of the parties. In Mallari v. Prudential
Bank, 54 the Court declared that the interest rate of "3% per month and higher
are excessive, unconscionable and exorbitant, hence, the stipulation was
void for being contrary to morals." Even so, the Court did not consider as
51
United Merchants Corporation v. Country Bankers Insurance Corporation, G.R. No. 198588, July 11,
2012, 676 SCRA 382, 395.
52
Paragraph 5 of the Promissory Note, last sentence, reads:
In case of default, I/we agree that as additional compensation, the interest rate shall
automatically be raised to the prevailing rate, the increased rate to be applied from the date of
default. (Records, pp. 5, 7).
53
Section l. The rate of interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum.
54
G.R. No. 197861, June 5, 2013, 697 SCRA 555, 564.
~
~
unconscionable the interest rate of 23% per annum agreed upon by the
parties. Upholding the 23% per annum interest rate agreed upon, the Court
instead opined that "the borrowers cannot renege on their obligation to
comply with what is incumbent upon them under the contract of loan as the
said contract is the law between the parties and they are bound by its
stipulations." 55 Consequently, the respondent could not impose the flat
interest rate of 14.239% per annum on the petitioner's loan obligation.
Verily, the obligatory force of the stipulations between the parties called for
the imposition of the interest rates stipulated in the promissory notes.
To accord with the prevailing jurisprudence, the Court pronounces

that the respondent was entitled to recover the principal amount of
Pl,500,000.00 subject to the stipulated interest of 14.239% per annum from
date of default until full payment; 56 and the principal amount of
oPl,200,000.00 subject to the stipulated interest of 17.532% per annum from
date of default until full payment. 57
The next matter to be considered and determined is the date of default.
According to Article 1169 of the Civil Code, there is delay or default

from the time the obligee judicially or extrajudically demands from the
obligor the fulfillment of his or her obligation. The records reveal that the
respondent did not establish when the petitioner defaulted in her obligation
to pay based on the two promissory notes. As such, its claim for payment
computed from July 15, 1998 until full payment of the obligation had no
moorings other than July 15, 1998 being the date reflected in the statements
ofpast due interest and penalty charges as of July 15, 1998. Nonetheless, its
counsel, through the letter dated July 7, 1998, 58 made a final demand in
writing for the petitioner to settle her total obligation within five days from
receipt. As the registry return receipt indicated, 59 the final demand letter was
received for the petitioner by one Elisa dela Cruz on July 28, 1998. Hence,
the petitioner had five days from such receipt, or until August 2, 1998,
within which to comply. The reckoning date of default is, therefore, August
3, 1998.
As to the penalty charge, the same was warranted for being expressly
stipulated in the promissory notes, to wit:
I/we further agree to pay the Bank, in addition to the agreed

interest rate, a penalty charge of eighteen per centum (18%) per annum
based on any unpaid principal to be computed from date of default until
55
Id., citing Villanueva v. Court of Appeals, G.R. No. 163433, August 22, 2011, 655 SCRA 707, 716-
717.
56
Records, p. 98.
57
Id. at 99.
58
Id. at I 08.
59
Id. at 109.
A
full payment of the obligation. 60
Verily, a penal clause is an accessory undertaking attached to a principal

obligation. It has for its purposes, firstly, to provide for liquidated damages;
and, secondly, to strengthen the coercive force of the obligation by the threat
of greater responsibility in the event of breach of obligation. 61 Under Article
1226 of the Civil Code, 62 a penal clause is a substitute indemnity for
damages and the payment of interests in case of noncompliance, unless there
is a stipulation to the contrary. In Tan v. Court of Appeals, 63 the Court has
elaborated on the nature of a penalty clause in the following:
Penalty on delinquent loans may take different forms. In

Government Service Insurance System v. Court of Appeals, this Court has
ruled that the New Civil Code permits an agreement upon a penalty apart
from the monetary interest. If the parties stipulate this kind of agreement, \'-
the penalty does not include the monetary interest, and as such the two are
different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to
state that such a stipulation about payment of an additional interest rate
partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2229 of the New Civil Code which provides
that:
If the obligation consists in the payment of a sum of

money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and the absence of stipulation, the legal
interest, which is six per cent per annum.
The penalty charge of two percent (2%) per month in the case at
bar began to accrue from the time of default by the petitioner. There is no
doubt that the petitioner is liable for both the stipulated monetary interest
and the stipulated penalty charge. The penalty charge is also called penalty
or compensatory interest.
The Court has explained the rate of compensatory interest on

monetary awards adjudged in decisions of the Court in Planters
Development Bank v. Lopez, 64 citing Nacar v. Gallery Frames, 65 to wit:
With respect to the computation of compensatory interest, Section

1 of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013,
which took effect on July 1, 2013, provides:
60
Rollo, pp. 37 and 39.
61
IV Tolentino, op. cit., at 259.
62
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this
code.
63
G.R. No. 116285, October 19, 2001, 367 SCRA 571, 579-580.
64
G.R. No. 186332, October 23, 2013, 708 SCRA 481, 501-503.
65
G.R. No. 189871, August 13, 2013, 703 SCRA 439, 455-457.
.ft.
Section 1. The rate of interest for the loan or forbearance

of any money, goods or credits and the rate allowed in
judgments, in the absence of an express contract as to such rate
of interest, shall be six percent (6%) per annum.
This provision amends Section 2 of Central Bank (CB) Circular

~ No. 905-82, Series of 1982, which took effect on January 1, 1983.
Notably, we recently upheld the constitutionality of CB Circular No. 905-
82 in Advocates for Truth in Lending, Inc., et al. v. Bangko Sentral ng
Pilipinas Monetary Board, etc. Section 2 of CB Circular No. 905-82
provides:
Section 2. The rate of interest for the loan or forbearance

of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of
interest, shall continue to be twelve percent (12%) per annum.
Pursuant to these changes, this Court modified the guidelines in

Eastern Shipping Lines, Inc. v. Court of Appeals in the case of Dario
Nacar v. Gallery Frames, et al.(Nacar). In Nacar, we established the
following guidelines:
I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in

the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as
follows:
1. When the obligation is breached, and it consists

in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
the absence of stipulation, the rate of interest shall
be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the
Civil Code. (emphasis and underscore supplied)

discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until
the demand can be established with reasonable
certainty. Accordingly, where the demand is
~ h
Decision 17 G.R. No. 16'fu82
established with reasonable certainty, the interest

shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code),
but when such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made (at which time the
quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on
the amount finally adjudged.

money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance
of credit.
And, in addition to the above, judgments that have become final and
executory prior to July 1, 2013, shall not be disturbed and shall continue to
be implemented applying the rate of interest fixed therein.
To accord with the foregoing rulings, the 17.532% and 14.239%

annual interest rates shall also respectively earn a penalty charge of 18% per
annum reckoned on the unpaid principals computed from the date of default
(August 3, 1998) until fully paid. This is in line with the express agreement
between the parties to impose such penalty charge.
Article 2212 of the Civil Code requires that interest due shall earn
legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point. Accordingly, the interest due shall itself earn
legal interest of 6% per annum from the date of finality of the judgment until
its full satisfaction, the interim period being deemed to be an equivalent to a
forbearance of credit. 66
WHEREFORE, the Court AFFIRMS the decision promulgated on

April 23, 2004 with the MODIFICATION that the petitioner shall pay to
the respondent: (1) the principal sum of Pl,500,000.00 under Promissory
Note No. 232711, plus interest at the rate of 14.239% per annum
commencing on August 3, 1998 until fully paid; (2) the principal su?ri of
Pl,200,000.00 under Promissory Note No. 232663, plus interest at the rate
of 17.532o/o per annum commencing on August 3, 1998 until fully paid; (3)
penalty interest on the unpaid principal amounts at the rate of 18% per
annum commencing on August 3, 1998 until fully paid; (4) legal interest of
66
Planters Development Bank v. Lopez, supra note 64.
~
6% per annum on the interests commencing from the finality of this

judgment until fully paid; (5) attorney's fees equivalent to 10% of the total
amount due to the respondent; and (6) costs of suit.
SO ORDERED.
WE CONCUR:
MARIA LOURDES P. A. SERENO

Chief Justice
~ ~ "'- (PA Al;: JJA. .f<W/

TERESITA J. LEONARDO-DECASTRO ESTELA 'Nf PERLAS-BERNABE
Associate Justice Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that

the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Cami's
Division.
MARIA LOURDES P.A. SERENO

Chief Justice
VOL. 79, OCTOBER 28, 1977 709

De Cortes vs. Venturanza
*
No. L26058. October 28, 1977.
AMPARO JOVEN DE CORTES & NOEL J. CORTES

(Jesus Noel), plaintiffappellees, vs. MARY E.
VENTURANZA, ETC., JOSE OLEDAN & ERLINDA M.
OLEDAN, defendantsappellants.
Civil Law Contracts Filing of complaint not premature

effects of default had already arisen from nonpayment of
contractual obligations.With respect to the first issues
whether the complaint was filed prematurelythere is no dispute
that plaintiffs filed their complaint on December 12, 1962 that
under the terms of the contract, x x x, the defendants were given
until January 1, 1962 within which to pay their obligation and
that January 1, 1962 had passed without the defendants having
paid to the plaintiffs the sum of P576,573.90 and the
corresponding interest thereon notwithstanding repeated
demands for payment made upon and duly received by them x x x.
Therefore, when plaintiffs filed the complaint on December 12,
1962, the effects of default as against the defendants had already
arisen. Besides no less than the defendants Venturanzas
themselves admitted in their brief that they were delayed in the
payment of the balance of their obligation to the plaintiffs.
Same Same Admission of a party in delay in the payment of
an obligation means that obligation had already become due and
demandable Failure to pay unjustified when cause of delay is not
force majeure nor an Act of God.One cannot admit being
delayed in the payment of his obligation unless he believes that
his obligation is already due and demandable. Stated otherwise,
there is no delay if the obligation is not yet due. The alleged cause
of their default in paying the balance of the price, is not force
majeure nor an act of God. Hence, their failure to pay is not
justified.
Same Same If intention of the parties is that the
consummation of the contract, Deed of Sale with Purchase Money
Mortgage should be dependent on the ability of the buyer collect
the purchase price on their two haciendas, the intention should
http://central.com.ph/sfsreader/session/0000015cd9e1e01160a23e29003600fb002c009e/t/?o=False 1/27
have been clearly stated in the contract When deed of sale specifies
with a period it is an obligation with a definite period case at bar.
x x x A careful reading of the Deed of Sale with Purchase Money
Mortgage, Exhibit B, reveals the conspicuous absence of any
provision making the consummation of the said contract
dependent on the ability of defendants
______________
* FIRST DIVISION.
710
Venturanzas to collect the purchase price of their two haciendas.

If this were the intention of the parties, they should have clearly
stated it in the contract. x x x The deed of sale with purchase
money mortgage clearly indicates that the balance of P576,573.90
shall be paid by the defendants, jointly and severally, within
three (3) years from January 1, 1959, with interest at the rate of
6% per annum, until fully paid. On January 1, 1962, the
defendants failed and refused to pay their obligation. This is a
clear case of an obligation with a definite period ex die, which
period was incidentally established for the benefit of the
defendants. The evidence presented by the plaintiffs to
substantiate these facts approaches moral certainty, not merely
preponderance of evidence. x x x x x x
Same Same Obligations arising from contracts have the force
of law between the contracting parties and should be complied
with in good faith Deed of sale did not contravene limitations of
freedom of contract.Furthermore, according to Article 1159 of
the New Civil Code, obligations arising from contracts have the
force of law between the contracting parties, and should be
complied with in good faith. The deed does not show on its face
that any of the limitations of the freedom of contract under Article
1306 of the same Code, such as law, morals, good customs, public
order, or public policy, exists. On the contrary, the terms of said
exhibit are so clear and leave no doubt with respect to the
intention of the contracting parties. Hence, the literal meaning of
its stipulations shall control. This is so because the intention of
the parties is clearly manifested and they are presumed to know
the consequences of their voluntary acts. x x x.
Same Same Since the period of payment of the mortgage on

the land had become due, and no payment therefor had been
received, foreclosure of mortgage would be proper.We, therefore,
see no reason to overturn the finding of the court a quo that the
defendants are indebted to the plaintiffs on the mortgage
constituted by them over the 33 parcels of land in question since
the period for payment of the obligation had become due and,
therefore, plaintiffs are entitled to a foreclosure of the said
mortgage.
Same Same Novation Concept and nature of novation as a
mode of extinguishing obligations.According to Manresa,
novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one
which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting the person of the
debtor, or by subrogating a third person
711
VOL. 79, OCTOBER 28, 1977 711
to the rights of the creditor. Unlike other modes of extinction of

obligations, novation is a juridical act with a dula functionit
extinguishes an obligation and creates a new one in lieu of the
old. x x x Under the provision on Novations, there are two forms
of novation by substituting the person of the debtor, and they are:
(1) expromision and (2) delegacion. In the former, the initiative for
the change does not come from the debtor and may even be made
without his knowledge, since it consists in a third person
assuming the obligation. As such, it logically requires the consent
of the third person and the creditor. In the latter, the debtor offers
and the creditor accepts a third person who consents to the
substitution and assumes the obligation x x x. In these two modes
of substitution, the consent of the creditor is an indispensable
requirement.
Same Same While the documents of sale of the property
between defendants and crossdefendants might have created a
judicial relation as between them, it cannot however affect the
relation of said defendants and plaintiffs since the latter as
creditors are not privies to said agreement and they have not given
their consent to the substitution of the person of the debtor
Reasons for requirement.x x x suffice it to state that while the
Agreement and Deed of Sale of Undivided Share in Real Estate x
x x, might have created a juridical relation as between defendants
Venturanzas and Oledans, it cannot however affect the relation

between them on one hand, and the plaintiffs, on the other, since
the latter are not privies to the said agreement, and this kind of
novation cannot be made without the consent of the plaintiffs.
One reason for the requirement of the creditors consent to such
substitution is obvious. Substitution of one debtor for another
may delay or prevent the fulfillment of the obligation by reason of
the financial inability or insolvency of the new debtor hence, the
creditor should agree to accept the substitution in order that it
may be binding on him. x x x In the case at bar, the agreement x x
relied upon by the defendants Oledas dows not show on its face
that the plaintiffs intervened in, much less gave their consent to,
the substitution as a matter of fact, plaintiff Cortes vehemently
denied having consented to the transfer of rights from the
Oledans to the Venturanzas alone. Res inter alios acta alteri
nocere non debet x x x There is thus a complete absence of animus
novandi, whether express or implied, on the part of the creditors
the Corteses.
Same Attorneys fees Claim for attorneys fees reasonable
considering the work still to be performed on the foreclosure
proceedings and the collection work by judicial proceedings.
Now, considering that the total amount recoverable in this case
712
approximates 1.4 million pesos as of October 31, 1977 x x x, and

that every step in the foreclosure proceedings had been
tenaciously contested, not to mention the work it will still require
counsel for the plaintiffs to collect the same by judicial
proceedings. We find that P50,000 is a reasonable amount to
which the plaintiffs are entitled as and for attorneys fees.
APPEAL from the decision of the Court of First Instance of

Bulacan.

Delia L. Hermoso for appellants the Venturanzas.
Ang. Atienza, Tabora & Del Rosario for appellants
the Oledans.
Bernardo Guerrero & Associates for appellees.
MAKASIAR, J.:
Direct appeal by the defendantsappellants from the

decision of the Court of First Instance of Bulacan against
them in its Civil Case No. 2693, entitled Felix Cortes y
Ochoa, and Noel J. Cortes (Jesus Noel), plaintiffs, versus
Gregorio Venturanza, Mary E. Venturanza, Jose Oledan
and Erlinda M. Oledan, defendants.
The original plaintiffs in this case were Felix Cortes y
Ochoa and Noel J. Cortes, and the original defendants were
Gregorio Venturanza, Mary E. Venturanza, Jose Oledan
and Erlinda M. Oledan. On December 11, 1967, defendant
Gregorio Venturanza died. Accordingly, as prayed for by
appellees, Mary E. Venturanza, Edna Lucille, Greymar,
Sylvia, Edward and Mary Grace, all surnamed Venturanza,
surviving spouse and children of the deceased Gregorio
Venturanza, were substituted as appellants, in place of the
deceased, by resolution of this Court dated February 28,
1968. On September 12, 1968, Felix Cortes y Ochoa died.
Appellees, through counsel, thereupon filed a petition
praying that the title of this case be changed to read:
Amparo Joven de Cortes and Noel J. Cortes (Jesus Noel),
plaintiffsappellees, versus Mary E. Venturanza, etc., Jose
Oledan and Erlinda M. Oledan, defendantsappellants,
which petition was granted by this Court in its resolution
dated April 11, 1969.
The background facts may be gleaned from the pertinent
portions of the decision of the court a quo, as follows:
713
VOL. 79, OCTOBER 28, 1977 713

Plaintiff Felix Cortes y Ochoa and Noel J. Cortes filed the instant
action for foreclosure of real estate against the defendants
Gregorio Venturanza, Mary E. Venturanza, Jose Oledan and
Erlinda M. Oledan. The complaint alleges that plaintiff Felix
Cortez y Ochoa was the original owner of nine (9) parcels of land
covered by Transfer Certificates of Title Nos. 21334 to 21342,
inclusive, while plaintiff Noel J. Cortes was likewise the original
owner of twentyfour (24) parcels of land covered by Transfer
Certificates of Title Nos. 21343, 21345, 21347 to 21367, inclusive,
all of the land records of Bulacan that on October 24, 1958 said
plaintiffs sold and delivered to the defendants all the above
mentioned thirtythree (33) parcels of land with all the
improvements thereon for the total sum of P716,573.90 of which
defendants agreed to pay jointly and severally the plaintiffs the
sum of P100,000.00 upon the signing and execution of a deed of
sale and P40,000.00 on January 1, 1959 thereby leaving a balance
of P576,573.90 which the defendants agreed and bound

themselves to pay plaintiffs jointly and severally within three (3)
years from January 1, 1959 with interest thereon at the rate of
6% per annum that defendants further agreed and bound
themselves to secure the payment of the said balance of
P576,573.90 with a first mortgage upon the said 33 parcels of land
with improvements that the defendants have already paid the
plaintiffs the total sum of P140,000.00 that of the unpaid balance
owing to plaintiffs, P169,484.24 pertain(ing)s to plaintiff Felix
Cortes and P407,089.66 pertains to plaintiff Noel J. Cortes that
upon the registration of the deed of sale and mortgage with the
office of the register of deeds of Bulacan new certificates of title
for the 33 parcels of land were issued in the names of the
defendants and the mortgage obligation was noted thereon that
the mortgage obligation fell due on January 1, 1962, but despite
repeated demands for payment, defendants failed and refused to
pay the said balance of P576,573.90 to plaintiffs that from the
time the mortgage obligation fell due and demandable up to
December 1, 1962 the total interest due from the defendants on
the balance of their obligation is P103,783.32 computed at the
stipulated interest of 6% per annum that it is stipulated in the
deed of sale with purchase money mortgage that in the event or
default by defendants to pay the obligation secured by the
mortgage and a suit is brought for the foreclosure of the mortgage
or any other legal proceedings is instituted for the enforcement of
plaintiffs right, defendants would be obligated and bound to pay
the plaintiffs reasonable compensation for attorneys fees which
plaintiffs fixed at P50,000.00.
Defendants Spouses Venturanza admit the allegations of the
complaint regarding plaintiffs former ownership of the lands in
question as well as their execution of the mortgage in favor of
714

plaintiffs but allege that they are at present the registered owners
of the same parcels of land by virtue of the sale thereof made to
them they likewise admit the allotment of payment to plaintiffs
of the balance of their obligation but allege that the said balance
has not yet become due and demandable so that they have not
incurred in default. As special affirmative defense defendants
Venturanza allege that the document designated as deed of sale
with purchase money mortgage does not express the true intent
and agreement of the parties with respect to the manner of
payment of the balance of the purchase price, the truth being that
defendants will pay the balance of the purchase price in the
amount of P576,573.90 to the plaintiffs, and the latter agreed, as

soon as defendants will have received from the Land Tenure
Administration the purchase price of their (defendants) hacienda
in Bugo, Cagayan de Oro in the amount of P360,000.00 which
hacienda is the object of exporpiration proceedings before the
Court of First Instance of said City that it was agreed moreover
that defendants will complete payment of the balance of the
purchase price upon the consummation of the sale of their other
hacienda at Buhi, Camarines Sur to one Mr. De Castro for
P837,00.00 more or less that this negotiation was known to
plaintiffs who agreed to wait for the sale of the same properties by
defendants that the property in question was bought by
defendant for speculative purposes. As second special and
affirmative defenses defendants allege that the deed of sale with
purchase money mortgage had been novated by a subsequent
agreement regarding the manner and period of payment to be
made by defendants and that, therefore, the cause of action has
not yet accrued.
Defendants Jose Oledan and Erlinda M. Oledan deny the
material allegations of the complaint with respect to the mortgage
obligation alleging that plaintiffs cause of action against them
has been extinguished and, therefore, did not become due against
them on January 1, 1962 that even as regards their co
defendants Venturanzas the mortgage obligation did not become
due on January 1, 1962 there having been a novation of the
original agreement which affected material changes in the
manner and condition of time of payment of the balance of the
mortgage obligation. By way of affirmative defenses defendants
Oledans alleged that the deed of sale with purchase money
mortgage fails to express the true intent and agreement of the
parties thereto insofar as the nature of the liability of the
defendants is concerned, the true intention being to hold them
(defendants Oledan) obligated unto plaintiffs only to the extent of
the proportion of their share, ownership and interests in the
property conveyed that their obligation to plaintiffs has been
extinguished by novation that their obligation to plaintiffs has
been extinguished by
715
VOL. 79, OCTOBER 28, 1977 715

the assumption of the obligation by defendants Venturanza as

provided for in the agreement among defendants dated December
28, 1959, such assumption of the obligation being made with full
knowledge (of) and consent of plaintiffs which partakes of the
character of a novation of the original agreement and that by
their failure to seasonably interrupt any opposition to the

assumption of any obligation by defendants Venturanza and to
take appropriate action thereon, plaintiffs have waived their right
to proceed against them.
By way of crossclaim against their codefendants Venturanza,
defendants Oledan allege that on December 28, 1958 they and
their codefendants executed and entered into an agreement
whereby they sold, transferred unto their codefendants all their
shares, ownership and interest in the property subject of a deed of
sale with purchase money mortgage for and in consideration of
the sum of P44,571.66 payable at the time and in the manner
specified in the written agreement that of the aforementioned
consideration crossdefendants have paid to them the sum of
P22,285.83 thereby leaving a balance still due and unpaid in the
amount of P22,285.83 which crossdefendants have failed to pay
within the period stipulated in their agreement that it is further
stipulated in their agreement with crossdefendants that in the
event of failure by the latter to pay the said balance within the
period agreed upon they (crossdefendants) shall pay to them the
sum of P6,367.30 for the period August 8, 1960 to August 28,
1961 another amount of P6,367.30 for the period August 28, 1961
to August 28, 1962 and still another amount of P6,367.30 for the
period August 28, 1963 by way of penalty, which despite repeated
demands crossdefendants have failed to pay that it is further
stipulated in their agreement that in the event of default on the
part of crossdefendants, interest in the legal rate of 6% per
annum shall be borne by the unpaid balance in the amount of
P22,285.83 plus the penalties aforementioned.
By way of counterclaim, defendantscrossplaintiffs allege
that at the time defendants executed the agreement dated
December 28, 1958 plaintiffs had full knowledge of and gave their
consent to the transfer of their shares, ownership and interest in
favor of their codefendants, as well as the assumption by the
latter of the mortgage obligation that despite such knowledge and
consent, plaintiffs induced crossdefendants not to register the
agreement and effect the issuance of new transfer certificate of
title in the name solely of defendants Venturanza, evidently for
the purpose of preversing cause of action against them under the
deed of sale with purchase money mortgage that as a
consequence of plaintiffs injurious and malicious suit against
them they suffered mental anguish, serious anxiety,
716

besmirched reputation and moral shock on the basis of which

plaintiffs should be held answerable to them in moral damages in
the amount of P100,000.00 aside from exemplary damages and
that as a consequence of plaintiffs having filed the instant action
against them they were compelled to engage the services of
counsel and incurred expenses of litigation in the total amount of
P20,000.00 for which plaintiffs should be held liable to them (pp.
93100, Corrected Rec. on Appeal, pp. 320323, rec).
After due trial, the court a quo rendered its judgment with
the following rationale and dispositive portion:
There is no question that defendants are indebted to plaintiffs on

the mortgage executed by them contained in the document
denominated as Deed of Sale with Purchase Money Mortgage
(Exhibit A) to the tune of P576,573.90 with interest thereon at
the stipulated rate of 6% per annum. The pertinent portion of the
document in question is quoted, as follows:
(c) The remaining balance of the purchase price, after deducting the
sums of P100,000.00 and P40,000.00, mentioned in Paragraphs (a) and
(b) of this Article II, aggregating the sum of Five Hundred Seventy Six
Thousand Five Hundred Seventy Three Pesos and Ninety Centavos
(P576,573.90) shall be paid jointly and severally, by the vendees to the
vendors within three (3) years from January 1, 1959, with interest
thereon at the rate of six per centum (6%) per annum, until fully paid, of
which the sum of P169,484.24, plus the corresponding interest thereon,
shall be paid by the vendees to the vendor, Felix Cortes y Ochoa, and the
balance of P407,089.66, plus the corresponding interest thereon, shall be
paid by the Vendees to the Vendor, Noel J. Cortes.
Defendants do not deny their failure to make good their

obligation to pay plaintiffs the balance of the purchase price
within the threeyear period agreed upon in their document.
However, defendants Venturanzas explained their failure as
being due to their inability to collect the payment of the sale of
their own property located in Buhi, Camarines Sur, and Bugo.
Cagayan de Oro. In this connection, we are again quoting a
specific provision of the agreement between the parties as regards
the payment of the obligation, thus:
C. In the event that the vendees shall fail to pay to the vendors, in the
form and manner provided in Paragraphs (b) and (c) of Article II hereof,
the said sums of P40,000.00 and P576,573.90, and the interest thereon,
or should the vendees
717
VOL. 79, OCTOBER 28, 1977 717

make default in the performance of any one or more of the conditions

stipulated herein, the Vendors shall have the right, at their election, to
foreclos(ur)e this mortgage, and to that end the vendors are hereby
appointed the attorneysinfact for the Vendees, with full power of
substitution, to enter upon and take possession of the mortgaged
properties, without the order of any court or any other authority other
than herein granted, and to sell and dispose of the same to the highest
bidder at public auction, x x.
Defendants claim that there had been a novation of the

contract between them and plaintiffs on account of the transfer
made by defendants Oledans of their interest in the property in
favor of their codefendants Venturanzas with the knowledge and
consent of the plaintiffs. As regards this claim of defendants, we
have another pertinenent provision of their contract which reads
as follows:
B. The vendees may, during the existence of this mortgage, sell the
property hereby mortgaged, or any part thereof, or encumber the same
with a second mortgage, with the previous written consent of the
vendors. x x x
In view of the foregoing stipulations in the contract between

the parties, while plaintiffs may have knowledge of the transfer
made by defendants Oledans of their interest in the property in
question in favor of their codefendants, yet insofar as the original
contract between plaintiffs and defendants are concerned, the
provisions thereof shall govern. For plaintiffs written consent to
any transfer is required by the provisions of their contract. Since
defendants were aware of the said provision, they should have
taken steps to obtain plaintiffs written consent if only to effect a
novation. To the mind of the court, it must have been due to a
premonition on the part of plaintiffs that there might be a
substitution of debtor that gave rise to the inclusion of the
aforequoted provision in their original contract.
It having been satisfactorily established that defendants are
indeed indebted to plaintiffs on the mortgage constituted by them
over the parcels of land in question, the period of payment of the
obligations having become due, plaintiffs are, therefore, entitled
to a foreclosure of the said mortgage.
The next question that crops up for determination is whether
or not defendants Oledans have a right against their co
defendants Venturanzas in this case. Exhibit 1Oledan which is
an Agreement and Deed of Sale of Undivided Share in Real Estate
entered into by and between the Venturanzas and the Oledans
clearly shows that by virtue of said document, the Venturanzas
assumed the whole obligation to plaintiffs for and in consideration
of the sum of
718

P44,571.66, onehalf of which amount was paid to the Oledans

upon the execution and signing thereof and the balance payable
within 8 months therefrom. The Venturanzas do not assail the
veracity of the document. However, they seem to deny having
agreed to the provisions of the penalty clause claiming that the
Oledans assured them that the same was just incorporated
therein as a matter of form but that it would not be enforced. The
Venturanzas having agreed to assume, as in fact, they have
assumed the whole obligation to the plaintiffs, they should,
therefore, be held liable to the Oledans for whatever the latter
shall be bound to pay to plaintiffs under the original contract
known as Deed of Sale with Purchase Money Mortgage.
WHEREFORE, judgment is hereby rendered in favor of
plaintiffs and against the defendants, ordering the latter jointly
and severally to pay to the former or to deposit with the clerk of
court the sum of P576,573.90 with interest thereon at the
stipulated rate of 6% per annum until fully paid, within 90 days
from notice hereof. In default of such payment the mortgaged
property will be sold at public auction to realize the mortgage
indebtedness and costs, in accordance with law.
On the crossclaim filed by defendantscrossclaimants
Oledans, crossdefendants Venturanzas are ordered to reimburse
to the former the amount which crossclaimants are to pay to
plaintiffs under the above judgment.
The parties will bear their own costs and expenses of
litigation (pp. 107113, Corrected Record on Appeal, pp. 327330,
rec).
Not satisfied with the foregoing decision of the court a quo,

particularly with respect to its dispositive portion,
plaintiffs filed a motion for reconsideration and/or new
trial, dated October 19, 1965, and an urgent supplemental
motion for reconsideration, dated November 2, 1965. The
defendants Oledans likewise filed their motion for
reconsideration dated November 2, 1965, and the
defendants Venturanzas also filed a motion for
reconsideration dated November 10, 1965.
Resolving the aforesaid motions of the parties litigants,
the trial court amended the dispositive portion of its
decision in question in its order dated November 22, 1965,
which reads as follows:
This case is again before the Court upon a motion for

reconsideration and/or new trial filed by plaintiffs dated October
19, 1965, an urgent supplemental motion for reconsideration
dated November 2, 1965 filed by the same plaintiffs, a motion for
719
VOL. 79, OCTOBER 28, 1977 719

reconsideration dated November 2, 1965 filed by defendants

Oledans, and a motion for reconsideration dated November 10,
1965 filed by defendants Venturanzas.
After a careful deliberation of the different motions for
reconsideration filed by the parties, the Court believes a further
modification of the decision of September 30, 1965, as amended by
the order of October 15, 1965, is in order. This, in accordance with
the agreement entered into by the parties embodied in the
document designated as Deed of Sale with Purchase Money
Mortgage.
WHEREFORE, the dispositive part of the decision of
September 30, 1965 is hereby reamended so as to read as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiffs and

against the defendants ordering the latter, jointly and severally, to pay
the former or to deposit with the clerk of court the sum of P576,573.90
with interest thereon at the stipulated rate of 6% per annum from
January 1, 1959 until fully paid, within 90 days from notice hereof. In
default of such payment the mortgaged property will be sold at public
auction to realize the mortgage indebtedness and costs, in accordance
with law.
On the crossclaim by the defendantscrossclaimants Oledans. Cross
defendants Venturanzas are ordered to reimburse lo the former the
amount which crossclaimants are to pay to plaintiffs under the above
judgment.
The parties will bear their own costs and expenses of litigation.
With the foregoing resolution the motion for reconsideration

filed by defendants Venturanzas and Oledans are, therefore,
DENIED (pp. 151152, Corrected Record on Appeal, pp. 349350,
rec).
From the foregoing judgment, as amended, the defendants

Venturanzas and Oledans now appeal directly before this
Court. The Venturanzas assigned four (4) errors while the
Oledans assinged five (5) errors allegedly committed by the
trial court. WE believe these errors taken together all boil
down to the following issues:
a. Whether, upon the filing by plaintiffs of their

complaint against the defendants on December 12,
1962, the obligation of the defendants had not yet
become due and demandable and, hence, the
complaint was filed prematurely.
b. Whether the payment of P576,573.90 with interest
thereon at the stipulated rate of 6% per annum was
to be made dependent upon the consummation of
the sale of the two haciendas of
720

defendants Venturanzas and, hence, there was a

novation of the contract of sate with purchase
money mortgage, Exhibit B, as a result of a change
in the manner of payment.
c. Whether the sale on December 28, 1959 by the
defendants Oledans to their codefendants
Venturanzas, of all their rights and interests in the
property, subjectmatter of the deed of sale with
purchase money mortgage, Exhibit B, likewise
constituted a novation thereof and, therefore, had
the effect of discharging the defendants Oledans
from their original obligation to the plaintiffs.
1. The first and second issues involve an interpretation of

paragraph II (c) of the Deed of Sale with Purchase Money
Mortgage, Exhibit B, which provides as follows:
(c) The remaining balance of the purchase price, after deducting

the sums of P100,000.00 and P40,000.00, mentioned in
Paragraphs (a) and (b) of this Article II, aggregating the sum of
FIVE HUNDRED SEVENTYSIX THOUSAND FIVE HUNDRED
SEVENTYTHREE PESOS AND NINETY CENTAVOS
(P576,573.90) shall be paid, jointly and severally, by the
VENDEES to the VENDORS WITHIN THREE (3) years from
January 1, 1959, with interest at the rate of Six Per Centum (6%)
per annum, until fully paid, of which the sum of P169,484.24, plus
the corresponding interest thereon, shall be paid by the
VENDEES to the VENDOR, FELIX CORTES y OCHOA, and the
balance of P407,089.66, plus the corresponding interest thereon,
shall be paid by the VENDEES to the VENDOR, NOEL J.
CORTES. x x x.
With respect to the first issuewhether the complaint was

filed prematurelythere is no dispute that plaintiffs filed
their complaint on December 12, 1962 that under the
terms of the contract, the pertinent portion of which is
quoted above, the defendants were given until January 1,
1962 within which to pay their obligation and that
January 1, 1962 had passed without the defendants having
paid to the plaintiffs the sum of P576,573.90 and the
corresponding interest thereon notwithstanding repeated
demands for payment made upon and duly received by
them (Exhs. D, D3, E, E3, pp. 72, 73, 73A, 7475, Folder
of Exhibits). Therefore, when plaintiffs filed the complaint
on December 12, 1962, the effects of default as against the
defendants had already arisen. Besides, no less than the
defendants Venturanzas themselves admitted in their brief
that they were delayed in the payment of the balance of
their obligation to the plaintiffs. Let us turn to page 25 of
their brief.
721
VOL. 79, OCTOBER 28, 1977 721

The delay in the payment of the balance of the purchase price

due to the plaintiffsappellees was caused by the delay in the
receipt of the payment of the purchase price of the two haciendas
of the herein defendantsappellants Venturanza spouses. The
noncompliance of herein defendantsappellants with their
obligations to plaintiffsappellees was due to circumstances not
within their control. x x x
One cannot admit being delayed in the payment of his

obligation unless he believes that his obligation is already
due and demandable. Stated otherwise, there is no delay if
the obligation is not yet due.
The alleged cause of their default in paying the balance
of the price, is not force majeure nor an act of God. Hence,
their failure to pay is not justified.
2. With respect to the second issue, defendants
Venturanzas contend that the threeyear period provided
for in the Deed of Sale with Purchase Money Mortgage,
Exhibit B, was dependent on the date when they would be
able to collect the purchase price of the two properties they
were trying to sell. For this purpose, they claim that Dr.
Cortes, one of the plaintiffs, granted them an extension of
time within which to pay and this act of Dr. Cortes
constituted a novation of the contract
This claim of defendants Venturanzas is equally devoid

of merit. A careful reading of the Deed of Sale with
Purchase Money Mortgage, Exhibit B, reveals the
conspicuous absence of any provision making the
consummation of the said contract dependent on the ability
of defendants Venturanzas to collect the purchase price of
their two haciendas. If this were the intention of the
parties, they should have clearly stated it in the contract. It
is true the defendants wrote two letters to Dr. Cortes
and/or his lawyer (Exhibits H and IVenturanza, p. 90,
Folder of Exhibits), wherein the defendants Verturanzas
requested an extension of time within which to pay and Dr.
Cortes admitted having been informed of the alleged
projected sale of defendants Venturanzas properties. Dr.
Cortes, however, vehemently denied having given said
defendants any extension of time.
The deed of sale with purchase money mortgage clearly
indicates that the balance of P576,573.90 shall be paid by
the defendants, jointly and severally, within three (3) years
from January 1, 1959, with interest at the rate of 6% per
annum, until fully paid. On January 1, 1962, the
defendants failed and refused to pay their
722

obligation. This is a clear case of an obligation with a

definite period ex die, which period was incidentally
established for the benefit of the defendants. The evidence
presented by the plaintiffs to substantiate these facts
approaches moral certainty, not merely preponderance of
evidence. Hence, defendants defense of novation as to the
period for payment, fails.
Furthermore, according to Article 1159 of the New Civil
Code, obligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith. The deed, Exhibit B, does not
show on its face that any of the limitations of the freedom
of contract under Article 1306 of the same Code, such as
law, morals, good customs, public order, or public policy,
exists. On the contrary, the terms of said exhibit are so
clear and leave no doubt with respect to the intention of the
contracting parties. Hence, the literal meaning of its
stipulations shall control (Art. 1370, New Civil Code). This
is so because the intention of the parties is clearly
manifested and they are presumed to intend the
consequences of their voluntary acts (Sec. 5, par. [c], Rule

131, Revised Rules of Court). There being nothing in the
deed, Exhibit B, which would argue against its
enforcement, it follows that there is no ground or reason
why it should not be given effect.
WE therefore, see no reason to overturn the finding of
the court a quo that the defendants are indebted to the
plaintiffs on the mortgage constituted by them over the 33
parcels of land in question since the period for payment of
the obligation had become due and, therefore, plaintiffs are
entitled to a foreclosure of the said mortgage.
3. The third and last issue pertains to the principal
defense of the defendants Oledans. These defendants claim
that because they transferred their interest and
participation in the property subject of the Deed of Sale
with Purchase Money Mortgage, Exhibit B, to the
defendants Venturanzas allegedly with the knowledge and
consent of the plaintiffs, novation by substitution of the
person of the debtor took place and, therefore, their
obligation to the plaintiffs had been extinguished.
In resolving this issue, it is important to state some
principles and jurisprudence underlying the concept and
nature of novation as a mode of extinguishing obligations.
According to Manresa, novation is the extinguishment of
an obligation by the substitution or change of the obligation
by a
723
VOL. 79, OCTOBER 28, 1977 723

subsequent one which extinguishes or modifies the first,

either by changing the object or principal conditions, or by
substituting the person of the debtor, or by subrogating a
third person to the rights of the creditor (8 Manresa 428,
cited in IV Civil Code of the Philippines by Tolentino 1962
ed., p. 352). Unlike other modes of extinction of obligations,
novation is a juridical act with a dual functionit
extinguishes an obligation and creates a new one in lieu of
the old.
Article 1293 of the New Civil Code provides:
Novation which consists in substituting a new debtor in the place

of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the
creditor (italics supplied).
Under this provision, there are two forms of novation by

substituting the person of the debtor, and they are: (1)
expromision and (2) delegacion. In the former, the initiative
for the change does not come from the debtor and may even
be made without his knowledge, since it consists in a third
person assuming the obligation. As such, it logically
requires the consent of the third person and the creditor. In
the latter, the debtor offers and the creditor accepts a third
person who consents to the substitution and assumes the
obligation, so that the intervention and the consent of these
three persons are necessary (8 Manresa 436437, cited in
IV Civil Code of the Philippines by Tolentino, 1962 ed., p.
360). In these two modes of substitution, the consent of the
creditor is an indispensable requirement (Garcia vs. Khu
Yek Chiong, 65 Phil. 466, 468).
Defendants Oledans theory is that the Agreement and
Deed of Sale of Undivided Share in Real Estate (Exhibit 1
Oledan, p. 91, Folder of Exhibits), executed and entered
into by and between them and their codefendants
Venturanzas, and which in effect transferred all their
interest and participation in the property subject of the
deed of mortgage (Exhibit B) to their codefendants
Venturanzas, extinguished their obligation to the plaintiffs.
In support of their theory, they cited Article 1293 of the
New Civil Code, quoted above, and then concluded that the
creditors consent to the novation which consists one is
entirely unnecessary and senseless. They also cited the
cases of Rio Grande Oil Co. vs. Coleman (39 O.G. No. 38,
986) and Santisimo Rosario de Molo vs. Gemperle (39 O.G.
No. 59, 1410), both decided by the Court of
724

Appeals, through the learned Mr. Justice Sabino Padilla,

who later became an active and respected member of this
Court.
A perusal of the aforecited cases shows the following:
From the Coleman case:
x x x A personal novation by substitution of another in place of

the debtor may be effected with or without the knowledge of the
debtor but not without the consent of the creditor (Art. 1205, Civil
Code [now Art. 1293, New Civil Code]). This is the legal provision
applicable to the case at bar. The reason for the requirement that
the creditor give his consent to the substitution is obvious. The

substitution of another in place of the debtor may prevent or delay
the fulfillment or performance of the obligation by reason of the
inability or insolvency of the new debtor hence, the consent of the
creditor is necessary. This kind of substitution may take place
without the knowledge of the debtor when a third party assumes
the obligation of the debtor with the consent of the creditor. The
novation effected in this way is called expromision. Substitution
may also take place when the debtor offers and the creditor
accepts a third party who assumes the obligation of the debtor.
The novation made in this manner is called delegacion. (Art. 1206,
Civil Code [now Art. 1295, New Civil Code]). In these two modes of
substitution, the consent of the creditor is always required. x x x
(Italics supplied).
From the Gemperte case:
A personal novation by substitution of another in place of the

debtor may take place with or without the knowledge of the
debtor but not without the consent of the creditor (article 1205,
Civil Code [now Art. 1293, New Civil Code]). The reason for the
requirement of the creditors consent to such substitution is
obvious. Substitution of one debtor, for another may delay or
prevent the fulfillment or performance of the obligation by reason
of the temporary inability or insolvency of the new debtor. In a
novation that takes place when the debtor offers and the creditor
accepts a third party in place of the former debtor, the consent of
the creditor is also necessary (art. 1206, Civil Code [now Art.
1295, New Civil Code]). x x x
After going over carefully the aforecited portions of the

decisions of the Court of Appals, cited by the defendants
Oledans, WE find that they do not help any the cause of
said defendants on the contrary, they both militate against
their theory. Be that as it may, suffice it to state that while
the Agreement and Deed of Sale of Undivided Share in
Real Estate, Exhibit 1Oledan, might have created a
juridical relation as between defendants Venturanzas and
725
VOL. 79, OCTOBER 28, 1977 725

Oledans, it cannot however affect the relation between

them on one hand, and the plaintiffs, on the other, since
the latter are not privies to the said agreement, and this
kind of novation cannot be made without the consent of the
plaintiffs (Garcia vs. Khu Yek Chiong, et al., supra). One
reason for the requirement of the creditors consent to such

substitution is obvious. Substitution of one debtor for
another may delay or prevent the fulfillment of the
obligation by reason of the financial inability or insolvency
of the new debtor hence, the creditor should agree to
accept the substitution in order that it may be binding on
him.
Incidentally, this case is, in practically all respects,
similar to, if not identical with, the case of McCullough &
Co. vs. Veloso and Serna (46 Phil. 1). In that case, plaintiff
sold to defendant Veloso its property known as
McCullough Building consisting of a land with the
building thereon, for the price of P700,000.00. Veloso paid a
down payment of P50,000.00 cash on account at the
execution of the contract, and the balance of P650,000.00 to
be paid on installment basis. To secure the payment of the
balance, Veloso mortgaged the property purchased in favor
of McCullough. It was stipulated that in case of failure on
the part of Veloso to comply with any of the stipulations
contained in the mortgage deed, all the installments with
the interest thereon at the rate of 7% per annum shall
become due, and the creditor shall then have the right to
bring the proper action in court.
Subsequently, Veloso sold the property with the
improvements thereon for P100,000.00 to Serna, who
agreed to respect the mortgage on the property in favor of
McCullough and to assume Velosos obligation to pay the
plaintiff the balance. Veloso paid P50,000.00 on account of
the P650,000.00 and Serna made several payments up to
the total sum of P250,000.00. Subsequently, however,
neither Veloso nor Serna made any payment upon the last
installments, by virtue of which delay, the whole obligation
became due McCullough went to court.
After due trial, the court sentenced defendant Veloso to
pay the plaintiff the sum of P510,047.34, with interest
thereon at 7% per annum, within three months otherwise,
the property mortgaged shall be sold at public auction to
the highest bidder and in the manner provided by law, the
proceeds of the sale to be applied to the payment of the
judgment, after deducting the fees of the courts officer.
726

On appeal, defendant Veloso contended that having sold

the property to Serna, and the latter having assumed the
obligation to pay the plaintiff the unpaid balance of the

price secured by the mortgage upon the property, he was
relieved from the obligation and it then devolved upon
Serna to pay the plaintiff. This means that as a
consequence of the contract between the appellant and
Serna, the contract between him and the plaintiff was
novated by the substitution of Serna as a new debtor.
The Supreme Court ruled
In order that this novation may take place, the law requires the
consent of the creditor (Art. 1205 of the Old Civil Code now Art.
1293 of the Now Civil Code). The plaintiff did not intervene in the
Contract between Veloso and Serna and did not expressly give his
consent to this substitution. Novation must be express, and
cannot be presumed.
In the case at bar, the agreement, Exhibit 1Oledan, relied

upon by the defendants Oledans, does not show on its face
that the plaintiffs intervened in, much less gave their
consent to, the substitution as a matter of fact, plaintiff
Cortes vehemently denied having consented to the transfer
of rights from the Oledans to the Venturanzas alone. Res
inter alios acta alteri nocere non debet. Besides, no less
than defendant Jose Oledan himself testified that he did
not personally see Dr. Cortes about the transfer of rights in
Exhibit 1Oledan, despite his commitment with his co
defendants in said agreement to inform Messrs. Felix
Cortes and Noel J. Cortes (Jesus Noel) of the execution of
the said agreement (p. 15, t.s.n. hearing of January 19,
1965). There is thus a complete absence of animus novandi,
whether express or implied, on the part of the creditors
the Corteses.
With respect to the claim of plaintiffs for reasonable
attorneys fees, paragraph III (G) of the Deed of Sale with
Purchase Money Mortgage, Exhibit B, provides:
G. In the event of default on the part of the VENDEES and by

reason thereof a suit is brought for the foreclosure of this
mortgage or any other legal proceedings is instituted for the
enforcement of any of the rights of the VENDORS hereunder, a
reasonable compensation shall be paid, jointly and severally, by
the VENDEES to the VENDORS for attorneys fees, in addition to
the fees and costs allowed by the Rules of Court.
727
VOL. 79, OCTOBER 28, 1977 727

The validity of the above agreement for reasonable

attorneys fees was questioned in the pleadings of the
defendants before the trial court. Before this Court, the
plaintiffs in their brief (pp. 121123, 126), called OUR
attention to the oversight in respect thereto committed by
the court a quo.
With respect, however, to the interest due to the
plaintiffs on the indebtedness of the defendants, WE are
reminded of the mandate of Article 2212 of the New Civil
Code, which provides:
Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
Per stipulation, plaintiffs are entitled to collect from

defendants interest at the rate of six per centum (6%) per
annum on the remaining balance of P576,573.90 from
January 1, 1959. Hence, for the period from January 1,
1959 to December 12, 1962, the date of the filing of the
complaint, plaintiffs are entitled to collect from the
defendants, by way of interest at six percent per annum,
the sum of P136,482.13. Applying the aforequoted legal
provision, this amount of P136,482.13 should be added to
the principal of P576,573.90, making a total of
P713,056.03, which shall earn legal interest stipulated at
six percent per annum from December 13, 1962 until fully
paid. Such interest is not due to stipulation rather it is due
to the mandate of the law hereinbefore quoted.
Now, considering that the total amount recoverable in
this case approximates 1.4 million pesos as of October 31,
1977 (consisting of principal of P576,573.90, plus
P136,482.13 interest from January 1, 1959 to December 12,
1962, plus P636.827.37 interest from December 13, 1962 to
October 31, 1977), and that every step in the foreclosure
proceedings had been tenaciously contested, not to mention
the work it will still require counsel for the plaintiffs to
collect the same by judicial proceedings, WE find that
P50,000.00 is a reasonable amount to which the plaintiffs
are entitled as and for attorneys fees.
Anent the crossclaim of defendants Oledans against
their codefendants Venturanzas to the effect that the
defendants Venturanzas are liable to them for the balance
of P22,285.83 in addition to the penalties stipulated in the
agreement and deed of sale, Exhibit 1Oledan, and the
interests provided therein, WE find the claim for the
balance of P22,285.83 meritorious.
728

On their claim for penalties and interests as provided for in

the same agreement, crossclaimants and defendants
Oledans rely on the pertinent portions of the agreement,
which read:
x x x x x
2. That upon the execution and signing of this Agreement, the
PARTIES OF THE FIRST PART (the Venturanzas) will pay to
the PARTIES OF THE SECOND PART (the Oledans), and the
latter hereby acknowledge receipt thereof, of the sum of TWENTY
TWO THOUSAND (TWO HUNDRED) AND EIGHTY FIVE
PESOS AND EIGHTY THREE CENTAVOS (P22,285.83),
Philippine Currency (Prudential Bank Check No. 965159) and the
balance of Twenty Two Thousand Two Hundred and Eighty Five
Pesos and Eighty Three centavos (P22,285.83), Philippine
Currency, shall be paid by the PARTIES OF THE FIRST PART to
the PARTIES OF THE SECOND PART within eight (8) months
from the date and execution of this Agreement and Deed of Sale
x x x x x x x x x x x
4. That in the event of failure on the part of the PARTIES OF
THE FIRST PART to pay the said balance of Twenty Two
Thousand Two Hundred and Eighty Five Pesos and Eighty
Centavos (P22,285.80) within the said period of eight (8) months
stipulated above, the said PARTIES OF THE FIRST PART will
pay to the PARTIES OF THE SECOND PART a penalty of Six
Thousand Three Hundred Sixty Seven Pesos and Thirty Centavos
(P6,367.30) for the period from August 28, 1960 to August 28,
1961 another penalty of P6,367.30 for the period from August 28,
1961 to August 28, 1962 and another penalty of P6,367.30 for the
period from August 28, 1962 to August 28, 1963. It is agreed that
any part payment on the said balance of P22,285.80 has no effect
on the payment of the penalty provided for herein, and in case of
nonpayment of the full amount of the balance of P22,285.80
within the said period of three years aforementioned or up to
August 28, 1963, then the said balance left unpaid plus the
penalties due, as provided for herein, shall bear an interest at the
legal rate. It is of course understood, that the penalties and
interest provided for herein shall not apply if the PARTIES OF
THE FIRST PART shall pay the said balance of Twenty Two
Thousand Two Hundred and Eighty Five Pesos and Eighty
Centavos (P22,285.80) within the eight (8) months stipulated in
paragraph 2 above, or on or before August 28, 1960
x x x x x x x x x x
(Brief for defendants Oledans, pp. 3234, Folder of Exhibits, pp.

9293).
A meticulous analysis of the aforequoted portions of

Exhibit 1Oledan shows:
729
VOL. 79, OCTOBER 28, 1977 729

1. That the Venturanzas were given a period of eight

(8) months from and after December 28, 1959the
date of the execution of the agreementwithin
which to pay the balance of P22,285.80
2. That in the event of failure on the part of the
Venturanzas to pay the said balance of P22,285.80
within the said period of eight (8) months, the
Venturanzas would pay to the Oledans a penalty of
P6,367.30 annually, bediming August 28, 1960, for
a period of three (3) years up to August 28, 1963,
regardless of any partial payment which the
Venturanzas might make on the balance of
P22,285.80 and
3. That in case of nonpayment of the whole obligation
of P22,285.80 within the stipulated period of three
(3) years from August 28, 1960 to August 28, 1963,
such obligation or any balance thereof remaining
unpaid, plus the penalties due at the rate of
P6,367.30 annually for three (3) years, shall earn
interest at the legal rate.
Going over the entire agreement, Exhibit 1Otedan, WE

have noted the following:
1. That in connection with the deed of sale with

mortgage, Exhibit B, the Venturanzas were the
ones who paid out of their own personal funds the
One Hundred Thousand Pesos (P100,000.00) to the
plaintiffs, representing the down payment on the
purchase price of the property, with the
understanding that the Oledans would reimburse
the Venturanzas their onehalf () share of
P50,000.00
2. That subsequently, the Oledans decided not to
continue with the payment or reimbursement to the
Venturanzas of their onehalf () share of
P50,000.00 as above indicated, but they agreed to
share in the amount of their investment of only

P20,000.00
3. That the Venturanzas were again the ones who
paid out of their own personal funds the succeeding
P40,000.00, which fell due on January 1, 1959, to
the plaintiffs
4. That it was only on January 16, 1959 that the
Oledans were able to reimburse to the Venturanzas
their onehalf () share of the P40,000.00 and
5. That the sum of P20,000.00 was the only amount
paid by the Oledans to and/or invested with the
Venturanzas in their joint venture envisioned in
the deed of sale with mortgage, Exhibit B.
In support of their claim for penalties and interests, the

crossclaimants and defendants Oledans contend that this
is a normal
730

stipulation in contracts of this character. WE do not agree

and hereby reject such claim for penalties as well as for
interests.
Settled is the rule that the contracting parties may
establish such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or
public policy (Art. 1306, New Civil Code). The records show
that crossclaimants and defendants Oledans more than
broke even on their investment of P20,000.00 when they
received from their codefendants Venturanzas the sum of
P22,285.83 on December 28, 1959. From all indications, it
would seem that defendants Venturanzas threw caution to
the four winds, so to say, and bound themselves to pay to
their codefendants Oledans the stipulated penalty of
P6,367.30 annually for three (3) years, beginning August
28, 1960, in their belief that within the said period of time
they would have more than enough money with which to
pay their obligation to the plaintiffs. Unfortunately,
however, to their great disappointment, the unexpected
happened as they ended up with no money with which to
pay not only the balance of their obligation to the plaintiffs
in the sum of P576,573.90, but also the balance of their
obligation to their codefendants Oledans in the sum of
P22,285.30. Be that as it may, justice and morality cannot

consent to and sanction a clearly iniquitous deprivation of
property, repulsive to the common sense of man. This is
what this Court said some sixty (60) years ago in the case
of Ibarra vs. Aveyro and Pre (37 Phil. 273, 282), which WE
cannot help but quote hereunder:
Notwithstanding the imprudence and temerity shown by the

defendants by their execution of a ruinous engagement, assumed,
as it appears, knowingly and voluntarily, morality and justice
cannot consent to and sanction a repugnant spoliation and
iniquitous deprivation of property, repulsive to the common sense
of man and therefore, as all acts performed against the provisions
of law are null and void, and as the penal clause referred to,
notwithstanding its being an ostensible violation of morals, was
inserted in said promissory note, and as there is no law that
expressly authorizes it, we must conclude that the contracting
party favored by said penal clause totally lacks all right of action
to enforce its fulfillment (italics supplied).
WHEREFORE, THE APPEALED JUDGMENT IS

MODIFIED AND ANOTHER ONE IS RENDERED,
DIRECTING:
731
VOL. 79, OCTOBER 28, 1977 731

I. ALL THE DEFENDANTS APPELLANTS

VENTURANZAS AND OLEDANS TO PAY
JOINTLY AND SEVERALLY THE PLAINTIFFS
APPELLEES:
A. THE SUM OF FIVE HUNDRED SEVENTY SIX

THOUSAND FIVE HUNDRED SEVENTY THREE
PESOS AND NINETY CENTAVOS (P576,573.90),
PLUS ONE HUNDRED THIRTY SIX THOUSAND
FOUR HUNDRED EIGHTY TWO PESOS AND
THIRTEEN CENTAVOS (P136,482.13) INTEREST
AT THE RATE OF SIX PER CENTUM (6%) PER
ANNUM FROM JANUARY 1, 1959 TO
DECEMBER 12, 1962, PLUS INTEREST AT THE
SAME RATE ON THE PRINCIPAL AMOUNT OF
P576, 573.90 ADDED TO THE ACCRUED
INTEREST, FOR THE PERIOD FROM
DECEMBER 13, 1962 UNTIL THE WHOLE
OBLIGATION IS FULLY PAID, WITHIN NINETY
(90) DAYS FROM NOTICE HEREOF. IN

DEFAULT OF SUCH PAYMENT, THE
MORTGAGED PROPERTIES SHALL BE SOLD
AT PUBLIC AUCTION TO REALIZE THE
MORTGAGE INDEBTEDNESS AND COSTS IN
AC CORDANCE WITH LAW AND
B. THE SUM OF FIFTY THOUSAND PESOS
(P50,000. 00) AS ATTORNEYS FEES:
II. THE CROSSDEFENDANTS VENTURANZAS TO

PAY AND/OR REIMBURSE THE CROSS
CLAIMANTS OLEDANS:
A. THE SUM OF TWENTY TWO THOUSAND TWO

HUNDRED AND EIGHTY FIVE PESOS AND
EIGHTY THREE CENTAVOS (P22,285.83), PLUS
INTEREST AT THE RATE OF SIX PERCENT (6%)
PER ANNUM COUNTED FROM THE FINALITY
OF THIS DECISION, UNTIL THE SAME IS
FULLY PAID
B. THE AMOUNT WHICH SAID CROSS
CLAIMANTS MAY PAY TO PLAINTIFFS
APPELLEES UNDER THIS JUDGMENT AND
III. THE DEFENDANTSAPPELLANTS

VENTURANZAS TO PAY TREBLE COSTS.
732

SO ORDERED.
Teehankee (Chairman), Muoz Palma, Martin,

Fernandez and Guerrero, JJ., concur.
Judgment modified.
Notes.A provision in passage tickets that carriage by

successive air carriers is to be regarded as a single
operation make the ticket issuing carrier liable for tortious
conduct of other carriers. (KLM Royal Dutch Airlines vs.
Court of Appeals, 65 SCRA 237).
Any substantial modification in government contracts is
not allowed by law. (Mota vs. San Diego, 63 SCRA 170).
The assignment in favor of the lessor, by a third person,
of his rights under a deed of chattel mortgage executed by
the lessor in favor of said person in order to guarantee the

payment of the rentals due up to the date of the
assignment, did not novate or otherwise affect the
obligation to pay rentals accruing subsequently thereto.
(Leonor vs. Sycip, 1 SCRA 1215).
If a bondholder gives up his bonds and accepts other
securities in their place, there is, in the absence of any
agreement governing the transaction, a novation of the
debt, a payment of the former obligation, and a
substitution of the latter. (United States Life Insurance Co.
in the City of the New York vs. Central Bank, 12 SCRA
752).
The mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed to
assume the obligation, when there is no agreement that the
first debtor shall be released from responsibility, does not
constitute novation, and the creditor can still enforce the
obligation against the original debtor. (Magdalena Estates,
Inc. vs. Rodriguez, 18 SCRA 967).
Where the new obligation merely reiterates or ratifies
the old obligation, although the former effects but minor
alterations or slight modifications with respect to the cause
or object or conditions of the latter, such changes do not
effectuate any substantial incompatibility between the two
obligations. (Millar vs. Court of Appeals, 38 SCRA 642).
o0o

Ligutan vs. Court of Appeals
*
G.R. No. 138677. February 12, 2002.
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA,

petitioners, vs. HON. COURT OF APPEALS & SECURITY
BANK & TRUST COMPANY, respondents.
Obligations and Contracts Penalty Clauses Words and

Phrases A penalty clause, expressly recognized by law, is an
accessory undertaking to assume greater liability on the part of an
obligor in case of breach of an
_______________
* THIRD DIVISION.
561
VOL. 376, FEBRUARY 12, 2002 561
obligation Although a court may not at liberty ignore the freedom

of the parties to agree on such terms and conditions as they see fit
that contravene neither law nor morals, good customs, public order
or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable
or if the principal obligation has been partly or irregularly
complied with.A penalty clause, expressly recognized by law, is
an accessory undertaking to assume greater liability on the part
of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide, in
effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the
existence and on the measure of damages caused by the breach.
http://central.com.ph/sfsreader/session/0000015cd9e322e30da54fdf003600fb002c009e/t/?o=False 1/14
Although a court may not at liberty ignore the freedom of the

parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable or if the
principal obligation has been partly or irregularly complied with.
Same Same The question of whether a penalty is reasonable
or iniquitous can be partly subjective and partly objective.The
question of whether a penalty is reasonable or iniquitous can be
partly subjective and partly objective. Its resolution would depend
on such factors as, but not necessarily confined to, the type, extent
and purpose of the penalty, the nature of the obligation, the mode
of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the sound
discretion of the court. In Rizal Commercial Banking Corp. vs.
Court of Appeals, just an example, the Court has tempered the
penalty charges after taking into account the debtors pitiful
situation and its offer to settle the entire obligation with the
creditor bank. The stipulated penalty might likewise be reduced
when a partial or irregular performance is made by the debtor.
The stipulated penalty might even be deleted such as when there
has been substantial performance in good faith by the obligor,
when the penalty clause itself suffers from fatal infirmity, or
when exceptional circumstances so exist as to warrant it.
Same Same Interests The essence or rationale for the
payment of interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty, and a penalty
stipulation is not necessarily preclusive of interest, if there is an
agreement to that effect, the two being distinct concepts which may
separately be demanded What may justify a court in not allowing
the creditor to impose full surcharges and
562
penalties, despite an express stipulation therefor in a valid

agreement, may not equally justify the nonpayment or reduction
of interest.Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness and
prays that the Court reduce the amount. This contention is a
fresh issue that has not been raised and ventilated before the
courts below. In any event, the interest stipulation, on its face,
does not appear as being that excessive. The essence or rationale

for the payment of interest, quite often referred to as cost of
money, is not exactly the same as that of a surcharge or a penalty.
A penalty stipulation is not necessarily preclusive of interest, if
there is an agreement to that effect, the two being distinct
concepts which may separately be demanded. What may justify a
court in not allowing the creditor to impose full surcharges and
penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the nonpayment or reduction
of interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking business and
the core of a banks existence.
Same Attorneys Fees Where the rate of attorneys fees has
been agreed to by the parties and intended to answer not only for
litigation expenses but also for collection efforts as well, an award
of 10% attorneys fees is reasonable.Petitioners next assail the
award of 10% of the total amount of indebtedness by way of
attorneys fees for being grossly excessive, exorbitant and
unconscionable visavis the time spent and the extent of services
rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorneys fees has been agreed to
by the parties and intended to answer not only for litigation
expenses but also for collection efforts as well, the Court, like the
appellate court, deems the award of 10% attorneys fees to be
reasonable.
Same Novation Requisites In order that an obligation may
be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the
old and the new obligation be on every point incompatible with
each other When not expressed, incompatibility is required so as to
ensure that the parties have indeed intended such novation despite
their failure to express it in categorical terms.Extinctive
novation requires, first, a previous valid obligation second, the
agreement of all the parties to the new contract third, the
extinguishment of the obligation and fourth, the validity of the
new one. In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligation be on every point incompatible with each other. An
obligation to pay a sum of money is not extinctively novated by a
new instrument which merely changes the terms of payment or
adding com
563
VOL. 376, FEBRUARY 12, 2002 563
patible covenants or where the old contract is merely

supplemented by the new one. When not expressed,
incompatibility is required so as to ensure that the parties have
indeed intended such novation despite their failure to express it
in categorical terms. The incompatibility, to be sure, should take
place in any of the essential elements of the obligation, i.e., (1) the
juridical relation or tie, such as from a mere commodatum to lease
of things, or from negotiorum gestio to agency, or from a mortgage
to antichresis, or from a sale to one of loan (2) the object or
principal conditions, such as a change of the nature of the
prestation or (3) the subjects, such as the substitution of a debtor
or the subrogation of the creditor. Extinctive novation does not
necessarily imply that the new agreement should be complete by
itself certain terms and conditions may be carried, expressly or
by implication, over to the new obligation.

Court of Appeals.

Florimond C. Rous for petitioners.
Castro, Bias, Samillano & Mangrobang for Security
Bank & Trust Co.
VITUG, J.:
Before the Court is a petition for review on certiorari under

Rule 45 of the Rules of Court, assailing the decision and
resolutions of the Court of Appeals in CAG.R. CV No.
34594, entitled Security Bank and Trust Co. vs. Tolomeo
Ligutan, et al.
Petitioners Tolomeo Ligutan and Leonidas dela Llana
obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust
Company. Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum borrowed
with an interest of 15.189% per annum upon maturity and
to pay a penalty of 5% every month on the outstanding
principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by
way of attorneys fees if the matter were indorsed to a
lawyer for collection or if a suit were instituted to enforce
payment. The obligation matured on 8 September 1981 the
bank, however, granted an extension but only up until 29
December 1981.
564

Despite several demands from the bank, petitioners failed

to settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a final
demand letter to petitioners informing them that they had
five days within which to make full payment. Since
petitioners still defaulted on their obligation, the bank filed
on 3 November 1982, with the Regional Trial Court of
Makati, Branch 143, a complaint for recovery of the due
amount.
After petitioners had filed a joint answer to the
complaint, the bank presented its evidence and, on 27
March 1985, rested its case. Petitioners, instead of
introducing their own evidence, had the hearing of the case
reset on two consecutive occasions. In view of the absence
of petitioners and their counsel on 28 August 1985, the
third hearing date, the bank moved, and the trial court
resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed
a motion for reconsideration of the order of the trial court
declaring them as having waived their right to present
evidence and prayed that they be allowed to prove their
case. The court a quo denied the motion in an order, dated
5 September
1
1988, and on 20 October 1989, it rendered its
decision, the dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiff and against the defendants, ordering the latter to pay,
jointly and severally, to the plaintiff, as follows:
1. The sum of P114,416.00 with interest thereon at the rate

of 15.189% per annum, 2% service charge and 5% per
month penalty charge, commencing on 20 May 1982 until
fully paid
2. To pay the further sum equivalent to 10% of the total
amount of indebtedness for and as attorneys fees and
2
3. To pay the costs of the suit.
Petitioners interposed an appeal with the Court of Appeals,

questioning the rejection by the trial court of their motion
to pres
_______________
1 Rollo, p. 114.
2 Rollo, pp. 117118.
565
VOL. 376, FEBRUARY 12, 2002 565

ent evidence and assailing the imposition of the 2% service

charge, the 5% per month penalty 3
charge and 10%
attorneys fees. In its decision of 7 March 1996, the
appellate court affirmed the judgment of the trial court
except on the matter of the 2% service charge which was
deleted pursuant to Central Bank Circular No. 783. Not
fully satisfied with the decision of the appellate court, both4
parties filed their respective motions for reconsideration.
Petitioners prayed for the reduction of the 5% stipulated
penalty for being unconscionable. The bank, on the other
hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but
from the time of default as so stipulated in the contract of
the parties.
On 28 October 1998, the Court of Appeals resolved the
two motions thusly:
We find merit in plaintiffappellees claim that the principal sum

of P114,416.00 with interest thereon must commence not on the
date of filing of the complaint as we have previously held in our
decision but on the date when the obligation became due.
Default generally begins from the moment the creditor
demands the performance of the obligation. However, demand is
not necessary to render the obligor in default when the obligation
or the law so provides.
In the case at bar, defendantsappellants executed a
promissory note where they undertook to pay the obligation on its
maturity date without necessity of demand. They also agreed to
pay the interest in case of nonpayment from the date of default.
x x x x x x x x x
While we maintain that defendantsappellants must be bound
by the contract which they acknowledged and signed, we take
cognizance of their plea for the application of the provisions of
Article 1229 x x x.
Considering that defendantsappellants partially complied
with their obligation under the promissory note by the reduction
of the original amount of P120,000.00 to P114,416.00 and in order
that they will finally settle their obligation, it is our view and we
so hold that in the interest of justice and public policy, a penalty
of 3% per month or 36% per annum would suffice.
_______________
3 Rollo, p. 39.
4 Rollo, pp. 55, 58.
566

x x x x x x x x x
WHEREFORE, the decision sought to be reconsidered is
hereby MODIFIED. The defendantsappellants Tolomeo Ligutan
and Leonidas dela Llana are hereby ordered to pay the plaintiff
appellee Security Bank and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the rate

of 15.189% per annum and 3% per month penalty charge
commencing May 20, 1982 until fully paid
2. The sum equivalent to 10% of the total 5
amount of the
indebtedness as and for attorneys fees.
On 16 November 1998, petitioners filed an omnibus motion

for reconsideration
6
and to admit newlydiscovered
evidence, alleging that while the case was pending before
the trial court, petitioner Tolomeo Ligutan and his wife
Bienvenida Ligutan executed a real estate mortgage on 18
January 1984 to secure the existing indebtedness of
petitioners Ligutan and dela Llana with the bank.
Petitioners contended that the execution of the real estate
mortgage had the effect of novating the contract between
them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August 1986,
that they were not informed about it, and the bank did not
credit them with the proceeds of the sale. The appellate
court denied the omnibus motion for reconsideration and to
admit newlydiscovered evidence, ratiocinating that such a
second motion for reconsideration cannot be entertained
under Section 2, Rule 52, of the 1997 Rules of Civil
Procedure. Furthermore, the appellate court said, the
newlydiscovered evidence being invoked by petitioners had
actually been known to them when the case was brought on
appeal7
and when the first motion for reconsideration was
filed.
Aggrieved by the decision and resolutions of the Court of
Appeals, petitioners elevated their case to this Court on 9
July 1999 via a petition for review on certiorari under Rule
45 of the Rules of Court, submitting thusly
_______________
5 Rollo, pp. 4849.

6 Rollo, p. 67.
7 Rollo, p. 52.
567
VOL. 376, FEBRUARY 12, 2002 567

I. The respondent Court of Appeals seriously erred in

not holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty
six (36%) percent per annum imposed by private
respondent bank on petitioners loan obligation are
still manifestly exhorbitant, iniquitous and
unconscionable.
II. The respondent Court of Appeals gravely erred in
not reducing to a reasonable level the ten (10%)
percent award of attorneys fees which is highly and
grossly excessive, unreasonable and
unconscionable.
III. The respondent Court of Appeals gravely erred in
not admitting petitioners newly discovered
evidence which could not have been timely
produced during the trial of this case.
IV. The respondent Court of Appeals seriously erred in
not holding that there was a novation of the cause
of action of private respondents complaint in the
instant case due to the subsequent execution of the
real estate mortgage during the pendency of this
case and 8 the subsequent foreclosure of the
mortgage.
Respondent bank, which did not take an appeal, would,

however, have it that the penalty sought to be deleted by
petitioners was even insufficient to fully cover and
compensate for the cost of money brought about by the
radical devaluation and decrease in the purchasing power
of the peso, particularly visavis the U.S. dollar, taking
into account the time frame of its occurrence. The Bank
would stress that only the amount of P5,584.00 9
had been
remitted out of the entire loan of P120,000.00. 10
A penalty clause, expressly recognized by law, is an
accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. It
functions to strengthen the coer
_______________
8 Rollo, pp. 1718.

9 Memorandum for Respondent.
10 Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case
of noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code. (1152a)
568

11
cive force of the obligation and to provide, in effect, for
what could be the liquidated damages resulting from such
a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the
existence
12
and on the measure of damages caused by the
breach. Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a
stipulated penalty, nevertheless, may be equitably reduced
by the courts if it is iniquitous or unconscionable or if the
principal
13
obligation has been partly or irregularly complied
with.
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the
sound discretion of the court.
14
In Rizal Commercial Banking
Corp. vs. Court of Appeals, just an example, the Court has
tempered the penalty charges after taking into account the
debtors pitiful situation and its offer to settle the entire
obligation with the creditor bank. The stipulated penalty
might likewise be reduced when 15a partial or irregular
performance is made by the debtor. The stipulated pen
_______________
11 SSS vs. Moonwalk Development and Housing Corporation, 221 SCRA

119.
12 Article 1228, Civil Code Manila Racing Club vs. Manila Jockey
Club, 69 Phil. 55.
13 Article 2227. Liquidated damages, whether intended as an indemnity
or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
Article 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.
14 289 SCRA 292 (1998).
15 Insular Bank of Asia and America vs. Spouses Salazar (159 SCRA
111), for instance, the Court reduced the penalty charge of 2% a month to
1% a month, considering that, on a loan of P42,050.00, the debtor spouses
569
VOL. 376, FEBRUARY 12, 2002 569

alty might even be deleted such as when there has 16

been
substantial performance in good faith by the obligor, when
the penalty clause itself suffers from fatal infirmity, 17or
when exceptional circumstances so exist as to warrant it.
The Court of Appeals, exercising its good judgment in
the instant case, has reduced the penalty interest from 5%
a month to 3% a month which petitioner still disputes.
Given the circumstances, not to mention the repeated acts
of breach by petitioners of their contractual obligation, the
Court sees no cogent ground to modify the ruling of the
appellate court.
Anent the stipulated interest of 15.189% per annum,
petitioners, for the first time, question its reasonableness
and prays that the Court reduce the amount. This
contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being
that excessive. The essence or rationale for the payment of
interest, quite often referred to as cost of money, is not
exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest,
if there is an agreement to that effect, the two being 18
distinct concepts which may separately be demanded.
What may justify a court in not allowing the creditor to
impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally
justify the nonpayment or reduction of interest. Indeed,

the interest prescribed in loan financing arrangements is a
fundamental part19 of the banking business and the core of a
banks existence.
_______________
paid a total of P68,676.75 which was applied by the creditor to satisfy

the penalty and interest charges.
16 Art. 1234. If the obligation has been substantially performed in good
faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee.
17 Garcia vs. Court of Appeals, 167 SCRA 815 (1988) See Palmares vs.
Court of Appeals, 288 SCRA 423 (1998) Ibarra vs. Aveyro, 37 Phil. 278.
18 Insular Bank of Asia and America vs. Spouses Salazar, 159 SCRA
133 (1988) GSIS vs. Court of Appeals, 145 SCRA 311 (1986) Equitable
Banking Corporation vs. Liwanag, 32 SCRA 293 (1970).
19 Rizal Commercial Banking Corporation vs. Court of Appeals, 289
SCRA 292 (1998).
570

Petitioners next assail the award of 10% of the total

amount of indebtedness by way of attorneys fees for being
grossly excessive, exorbitant and unconscionable visavis
the time spent and the extent of services rendered by
counsel for the bank and the nature of the case. Bearing in
mind that the rate of attorneys fees has been agreed to by
the parties and intended to answer not only for litigation
expenses but also for collection efforts as well, the Court,
like the appellate court, deems the award of 10% attorneys
fees to be reasonable.
Neither can the appellate court be held to have erred in
rejecting petitioners call for a new trial or to admit newly
discovered evidence. As the appellate court so held in its
resolution of 14 May 1999
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no

second motion for reconsideration of a judgment or final
resolution by the same party shall be entertained. Considering
that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to
this court that the newlydiscovered evidence being invoked by
defendantsappellants have actually been existent when the case
was brought on appeal to this court as well as when the first

motion for reconsideration was filed. Hence, it is quite surprising
why defendantsappellants raised the alleged newlydiscovered
evidence only at this stage when they could have done so in the
earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for
reconsideration is not contingent upon the averment of new
grounds to assail the judgment, i.e., grounds other than those
theretofore presented and rejected. Otherwise, attainment of
finality of a judgment might be stayed off indefinitely, depending
on the partys ingenuousness or cleverness in conceiving and
formulating additional flaws or newly discovered errors therein,
or thinking up some injury 20
or prejudice to the rights of the
movant for reconsideration.
At any rate, the subsequent execution of the real estate

mortgage as security for the existing loan would not have
resulted in the
_______________
20 Rollo, p. 53.
571
VOL. 376, FEBRUARY 12, 2002 571

extinguishment of the original contract of loan because of

novation. Petitioners acknowledge that the real estate
mortgage contract does not contain any express stipulation
by the parties intending it to supersede the existing loan 21
agreement between the petitioners and the bank.
Respondent bank has correctly postulated that the
mortgage is but an accessory contract to secure the loan in
the promissory note.
Extinctive novation requires, first, a previous valid
obligation second, the agreement of all the parties to the
new contract third, the extinguishment22 of the obligation
and fourth, the validity of the new one. In order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new 23
obligation be on every point incompatible with each other.
An obligation to pay a sum of money is not extinctively
novated by a new instrument which merely changes the
terms of payment or adding compatible covenants or where 24
the old contract is merely supplemented by the new one.
When not expressed, incompatibility is required so as to

ensure that the parties have indeed intended such novation
despite their failure to express it in categorical terms. The
incompatibility, to be sure, should take place in any of the
essential elements of the obligation, i.e., (1) the juridical
relation or tie, such as from a mere commodatum to lease
of things, or from negotiorum
25
gestio to agency, or from
26
a
mortgage to antichresis, or from a sale to one of loan (2)
the object or principal conditions, such as a change of the
nature of the prestation or (3) the subjects, such as
_______________
21 Memorandum for Petitioners, Rollo, p. 196.

22 Velasquez vs. Court of Appeals, 309 SCRA 539 (1999) Ong vs. Court
of Appeals, 310 SCRA 1 (1999) Bautista vs. Pilar Development
Corporation, 312 SCRA 611 (1999).
23 See Article 1292, Civil Code Pacific Mills, Inc. vs. Court of Appeals,
206 SCRA 317 (1992) Quinto vs. People, 305 SCRA 708 (1999) Cruz vs.
Court of Appeals, 293 SCRA 239 (1998).
24 Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967 (1966), as
reiterated in Velasquez vs. Court of Appeals, 309 SCRA 539 (1999).
25 Jagunap vs. Mirasol, [CA], 48 O.G. 3911.
26 Soncuya vs. Azarraga, 65 Phil. 635.
572

27
the substitution of a debtor or the subrogation of the
creditor. Extinctive novation does not necessarily imply
that the new agreement should be complete by itself
certain terms and conditions may be carried, expressly or
by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Melo (Chairman), Panganiban, SandovalGutierrez

and Carpio, JJ., concur.
Petition denied.
Notes.There can be no novation unless two distinct

and successive binding contracts take place, with the later
one designed to replace the preceding convention.
Modifications introduced before a bargain becomes
obligatory can in no sense constitute novation in law.
(Montelibano vs. BacolodMurcia Co., Inc., 5 SCRA 36

[1962])
Novation is never presumedit must be proven as a fact
either by express stipulation of the parties or by
implication derived from an irreconcilable incompatibility
between old and new obligations or contracts. (Uraca vs.
Court of Appeals, 278 SCRA 702 [1997])
There is no novation where the obligation to pay a sum
of money remained and the assignment merely served as
security for the loans covered by the promissory notes.
(Development Bank of the Philippines vs. Court of Appeals,
284 SCRA 14 [1998])
o0o
_______________
27 Azarraga vs. Rodriquez, 9 Phil. 637.
573
G.R. No. 153852. October 24, 2012.*
SPOUSES HUMBERTO P. DELOS SANTOS and

CARMENCITA M. DELOS SANTOS, petitioners, vs.
METROPOLITAN BANK AND TRUST COMPANY,
respondent.
Remedial Law Special Civil Actions Certiorari The writ of

certiorari is not a general utility tool in the legal workshop, and
cannot be issued to correct every error committed by a lower
court.We remind that the writ of certioraribeing a remedy
narrow in scope and inflexible in character, whose purpose is to
keep an inferior court within the bounds of its jurisdiction, or to
prevent an inferior court from committing such grave abuse of
discretion amounting to excess of jurisdiction, or to relieve parties
from arbitrary acts of courts (i.e., acts that courts have no power
or authority in law to perform)is not a general utility tool in the
legal workshop, and cannot be issued to correct every error
committed by a lower court.
Same Same Same The sole office of the writ of certiorari is
the correction of errors of jurisdiction, which includes the
commission of grave abuse of discretion amounting to lack of
jurisdiction.The sole office of the writ of certiorari is the
correction of errors of jurisdiction, which includes the commission
of grave abuse of discretion amounting to lack of jurisdiction. In
this regard, mere abuse of discretion is not enough to warrant the
issuance of the writ. The abuse of discretion must be grave, which
means either that the judicial or quasijudicial power was
exercised in an arbitrary or despotic manner by reason of passion
or personal hostility, or that the respondent judge, tribunal or
board evaded a positive duty, or virtually refused to perform the
duty enjoined or to act in contemplation of law, such as when such
judge, tribunal or board exercising judicial or quasijudicial
powers acted in a capricious or whimsical manner as to be
equivalent to lack of jurisdiction.
_______________
*FIRST DIVISION.
411
http://central.com.ph/sfsreader/session/0000015cd9e42e015f17adc8003600fb002c009e/t/?o=False 1/19
VOL. 684, OCTOBER 24, 2012 411
Delos Santos vs. Metropolitan Bank and Trust Company
Same Same Foreclosure of Mortgage Where the parties have

stipulated in their agreement, mortgage contract and promissory
note that the mortgagee is authorized to foreclose the mortgage
upon the mortgagors default, the mortgagee has a clear right to
the foreclosure in case of the mortgagors default.The foreclosure
of a mortgage is but a necessary consequence of the nonpayment
of an obligation secured by the mortgage. Where the parties have
stipulated in their agreement, mortgage contract and promissory
note that the mortgagee is authorized to foreclose the mortgage
upon the mortgagors default, the mortgagee has a clear right to
the foreclosure in case of the mortgagors default. Thereby, the
issuance of a writ of preliminary injunction upon the application
of the mortgagor will be improper. Mindful that an injunction
would be a limitation upon the freedom of action of Metrobank,
the RTC justifiably refused to grant the petitioners application
for the writ of preliminary injunction. We underscore that the
writ could be granted only if the RTC was fully satisfied that the
law permitted it and the emergency demanded it. That, needless
to state, was not true herein.
Same Provisional Remedies Injunction Injunction will not
protect contingent, abstract or future rights whose existence is
doubtful or disputed An application for injunctive relief is strictly
construed against the pleader.Injunction will not protect
contingent, abstract or future rights whose existence is doubtful
or disputed. Indeed, there must exist an actual right, because
injunction will not be issued to protect a right not in esse and
which may never arise, or to restrain an act which does not give
rise to a cause of action. At any rate, an application for injunctive
relief is strictly construed against the pleader.

Court of Appeals.
Into, Pantojan & Gonzales Law Offices for petitioners.
Liza, Galicia, Galicia and Associates for respondent.
412

BERSAMIN, J.:
A writ of preliminary injunction to enjoin an impending

extrajudicial foreclosure sale is issued only upon a clear
showing of a violation of the mortgagors unmistakable
right.1
This appeal is taken by the petitioners to review and
reverse the decision promulgated on February 19, 2002,2
whereby the Court of Appeals (CA) dismissed their petition
for certiorari that assailed the denial by the Regional Trial
Court in Davao City (RTC) of their application for the
issuance of a writ of preliminary injunction to prevent the
extrajudicial foreclosure sale of their mortgaged asset
initiated by their mortgagee, respondent Metropolitan
Bank and Trust Company (Metrobank).
Antecedents
From December 9, 1996 until March 20, 1998, the
petitioners took out several loans totaling P12,000,000.00
from Metrobank, Davao City Branch, the proceeds of which
they would use in constructing a hotel on their 305square
meter parcel of land located in Davao City and covered by
Transfer Certificate of Title No. I218079 of the Registry of
Deeds of Davao City. They executed various promissory
notes covering the loans, and constituted a mortgage over
their parcel of land to secure the performance of their
obligation. The stipulated interest rates were 15.75% per
annum for the long term loans (maturing on December 9,
2006) and 22.204% per annum for a short term loan of
P4,400,000.00 (maturing on March 12,
_______________
1 Selegna Management and Development Corporation v. United
Coconut Planters Bank, G.R. No. 165662, May 3, 2006, 489 SCRA 125,
127.
2 Rollo, pp. 4348 penned by Associate Justice Eugenio S. Labitoria
(retired), with Associate Justice Teodoro P. Regino (retired) and Associate
Justice Rebecca de GuiaSalvador, concurring.
413
VOL. 684, OCTOBER 24, 2012 413

1999).3 The interest rates were fixed for the first year,
subject to escalation or deescalation in certain events
without advance notice to them. The loan agreements
further stipulated that the entire amount of the loans
would become due and demandable upon default in the
payment of any installment, interest or other charges.4
On December 27, 1999, Metrobank sought the

extrajudicial foreclosure of the real estate mortgage5 after
the petitioners defaulted in their installment payments.
The petitioners were notified of the foreclosure and of the
forced sale being scheduled on March 7, 2000. The notice of
the sale stated that the total amount of the obligation was
P16,414,801.36 as of October 26, 1999.6
On April 4, 2000, prior to the scheduled foreclosure sale
(i.e., the original date of March 7, 2000 having been
meanwhile reset to April 6, 2000), the petitioners filed in
the RTC a complaint (later amended) for damages, fixing of
interest rate, and application of excess payments (with
prayer for a writ of preliminary injunction). They alleged
therein that Metrobank had no right to foreclose the
mortgage because they were not in default of their
obligations that Metrobank had imposed interest rates
(i.e., 15.75% per annum for two longterm loans and
22.204% per annum for the short term loan) on three of
their loans that were different from the rate of 14.75% per
annum agreed upon that Metrobank had increased the
interest rates on some of their loans without any basis by
invoking the escalation clause written in the loan
agreement that they had paid P2,561,557.87 instead of
only P1,802,867.00 based on the stipulated interest rates,
resulting in their excess payment of P758,690.87 as
interest, which should then be applied to their accrued
obligation that they had requested
_______________
3Rollo, p. 100.
4Records, pp. 3354.
5Rollo, pp. 146148.
6Records, p. 119.
414

the reduction of the escalated interest rates on several

occasions because of its damaging effect on their hotel
business, but Metrobank had denied their request and
that they were not yet in default because the longterm
loans would become due and demandable on December 9,
2006 yet and they had been paying interest on the short
term loan in advance.
The complaint prayed that a writ of preliminary

injunction to enjoin the scheduled foreclosure sale be
issued. They further prayed for a judgment making the
injunction permanent, and directing Metrobank, namely:
(a) to apply the excess payment of P758,690.87 to the
accrued interest (b) to pay P150,000.00 for the losses
suffered in their hotel business (c) to fix the interest rates
of the loans and (d) to pay moral and exemplary damages
plus attorneys fees.7
In its answer, Metrobank stated that the increase in the
interest rates had been made pursuant to the escalation
clause stipulated in the loan agreements and that not all
of the payments by the petitioners had been applied to the
loans covered by the real estate mortgage, because some
had been applied to another loan of theirs amounting to
P500,000.00 that had not been secured by the mortgage.
In the meantime, the RTC issued a temporary
restraining order to enjoin the foreclosure sale.8 After
hearing on notice, the RTC issued its order dated May 2,
2000,9 granting the petitioners application for a writ of
preliminary injunction.
Metrobank moved for reconsideration.10 The petitioners
did not file any opposition to Metrobanks motion for
reconsideration also, they did not attend the scheduled
hearing of the motion for reconsideration.
_______________
7 Rollo, pp. 97108.
8 Records, p. 125.
9 Rollo, p. 110.
10Id., at pp. 111114.
415
VOL. 684, OCTOBER 24, 2012 415

On May 19, 2000, the RTC granted Metrobanks motion

for reconsideration, holding in part,11 as follows:
xxx [I]n the motion at bench as well as at the hearing this

morning defendant Metro Bank pointed out that in all the
promissory notes executed by the plaintiffs there is typewritten
inside a box immediately following the first paragraph the
following:
At the effective rate of 15.75% for the first year subject to
upward/downward adjustments for the next year
thereafter.
Moreover, in the form of the same promissory notes, there is

the additional stipulation which reads:
The rate of interest and/or bank charges herein
stipulated, during the term of this Promissory Note, its
extension, renewals or other modifications, may be
increased, decreased, or otherwise changed from time to time
by the bank without advance notice to me/us in the event of
changes in the interest rates prescribed by law of the
Monetary Board of the Central Bank of the Philippines, in
the rediscount rate of member banks with the Central Bank
of the Philippines, in the interest rates on savings and time
deposits, in the interest rates on the Banks borrowings, in
the reserve requirements, or in the overall costs of funding or
money
There being no opposition to the motion despite receipt of a
copy thereof by the plaintiffs through counsel and finding merit to
the motion for reconsideration, this Court resolves to reconsider
and set aside the Order of this Court dated May 2, 2000.
xxxx
SO ORDERED.
The petitioners sought the reconsideration of the order,

for which the RTC required the parties to submit their
respective memoranda. In their memorandum, the
petitioners insisted that they had an excess payment
sufficient to cover the amounts due on the principal.
_______________
11Id., at pp. 121122.
416

Nonetheless, on June 8, 2001, the RTC denied the

petitioners motion for reconsideration,12 to wit:
The record does not show that plaintiffs have updated their
installment payments by depositing the same with this Court,
with the interest thereon at the rate they contend to be the true
and correct rate agreed upon by the parties.
Hence, even if their contention with respect to the rates of
interest is true and correct, they are in default just the same in
the payment of their principal obligation.
WHEREFORE, the MOTION FOR RECONSIDERATION is
denied.
Ruling of the CA
Aggrieved, the petitioners commenced a special civil
action for certiorari in the CA, ascribing grave abuse of
discretion to the RTC when it issued the orders dated May
19, 2000 and June 8, 2001.
On February 19, 2002, the CA rendered the assailed
decision dismissing the petition for certiorari for lack of
merit, and affirming the assailed orders,13 stating:
Petitioners aver that the respondent Court gravely abused its

discretion in finding that petitioners are in default in the payment
of their obligation to the private respondent.
We disagree.
The Court below did not excessively exercise its judicial
authority not only in setting aside the May 2, 2000 Order, but also
in denying petitioners motion for reconsideration due to the
faults attributable to them.
When private respondent Metrobank moved for the
reconsideration of the Order of May 2, 2000 which granted the
issuance of the writ of preliminary injunction, petitioners failed to
oppose the
_______________
12Id., at p. 93.
13Id., at pp. 4348.
417
VOL. 684, OCTOBER 24, 2012 417

same despite receipt of said motion for reconsideration. The public

respondent Court said
For resolution is the Motion for Reconsideration filed by
the defendant Metropolitan Bank and Trust Company,
dated May 12, 2000, a copy of which was received by Atty.
Philip Pantojan for the plaintiffs on May 16, 2000. There is
no opposition nor appearance for the plaintiffs this morning
at the scheduled hearing of said motion x x x.
Corollarily, the issuance of the Order of June 8, 2001 was xxx
based on petitioners [being] remiss in their obligation to update
their installment payments.
The Supreme Court ruled in this wise:
To justify the issuance of the writ of certiorari, the abuse
of discretion on the part of the tribunal or officer must be
grave, as when the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility.
Petitioners likewise discussed at length the issue of whether or

not the private respondent has collected the right interest rate on
the loans they obtained from the private respondent, as well as
the propriety of the application of escalated interest rate which
was applied to their loans by the latter. In the instant petition,
questions of fact are not generally permitted, the inquiry being
limited essentially to whether the public respondent acted
without or in excess of its jurisdiction or with grave abuse of
discretion in issuing the questioned Orders, neither is the instant
petition available to correct mistakes in the judges findings and
conclusions, nor to cure erroneous conclusions of law and fact, if
there be any.
Certiorari will issue only to correct errors of jurisdiction,
not errors of procedure or mistakes in the findings or
conclusions of the lower court.
A review of facts and evidence is not the province of the
extraordinary remedy of certiorari.
WHEREFORE, the petition is DENIED for lack of merit. The
assailed Orders of the respondent Court are AFFIRMED.
SO ORDERED.
418

The petitioners moved for reconsideration of the

decision, but the CA denied the motion for lack of merit on
May 7, 2002.14
Hence, this appeal.
Issues
The petitioners pose the following issues, namely:
1. Whether or not the Presiding Judge in issuing the 08 June 2001

Order, finding the petitioners in default of their obligation with the
Bank, has committed grave abuse of discretion amounting to excess
or lack of jurisdiction as the same run counter against the legal
principle enunciated in the Almeda Case
2. Assuming that the Presiding Judge did not excessively exercise [his]
judicial authority in the issuance of the assailed orders,
notwithstanding [their] consistency with the legal principle
enunciated in the Almeda Case, whether or not the petitioners can
avail of the remedy under Rule 65, taking into consideration the
sense of urgency involved in the resolution of the issue raised
3. Whether or not the Petition lodged before the Court of Appeals
presented a question of fact, and hence not within the province of the
extraordinary remedy of certiorari.15
The petitioners argue that the foreclosure of their

mortgage was premature that they could not yet be
considered in default under the ruling in Almeda v. Court
of Appeals,16 because the trial court was still to determine
with certainty the exact amount of their obligation to
Metrobank that they would likely prevail in their action
because Metrobank had
_______________
14Id., at pp. 6869.
15Id., at pp. 2021.
16G.R. No. 113412, April 17, 1996, 256 SCRA 292.
419
VOL. 684, OCTOBER 24, 2012 419

altered the terms of the loan agreement by increasing the

interest rates without their prior assent and that unless
the foreclosure sale was restrained their action would be
rendered moot. They urge that despite finding no grave
abuse of discretion on the part of the RTC in denying their
application for preliminary injunction, the CA should have
nonetheless issued a writ of certiorari considering that they
had no other plain and speedy remedy.
Metrobank counters that Almeda v. Court of Appeals
was not applicable because that ruling presupposed the
existence of the following conditions, to wit: (a) the
escalation and deescalation of the interest rate were
subject to the agreement of the parties (b) the petitioners
as obligors must have protested the highly escalated
interest rates prior to the application for foreclosure (c)
they must not be in default in their obligations (d) they
must have tendered payment to Metrobank equivalent to
the principal and accrued interest calculated at the
originally stipulated rate and (e) upon refusal of
Metrobank to receive payment, they should have consigned
the tendered amount in court.17 It asserts that the
petitioners loans, unlike the obligation involved in Almeda
v. Court of Appeals, had already matured prior to the filing
of the case, and that they had not tendered or consigned in
court the amount of the principal and the accrued interest
at the rate they claimed to be the correct one.18
Based on the foregoing, the issues to be settled are,
firstly, whether the petitioners had a cause of action for the
grant of the extraordinary writ of certiorari and, secondly,
whether the petitioners were entitled to the writ of

preliminary injunction in light of the ruling in Almeda v.
Court of Appeals.
_______________
17Rollo, pp. 174175.
18Id., at pp. 174175.
420

Ruling
The appeal has no merit.
To begin with, the petitioners resort to the special civil
action of certiorari to assail the May 19, 2000 order of the
RTC (reconsidering and setting aside its order dated May
2, 2000 issuing the temporary restraining order against
Metrobank to stop the foreclosure sale) was improper. They
thereby apparently misapprehended the true nature and
function of a writ of certiorari. It is clear to us, therefore,
that the CA justly and properly dismissed their petition for
the writ of certiorari.
We remind that the writ of certioraribeing a remedy
narrow in scope and inflexible in character, whose purpose
is to keep an inferior court within the bounds of its
jurisdiction, or to prevent an inferior court from committing
such grave abuse of discretion amounting to excess of
jurisdiction, or to relieve parties from arbitrary acts of
courts (i.e., acts that courts have no power or authority in
law to perform)is not a general utility tool in the legal
workshop,19 and cannot be issued to correct every error
committed by a lower court.
In the common law, from which the remedy of certiorari
evolved, the writ of certiorari was issued out of Chancery,
or the Kings Bench, commanding agents or officers of the
inferior courts to return the record of a cause pending
before them, so as to give the party more sure and speedy
justice, for the writ would enable the superior court to
determine from an inspection of the record whether the
inferior courts judgment was rendered without authority.20
The errors were of such a nature that, if allowed to stand,
they would result in a sub
_______________
19 Estares v. Court of Appeals, G.R. No. 144755, June 8, 2005, 459

SCRA 604, 620621.
20Cushman v. Commissioners Court of Blount County, 49 So. 311, 312,
160 Ala. 227 (1909) Ex parte Hennies, 34 So.2d 22, 23, 33 Ala. App. 377
(1948) Schwander v. Feeneys Del. Super., 29 A.2d 369, 371 (1942).
421
VOL. 684, OCTOBER 24, 2012 421

stantial injury to the petitioner to whom no other remedy

was available.21 If the inferior court acted without
authority, the record was then revised and corrected in
matters of law.22 The writ of certiorari was limited to cases
in which the inferior court was said to be exceeding its
jurisdiction or was not proceeding according to essential
requirements of law and would lie only to review judicial or
quasijudicial acts.23
The concept of the remedy of certiorari in our judicial
system remains much the same as it has been in the
common law. In this jurisdiction, however, the exercise of
the power to issue the writ of certiorari is largely regulated
by laying down the instances or situations in the Rules of
Court in which a superior court may issue the writ of
certiorari to an inferior court or officer. Section 1, Rule 65
of the Rules of Court compellingly provides the
requirements for that purpose, viz.:
Section 1. Petition for certiorari.When any tribunal, board

or officer exercising judicial or quasijudicial functions has acted
without or in excess of its or his jurisdiction, or with grave abuse
of discretion amounting to lack or excess of jurisdiction, and there
is no appeal, or any plain, speedy, and adequate remedy in the
ordinary course of law, a person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered annulling or
modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of
the judgment, order or resolution subject thereof, copies of all
pleadings and documents relevant and pertinent thereto, and a
sworn certification of nonforum shopping as provided in the third
paragraph of section 3, Rule 46. (1a)
_______________
21Worcester Gas Light Co. v. Commissioners of Woodland Water Dist.

in Town of Auburn, 49 N.E.2d 447, 448, 314 Mass. 60 (1943).
22Toulouse v. Board of Zoning Adjustment, 87 A.2d 670, 673, 147 Me.
387 (1952).
23Greater Miami Development Corp. v. Pender, 194 So. 867, 868, 142
Fla. 390 (1940).
422

Pursuant to Section 1, supra, the petitioner must show

that, one, the tribunal, board or officer exercising judicial or
quasijudicial functions acted without or in excess of
jurisdiction or with grave abuse of discretion amounting to
lack or excess of jurisdiction, and, two, there is neither an
appeal nor any plain, speedy and adequate remedy in the
ordinary course of law for the purpose of amending or
nullifying the proceeding.
Considering that the requisites must concurrently be
attendant, the herein petitioners stance that a writ of
certiorari should have been issued even if the CA found no
showing of grave abuse of discretion is absurd. The
commission of grave abuse of discretion was a fundamental
requisite for the writ of certiorari to issue against the RTC.
Without their strong showing either of the RTCs lack or
excess of jurisdiction, or of grave abuse of discretion by the
RTC amounting to lack or excess of jurisdiction, the writ of
certiorari would not issue for being bereft of legal and
factual bases. We need to emphasize, too, that with
certiorari being an extraordinary remedy, they must
strictly observe the rules laid down by law for granting the
relief sought.24
The sole office of the writ of certiorari is the correction of
errors of jurisdiction, which includes the commission of
grave abuse of discretion amounting to lack of jurisdiction.
In this regard, mere abuse of discretion is not enough to
warrant the issuance of the writ. The abuse of discretion
must be grave, which means either that the judicial or
quasijudicial power was exercised in an arbitrary or
despotic manner by reason of passion or personal hostility,
or that the respondent judge, tribunal or board evaded a
positive duty, or virtually refused to perform the duty
enjoined or to act in contemplation of law,
_______________
24Serrano v. Galant Maritime Services, Inc., G.R. No. 151833, August

7, 2003, 408 SCRA 523, 526 Manila Midtown Hotels & Land Corp. v.
NLRC, G.R. No. 118397, March 27, 1998, 288 SCRA 259, 265.
423
VOL. 684, OCTOBER 24, 2012 423

such as when such judge, tribunal or board exercising

judicial or quasijudicial powers acted in a capricious or
whimsical manner as to be equivalent to lack of
jurisdiction.
Secondly, the Court must find that the petitioners were
not entitled to enjoin or prevent the extrajudicial
foreclosure of their mortgage by Metrobank. They were
undeniably already in default of their obligations the
performance of which the mortgage had precisely secured.
Hence, Metrobank had the unassailable right to the
foreclosure. In contrast, their right to prevent the
foreclosure did not exist. Hence, they could not be validly
granted the injunction they sought.
The foreclosure of a mortgage is but a necessary
consequence of the nonpayment of an obligation secured
by the mortgage. Where the parties have stipulated in their
agreement, mortgage contract and promissory note that the
mortgagee is authorized to foreclose the mortgage upon the
mortgagors default, the mortgagee has a clear right to the
foreclosure in case of the mortgagors default. Thereby, the
issuance of a writ of preliminary injunction upon the
application of the mortgagor will be improper.25 Mindful
that an injunction would be a limitation upon the freedom
of action of Metrobank, the RTC justifiably refused to grant
the petitioners application for the writ of preliminary
injunction. We underscore that the writ could be granted
only if the RTC was fully satisfied that the law permitted it
and the emergency demanded it.26 That, needless to state,
was not true herein.
In City Government of Butuan v. Consolidated
Broadcasting System (CBS), Inc.,27 the Court restated the
nature and concept of a writ of preliminary injunction in
the following manner, to wit:
_______________
25 Equitable PCI Bank, Inc. v. OJMark Trading, Inc., G.R. No.
165950, August 11, 2010, 628 SCRA 79, 9192.
26 China Banking Corporation v. Ciriaco, G.R. No. 170038, July 11,

2012, 676 SCRA 132.
27G.R. No. 157315, December 1, 2010, 636 SCRA 320, 336337.
424

A preliminary injunction is an order granted at any stage of an

action or proceeding prior to the judgment or final order requiring
a party or a court, an agency, or a person to refrain from a
particular act or acts. It may also require the performance of a
particular act or acts, in which case it is known as a preliminary
mandatory injunction. Thus, a prohibitory injunction is one that
commands a party to refrain from doing a particular act, while a
mandatory injunction commands the performance of some
positive act to correct a wrong in the past.
As with all equitable remedies, injunction must be
issued only at the instance of a party who possesses
sufficient interest in or title to the right or the property
sought to be protected. It is proper only when the
applicant appears to be entitled to the relief demanded in
the complaint, which must aver the existence of the right
and the violation of the right, or whose averments must in
the minimum constitute a prima facie showing of a right
to the final relief sought. Accordingly, the conditions for
the issuance of the injunctive writ are: (a) that the right to
be protected exists prima facie (b) that the act sought to
be enjoined is violative of that right and (c) that there is
an urgent and paramount necessity for the writ to prevent
serious damage. An injunction will not issue to protect a
right not in esse, or a right which is merely contingent and
may never arise or to restrain an act which does not give
rise to a cause of action or to prevent the perpetration of
an act prohibited by statute. Indeed, a right, to be
protected by injunction, means a right clearly founded on
or granted by law or is enforceable as a matter of law. (Bold
emphasis supplied)
Thirdly, the petitioners allege that: (a) Metrobank had

increased the interest rates without their assent and
without any basis and (b) they had an excess payment
sufficient to cover the amounts due. In support of their
allegation, they submitted a table of the interest payments,
wherein they projected what they had actually paid to
Metrobank and contrasted the payments to what they
claimed to have been the correct amounts of interest,

resulting in an excess payment of P605,557.81.
425
VOL. 684, OCTOBER 24, 2012 425

The petitioners fail to convince.

We consider to be unsubstantiated the petitioners claim
of their lack of consent to the escalation clauses. They did
not adduce evidence to show that they did not assent to the
increases in the interest rates. The records reveal instead
that they requested only the reduction of the interest rate
or the restructuring of their loans.28 Moreover, the mere
averment that the excess payments were sufficient to cover
their accrued obligation computed on the basis of the
stipulated interest rate cannot be readily accepted. Their
computation, as their memorandum submitted to the RTC
would explain,29 was too simplistic, for it factored only the
principal due but not the accrued interests and penalty
charges that were also stipulated in the loan agreements.
It is relevant to observe in this connection that
escalation clauses like those affecting the petitioners were
not void per se, and that an increase in the interest rate
pursuant to such clauses were not necessarily void. In
Philippine National Bank v. Rocamora,30 the Court has
said:
Escalation clauses are valid and do not contravene public

policy. These clauses are common in credit agreements as means
of maintaining fiscal stability and retaining the value of money on
longterm contracts. To avoid any resulting onesided situation
that escalation clauses may bring, we required in Banco Filipino
the inclusion in the parties agreement of a deescalation clause
that would authorize a reduction in the interest rates
corresponding to downward changes made by law or by the
Monetary Board.
The validity of escalation clauses notwithstanding, we
cautioned that these clauses do not give creditors the unbridled
right to adjust interest rates unilaterally. As we said in the same
Banco Filipino case, any increase in the rate of interest made
pursu
_______________
28Records, pp. 111112 and 361.
29Id., at pp. 351357.
30G.R. No. 164549, September 18, 2009, 600 SCRA 395, 406407.
426

ant to an escalation clause must be the result of an

agreement between the parties. The minds of all the parties
must meet on the proposed modification as this modification
affects an important aspect of the agreement. There can be no
contract in the true sense in the absence of the element of an
agreement, i.e., the parties mutual consent. Thus, any change
must be mutually agreed upon, otherwise, the change
carries no binding effect. A stipulation on the validity or
compliance with the contract that is left solely to the will of one of
the parties is void the stipulation goes against the principle of
mutuality of contract under Article 1308 of the Civil Code.
We reiterate that injunction will not protect contingent,

abstract or future rights whose existence is doubtful or
disputed.31 Indeed, there must exist an actual right,32
because injunction will not be issued to protect a right not
in esse and which may never arise, or to restrain an act
which does not give rise to a cause of action. At any rate, an
application for injunctive relief is strictly construed against
the pleader.33
Nor do we discern any substantial controversy that had
any real bearing on Metrobanks right to foreclose the
mortgage. The mere possibility that the RTC would rule in
the end in the petitioners favor by lowering the interest
rates and directing the application of the excess payments
to the accrued principal and interest did not diminish the
fact that when Metrobank filed its application for
extrajudicial foreclosure they were already in default as to
their obligations and that their shortterm loan of
P4,400,000.00 had already matured. Under such
circumstances, their application for the
_______________
31 Boncodin v. National Power Corporation Employees Consolidated
Union (NECU), G.R. No. 162716, September 27, 2006, 503 SCRA 611, 623.
32Duvaz Corporation v. Export and Industry Bank, G.R. No. 163011,
June 7, 2007, 523 SCRA 405, 413414 citing Almeida v. Court of Appeals,
G.R. No. 159124, January 17, 2005, 448 SCRA 681.
33 St. James College of Paraaque v. Equitable PCI Bank, G.R. No.
179441, August 9, 2010, 627 SCRA 328, 350.
427
VOL. 684, OCTOBER 24, 2012 427

writ of preliminary injunction could not but be viewed as a

futile attempt to deter or delay the forced sale of their
property.
Lastly, citing the ruling in Almeda v. Court of Appeals,
to the effect that the issuance of a preliminary injunction
pending the resolution of the issue on the correct interest
rate would be justified, the petitioners submit that they
could be rightly considered in default only after they had
failed to settle the exact amount of their obligation as
determined by the trial court in the main case.
The petitioners reliance on the ruling in Almeda v.
Court of Appeals was misplaced.
Although it is true that the ruling in Almeda v. Court of
Appeals sustained the issuance of the preliminary
injunction pending the determination of the issue on the
interest rates, with the Court stating:
In the first place, because of the dispute regarding the interest

rate increases, an issue which was never settled on merit in the
courts below, the exact amount of petitioners obligations could
not be determined. Thus, the foreclosure provisions of P.D. 385
could be validly invoked by respondent bank only after settlement
of the question involving the interest rate on the loan, and only
after the spouses refused to meet their obligations following such
determination.34 x x x.
Almeda v. Court of Appeals involved circumstances that

were far from identical with those obtaining herein. To
start with, Almeda v. Court of Appeals involved the
mandatory foreclosure of a mortgage by a government
financial institution pursuant to Presidential Decree No.
38535 should the arrears
_______________
34Supra note 16, at p. 324.
35 Requiring Government Financial Institutions to Foreclose
Mandatorily All Loans with Arrearages, including Interest and Charges
amounting to at least Twenty Percent (20%) of the Total Outstanding
Obligation.
428

reach 20% of the total outstanding obligation. On the other

hand, Metrobank is not a government financial institution.
Secondly, the petitioners in Almeda v. Court of Appeals
were not yet in default at the time they brought the action
questioning the propriety of the interest rate increases, but
the herein petitioners were already in default and the
mortgage had already been foreclosed when they assailed
the interest rates in court. Thirdly, the Court found in
Almeda v. Court of Appeals that the increases in the
interest rates had been made without the prior assent of
the borrowers, who had even consistently protested the
increases in the stipulated interest rate. In contrast, the
Court cannot make the same conclusion herein for lack of
basis. Fourthly, the interest rates in Almeda v. Court of
Appeals were raised to such a very high level that the
borrowers were practically enslaved and their assets
depleted, with the interest rate even reaching at one point
a high of 68% per annum. Here, however, the increases
reached a high of only 31% per annum, according to the
petitioners themselves. Lastly, the Court in Almeda v.
Court of Appeals attributed good faith to the petitioners by
their act of consigning in court the amounts of what they
believed to be their remaining obligation. No similar tender
or consignation of the amount claimed by the petitioners
herein to be their correct outstanding obligation was made
by them.
In fine, the petitioners in Almeda v. Court of Appeals
had the existing right to a writ of preliminary injunction
pending the resolution of the main case, but the herein
petitioners did not. Stated otherwise, no writ of
preliminary injunction to enjoin an impending extrajudicial
foreclosure sale should issue except upon a clear showing of
a violation of the mortgagors unmistakable right to the
injunction.
WHEREFORE, the Court DENIES the petition for
review on certiorari AFFIRMS the decision promulgated
on February 19, 2002 and ORDERS the petitioners to pay
the costs of suit.
429
VOL. 684, OCTOBER 24, 2012 429

SO ORDERED.
Sereno (C.J.), LeonardoDe Castro, Villarama, Jr. and

Reyes, JJ., concur.
Petition denied, judgment affirmed.
Notes.A petition for certiorari under Rule 65 of the

Rules of Court is confined to the correction of errors of
jurisdiction and will not issue absent a showing of a
capricious and whimsical exercise of judgment, equivalent
to lack of jurisdiction. (Aujero vs. Philippine
Communications Satellite Corporation, 663 SCRA 467
[2012])
When the principal obligation is not paid when due, the
mortgagee consequently has the right to foreclose the
mortgage, sell the property, and apply the proceeds of the
sale to the satisfaction of the unpaid loan. (Dela Pea vs.
Avila, 665 SCRA 553 [2012])
o0o
VOL. 527, JULY 17, 2007 727

Bulos, Jr. vs. Yasuma
*
G.R. No. 164159. July 17, 2007.
HONORIO C. BULOS, JR., petitioner, vs. KOJI YASUMA,

respondent.
Appeals The jurisdiction of the Supreme Court in a Petition

for Review under Rule 45 is limited to reviewing only errors of law.
It is wellsettled that the findings of fact of the trial court,
especially when affirmed by the Court of Appeals, are accorded
the highest degree of respect, and generally will not be disturbed
on appeal. Such findings are binding and conclusive to the Court.
Furthermore, it is not the Courts function under Rule 45 of the
1997 Revised Rules of Civil Procedure to review, examine and
evaluate or weigh the probative value of the evidence presented.
The jurisdiction of the Court in a Petition for Review under Rule
45 is limited to reviewing only errors of law. Unless the case falls
under the recognized exceptions, the rule shall not be disturbed.
Same Exceptions.Recognized exceptions to this rule are: (1)
when the findings are grounded entirely on speculation, surmises
or conjectures (2) when the inference made is manifestly
mistaken, absurd or impossible (3) when there is grave abuse of
discretion (4)
_______________
* THIRD DIVISION.
728
http://central.com.ph/sfsreader/session/0000015cd9e51c9cf7771cb5003600fb002c009e/t/?o=False 1/20
when the judgment is based on a misapprehension of facts (5)

when the finding of facts are conflicting (6) when in making the
findings, the Court of Appeals went beyond the issues of the case,
or its findings are contrary to the admissions of both the appellee
and the appellant (7) when the findings are contrary to the trial
court (8) when the findings are conclusions without citation of
specific evidence on which they are based (9) when the facts set
forth in the petition as well as in the petitioners main and reply
briefs are not disputed by the respondents (10) when the findings
of facts are premised on the supposed absence of evidence and
contradicted by the evidence on record and (11) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed
by the parties, which if properly considered, would justify a
different conclusion. (Langkaan Realty Development, Inc. v.
United Coconut Planters Bank, 400 Phil. 1349, 1356 347 SCRA
542, 549 [2000] Nokom v. National Labor Relations Commission,
390 Phil. 1228, 12421243 336 SCRA 97, 110 [2000]
Commissioner of Internal Revenue v. Embroidery and Garments
Industries [Phils.], Inc., 364 Phil. 541, 546547 305 SCRA 70, 74
75 [1999] Sps. Sta. Maria v. Court of Appeals, 349 Phil. 275, 282
283 285 SCRA 351, 357358 [1998]).
Contracts Debts Payment When the existence of a debt is
fully established by the evidence contained in the record, the
burden of proving that it has been extinguished by payment
devolves upon the debtor who offers such defense.When the
existence of a debt is fully established by the evidence contained
in the record, the burden of proving that it has been extinguished
by payment devolves upon the debtor who offers such defense.
The debtor has the burden of showing with legal certainty that
the obligation has been discharged by payment. In the present
case, the petitioner failed to prove that indeed, his liability to pay
the remaining balance of his obligation with the respondent had
been extinguished by his offer to transfer to respondent his shares
of stocks in the Rural Bank of Paraaque.
Banks and Banking Assignments A foreigner is not qualified
to own capital stock in a rural bank, and could not therefore accept
assignment of shares of stocks in a rural bank.Section 4,
Republic Act No. 7353, otherwise known as The Rural Banks Act
of 1992, provides: Section 4. x x x. With the exception of
shareholdings of corporations organized primarily to hold equities
in rural banks as provided for under Section 12C of Republic Act
No. 337, as
729
VOL. 527, JULY 17, 2007 729

amended, and of Filipinocontrolled domestic banks, the capital

stock of any rural bank shall be fully owned and held
directly or indirectly by citizens of the Philippines or
corporations, associations or cooperatives qualified under
Philippine laws to own and hold such capital stock: x x x.
(Emphasis supplied.) Given the foregoing provision of law, this
Court agrees with the Court of Appeals that the respondent, being
a foreigner, is not qualified to own capital stock in the Rural Bank
of Paraaque. This renders the assignment of shares of stocks in
the Rural Bank of Paraaque in favor of respondent void. As
previously stated, the assignment of the shares of stocks in the
rural bank was not accepted by the respondent precisely because
of the prohibition stated under Republic Act No. 7353, which was
explained to him by his counsel, the late Atty. Timario, Jr.
Usury Law Interest An interest rate of 4% per month or 48%
per annum is highly unconscionable and inordinate.In the face
of all of the above, this Court nevertheless sustains the assertion
of the petitioner that the imposition of 21% interest on the
outstanding loan obligation of P2,240,000.00 has no legal and
factual bases. According to the promissory note executed by Dr.
Lim, and agreed to by all the parties, in case of the borrowers
failure to pay the loan obligation within the stipulated period, the
extended period shall be considered running monthly under the
same terms and rate of interest, which is 4% per month, until the
principal has been fully paid. Thus, the remaining balance of
P2,240,000.00 is still subject to the interest rate of 4% per month
or 48% per annum. To our mind such rate of interest is highly
unconscionable and inordinate.
Same Same While the Usury Law has been suspended by
Central Bank Circular No. 905, s. 1982, effective on 1 January
1983, and parties to a loan agreement have been given wide
latitude to agree on any interest rate, still stipulated interest rates
are illegal if they are unconscionablenothing in the said circular
grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.In the case of Ruiz v. Court of
Appeals, 401 SCRA 410 (2003), citing the cases of Medel v. Court
of Appeals, 299 SCRA 481 (1998), Garcia v. Court of Appeals, 167
SCRA 815 (1988), Spouses Bautista v. Pilar Development
Corporation, 312 SCRA 611 (1999), and the recent case of Spouses
Solangon v. Salazar, 360 SCRA 379 (2001), this Court considered
the 3% interest per month or 36% interest per annum as
730
excessive and unconscionable. Thereby, the Court, in the said

case, equitably reduced the rate of interest to 1% interest per
month or 12% interest per annum. The Court also held that while
the Usury Law has been suspended by Central Bank Circular No.
905, s. 1982, effective on 1 January 1983, and parties to a loan
agreement have been given wide latitude to agree on any interest
rate, still stipulated interest rates are illegal if they are
unconscionable. Nothing in the said circular grants lenders carte
blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets.
Surely, it is more consonant with justice that the rate of interest
in the present case, which is 4% per month or 48% per annum, be
reduced equitably. We find, that the reduction of the interest rate
by the trial court, pegged at 21% per annum, was not proper.
Same Same Following established jurisprudence, the legal
interest rate of 12% should apply, computed from the date of
judicial demand.The agreed interest rate of 4% per month or
48% per annum is unconscionable and must be mitigated.
Following established jurisprudence, the legal interest rate of 12%
should apply, computed from the date of judicial demand, that is,
7 April 1990. The aforequoted paragraph 3 of the guidelines is
also appropriate herein, and a 12% interest per annum is imposed
on petitioners monetary liability to respondent from the date of
the finality of this Decision until it is fully paid.
Judgments The general rule is that, where there is conflict
between the dispositive portion or the fallo and the body of a
decision, the fallo controls, a rule that rests on the theory that the
fallo is the final order while the opinion in the body is merely a
statement ordering nothing.The general rule is that, where
there is conflict between the dispositive portion or the fallo and
the body of a decision, the fallo controls. This rule rests on the
theory that the fallo is the final order while the opinion in the
body is merely a statement ordering nothing. However, where the
inevitable conclusion from the body of the decision is so clear as to
show that there was a mistake in the dispositive portion, the body
of the decision prevails. In his complaint before the RTC, the
respondent prayed for 20% of P2,240,000.00 as attorneys fees. In
the body of the RTC decision, the trial court awarded outright
respondents prayer for attorneys fees without any discussion
that it found the 20% respondent prayed for as excessive and that
it was reducing the percentage of the attor
731
VOL. 527, JULY 17, 2007 731
neys fees to 10%. This court is more inclined to believe that the
10% attorneys fees in the body of the RTC decision is merely a
typographical error. Consequently, the general rule applies to this
case, and the 20% attorneys fees ordered paid by the fallo of the
RTC decision controls.


Renato T. Nuguid for petitioner.
Glenn R. Subia for respondent.
CHICONAZARIO, J.:
1
This is a Petition for Review on Certiorari under Rule 45 of
the 1997 Revised Rules of Civil Procedure seeking 2
to set
aside and to declare null and void (1) the Decision, dated 5
January 2004, of the Court of Appeals3
in CAG.R. CV No.
54969, which affirmed the Decision, dated 30 August 1996,
of the Makati City Regional Trial Court (RTC), Branch 4
148,
in Civil Case No. 901053 and (2) the Resolution of the
Court of Appeals, dated 11 June 2004, which denied the
petitioners Motion for Reconsideration.
Herein petitioner Honorio C. Bulos (petitioner) was one
of the defendants in a Complaint for collection of sum of
money plus damages with prayer for a writ of preliminary
attachment, docketed as Civil Case No. 901053, entitled,
Koji Yasuma v. Ramon R. Lim, Honorio C. Bulos and Bede
S. Tabalingcos, filed with the RTC by herein respondent
Koji Yasuma, a Japanese national.
_______________
1 Rollo, pp. 3155.

2 Penned by Associate Justice Arsenio J. Magpale with Associate
Justices Conrado M. Vasquez, Jr. and Bienvenido L. Reyes, concurring
id., at pp. 819.
3 Penned by Judge Oscar B. Pimentel id., at pp. 126167.
4 Id., at pp. 183184.
732

The controversy in the present case arose from the

following antecedents:
Petitioner, together with Dr. Ramon R. Lim (Dr. Lim)
and Atty. Bede S. Tabalingcos (Atty. Tabalingcos), obtained
a loan from Koji Yasuma (respondent) in the amount5
of
P2,500,000.00, as evidenced by a promissory note, dated 11
October 1988, signed solely by Dr. Lim per agreement 6
among the petitioner, Dr. Lim and Atty. Tabalingcos. The
said promissory note provides for the following conditions:
(1) payment of interest at the rate of 4% for a period of
three months or until 10 January 1989 (2) in case of a roll
over for failure of the borrowers to pay on the agreed
period, the extension will be considered running monthly
under the same terms and rate of interest until the
principal amount has been fully paid and (3) should the
said promissory note be brought to court for collection, the
borrowers agree to pay an additional amount equivalent to
10% of the principal amount plus attorneys fee, which in
no case shall be less than P10,000.00. As a security for the
said loan, both
7
petitioner and Dr. Lim executed Real Estate
Mortgages over their respective properties.
On 16 December 1988,8 petitioner and Dr. Lim executed
a Deed of Assumption, to the effect that petitioner
assumed the loan obligation of Dr. Lim due respondent
with the condition that Dr. Lim shall first secure the
respondents consent to and approval of the said Deed of
Assumption. However, the conformity of respondent to the
said Deed of Assumption was not obtained by Dr. Lim.
When the loan obligation became due and demandable on
10 January 1989, respondent demanded payment from the
petitioner, Dr. Lim and Atty. Tabalingcos, but they failed
and refused to pay the same. Respondent then made a
demand in writing and through telephone calls to Atty.
Tabalingcos. Atty. Tabalingcos just told respondent that
_______________
5 Id., at p. 81.
6 TSN, 25 May 1992, pp. 712 TSN, 31 March 1995, p. 6.
7 Rollo, pp. 8285.
8 Records, Vol. II, p. 444.
733
VOL. 527, JULY 17, 2007 733

he would talk first to the petitioner and Dr. Lim and he

will then inform the respondent of their response, but Atty.
Tabalingcos never called back.
After painstaking efforts to collect the loan from the
petitioner, Dr. Lim and Atty. Tabalingcos, respondent
requested Atty. Tabalingcos, who happened to be his legal
adviser at that time, to foreclose the Real Estate Mortgages
executed by the petitioner and Dr. Lim over their
respective properties. Atty. Tabalingcos failed to do so.
Instead, he made a proposal to respondent that the
petitioner had certain properties in Paraaque City which
he was willing to sell to the respondent to cover the
obligation of the petitioner, Dr. Lim and Atty. Tabalingcos.
Out of respondents desperation to collect the loan that he
had extended to the petitioner, Dr. Lim and Atty.
Tabalingcos, respondent agreed to the aforesaid 9
proposal.
Thus, on 24 February 1989, a Deed of Sale, over certain
parcels of land located in Paraaque City and covered by
Transfer Certificates of Title (TCTs) No. 467734 and
332355 in the name of petitioner, was executed in favor of
the respondent for a total consideration of P1,630,750.00,
paid via a dacion en pago arrangement.
After the execution of the Deed of Sale, all the parties
agreed that there was still a balance of10
P2,240,000.00 owed
to the respondent. In a Certification dated 27 February
1989, which the petitioner and Dr. Lim considered as
another Deed of Assumption, petitioner assumed the
P1,500,000.00 obligation of Dr. Lim. The consideration11
for
the said assumption of obligation is the transfer of the
shares of stocks of the Rural Bank of Paraaque to the
respondent to offset the obligation. Petitioner thus offered
the said shares of stocks to the respondent. Atty.
Tabalingcos, for his part and in his capacity
_______________
9 Rollo, pp. 111113.

10 Id., at p. 115.
11 The petitioner, Dr. Lim and Atty. Tabalingcos are stockholders of the
Rural Bank of Paraaque. However, Dr. Lim later on decided not to join
the bank anymore.
734

as Chairman 12
of the Board of the said bank, issued a
certification to the effect that the respondent holds
P1,250,000.00 worth of shares of stocks, equivalent to 20%
shareholdings in the Rural Bank of Paraaque. However,
during that time, the Rural Bank of Paraaque must first
increase its authorized capital stock subject to the approval
of the Securities and Exchange Commission (SEC) because
the original shares had already been fully subscribed and
fully paid. Because of this and of the information provided
by his then counsel, the late Atty. Bayani M. Timario, Jr.
(Atty. Timario, Jr.), that a foreigner cannot be a
stockholder of a rural bank, the respondent absolutely
refused to accept the shares of stocks and demanded
instead an outright payment of the loan obligation. As the
shares of stocks were already assigned to the respondent
via a certification issued
13
by Atty. Tabalingcos, the latter
then issued a check in the amount of P2,240,000.00 to the
order of the respondent, dated 25 December 1989, to buy
the said shares in behalf of an interested buyer. When the
respondent presented the check to the bank, it was
dishonored for having been drawn against insufficient
funds. 14
Subsequently, the respondent sent a demand letter to
each of the borrowersthe petitioner, Dr. Lim and Atty.
Tabalingcosfor the full payment of their outstanding
obligation but, to no avail. This prompted the respondent
to file with the RTC a Complaint for Sum of Money with
Damages and with Prayer for a Writ of Preliminary
Attachment against the petitioner, Dr. Lim and Atty.
Tabalingcos.
15
On 23 April 1990, the trial court issued an
Order granting the writ of preliminary attachment
applied for by the respondent upon his filing of a bond fixed
at P2,240,000.00. By virtue of the said writ, several lots of
the petitioner, and the house and lot of Dr. Lim located in
Quezon City, were attached. Petitioner
_______________
12 Rollo, p. 116.
13 Id., at p. 86.
14 Id., at pp. 8793.
15 Id., at pp. 9495.
735
VOL. 527, JULY 17, 2007 735

filed a Motion to Dissolve Writ of Attachment which was

granted
16
by the trial court in its Order dated 7 October
1992 conditioned upon petitioners posting of a counter
bond in the amount of P2,240,000.00. Petitioner moved for
the reduction of his counterbond to P770,000.00
considering that the respondent made an admission that
the petitioner partially paid the loan obligation in the
amount of P1,630,750.00. The said motion was granted
17
by
the court a quo in its Order dated 1 August 1995.
On 30 August 1996, the trial court rendered a Decision
in favor of the respondent and against the petitioner, Dr.
Lim and Atty. Tabalingcos, the decretal portion of which
reads as follows:
WHEREFORE, premises considered, and finding that [herein

respondent] has fully established not only by preponderance of
evidence by competent proof of his entitlement to his claims in the
[C]omplaint, judgment is hereby rendered in favor of [respondent]
and against [herein petitioner, together with Dr. Lim and Atty.
Tabalingcos]. Ordering [the petitioner, Dr. Lim and Atty.
Tabalingcos] to jointly and severally pay the [respondent] the
following:
(1) The amount of P2,240,000.00 plus interest of 21% per

annum as of April, 1990, the time of the filing of the
[C]omplaint
(2) The sum equivalent to 20% of P2,240,000.00 plus P500.00
per appearance in the case, for and as attorneys fees.
(3) Costs of the suit.
The crossclaim filed by [Atty. Tabalingcos] against the

[petitioner] is hereby DISMISSED for reasons stated above. 18
Costs against [petitioner, Dr. Lim and Atty. Tabalingcos].
Aggrieved by the aforesaid Decision of the trial court, the

petitioner, Dr. Lim and Atty. Tabalingcos appealed to the
_______________
16 Id., at p. 122.
17 Id., at pp. 123124.
18 Id., at p. 167.
736

Court of Appeals. However, Atty. Tabalingcos did not file

his appellants brief. On 5 January 2004, the Court of
Appeals rendered a Decision affirming in toto the Decision
of the trial court. The petitioner moved for its
reconsideration, but it was denied in a Resolution dated 11
June 2004 issued by the appellate court.
Hence, this petition by petitioner. However, Dr. Lim and
Atty. Tabalingcos did not appeal before this Court.
Petitioner submits the following issues for this Courts
resolution:
I. Whether or not the obligation of petitioner to pay

respondent has already (sic) fully extinguished.
II. Whether or not the offer to purchase shares of stock
of Rural Bank of Paraaque amounting to
P1,250,000.00 extinguished petitioner Bulos
obligation to pay the balance of the loan with (sic)
respondent.
III. Whether or not petitioner Bulos is entitled to claim
for damages.
IV. Whether or not [the] imposition of 21% interest on
P2,240,000.00 and 20% of the said amount as
attorneys fees has no legal and factual basis (sic).
Petitioner argues that despite the partial payment made by

him in the amount P1,630,750.00, and in spite of the
respondents unequivocal admission of the same, still, the
respondent did not deduct the said amount from the total
amount of the obligation due him. Instead, the respondent
continuously claimed the amount of P2,240,000.00 as of 25
December 1989, plus interest at the rate of 4% per month
from 25 December 1989 when he filed his Complaint on 7
April 1990.
The petitioner likewise avers that his obligation to pay
the balance of the loan to the respondent had already been
extinguished when he offered to the respondent the shares
of stocks of the Rural Bank of Paraaque amounting to
P1,250,000.00. Respondents assertion that he did not
accept the offer of the shares of stocks because of his
nationality
737
VOL. 527, JULY 17, 2007 737

deserves scant consideration as in fact, he had religiously

followed up with petitioner and Atty. Tabalingcos the
issuance of the certificate for the said shares of stocks.
Petitioner further alleges that he is entitled to claim
damages for he had been subjected to ridicule, mental
anguish, besmirched reputation, and extreme anxiety as a
result of the respondents unfounded and malicious suit.
Petitioner lost business opportunities as a consequence of
the attachment made on his real properties in Tarlac thus,
respondent should be made liable for the payment of
damages for all that he had suffered. As to the imposition
of 21% interest on the P2,240,000.00 outstanding loan
obligation and 20% of the said amount as attorneys fees,
petitioner asserts that the same has no legal and factual
bases. The imposition of the said interest is highly
excessive and exorbitant in light of the dacion en pago
arrangement and the assignment of shares of stocks of the
Rural Bank of Paraaque.
It is wellsettled that the findings of fact of the trial
court, especially when affirmed by the Court of Appeals,
are accorded the highest degree of respect, and generally
will not be disturbed on appeal. Such findings are binding
and conclusive to the Court. Furthermore, it is not the
Courts function under Rule 45 of the 1997 Revised Rules of
Civil Procedure to review, examine and evaluate or weigh
the probative value of the evidence presented. The
jurisdiction of the Court in a Petition for Review 19
under
Rule 45 is limited to reviewing only errors of law. 20
Unless
the case falls under the recognized exceptions, the rule
shall not be disturbed.
_______________
19 Culaba v. Court of Appeals, G.R. No. 125862, 15 April 2004, 427

SCRA 721, 729.
20 Recognized exceptions to this rule are: (1) when the findings are
grounded entirely on speculation, surmises or conjectures (2) when the
inference made is manifestly mistaken, absurd or impossible (3) when
there is grave abuse of discretion (4) when the judgment is based on a
misapprehension of facts (5) when the finding of facts are conflicting (6)
when in making the findings, the Court of
738

The following findings of fact, properly supported by

evidence, made by both the trial court and the appellate
court can no longer be modified and are binding on this
Court: (1) the original loan obtained by the petitioner,
together with Dr. Lim and Atty. Tabalingcos, from the
respondent amounted to P2,500,000.00 with 4% interest for
three months, or from 11 October 1988 up to 10 January
1989, and in case of extension of the loan, the interest of
5% per month will be imposed (2) the obligation of the
petitioner, Dr. Lim and Atty. Tabalingcos was joint and
solidary as evidenced by the following acts:
(a) the promissory note was solely signed by Dr. Lim

per agreement among the parties
(b) the act of Dr. Lim in executing a Deed of Real
Estate Mortgage in favor of respondent to cover the
amount of the promissory note
(c) the act of the petitioner in executing a second Deed
of Real Estate Mortgage as additional security to
the loan and
(d) the act of Atty. Tabalingcos in issuing a check in
the amount of P2, 240,000.00 to cover the balance of
the obligation
_______________
Appeals went beyond the issues of the case, or its findings are contrary
to the admissions of both the appellee and the appellant (7) when the
findings are contrary to the trial court (8) when the findings are
conclusions without citation of specific evidence on which they are based
(9) when the facts set forth in the petition as well as in the petitioners
main and reply briefs are not disputed by the respondents (10) when the
findings of facts are premised on the supposed absence of evidence and
contradicted by the evidence on record and (11) when the Court of
Appeals manifestly overlooked certain relevant facts not disputed by the
parties, which if properly considered, would justify a different conclusion.
(Langkaan Realty Development, Inc. v. United Coconut Planters Bank, 400
Phil. 1349, 1356 347 SCRA 542, 549 [2000] Nokom v. National Labor
Relations Commission, 390 Phil. 1228, 12421243 336 SCRA 97, 110
[2000] Commissioner of Internal Revenue v. Embroidery and Garments
Industries [Phils.], Inc., 364 Phil. 541, 546547 305 SCRA 70, 7475
[1999] Sps. Sta. Maria v. Court of Appeals, 349 Phil. 275, 282283 285
SCRA 351, 357358 [1998]).
739
VOL. 527, JULY 17, 2007 739
(3) petitioner failed to pay the loan by 10 January 1989

thus, from 11 October 1988 up to February 1989, the loan
obligation, including interest, reached a total amount of
P2,700,000.00 (4) petitioner made a partial payment via a
dacion en pago, amounting to P1,630,750.00, which was
deducted from the total loan obligation of P2,700,000.00
leaving a balance of P1,069,000.00 as of 24 February 1989
(5) by March 1989, the balance of the loan began earning a
5% interest per month after all the parties agreed to an
increase in the interest rate during the extended period (6)
taking into consideration the outstanding loan balance of
P1,069,000.00, plus interest, and minus a discount granted
by respondent, the amount still due respondent was
determined by the parties to be P2,240,000.00 and (7) to
pay the remaining indebtedness, Atty. Tabalingcos issued a
check covering the amount but it was dishonored,
therefore, the indebtedness remains at P2,240,000.00.
When the existence of a debt is fully established by the
evidence contained in the record, the burden of proving
that it has been extinguished by payment devolves upon
the debtor who offers such defense. The debtor has the
burden of showing with legal certainty
21
that the obligation
has been discharged by payment. In the present case, the
petitioner failed to prove that indeed, his liability to pay
the remaining balance of his obligation with the respondent
had been extinguished by his offer to transfer to
respondent his shares of stocks in the Rural Bank of
Paraaque.
The defense of the petitioner that the offer he made to
respondent of his shares of stocks in Rural Bank of
Paraaque amounting to P1,250,000.00 had already
extinguished his obligation to pay the balance of the loan
stands on hollow ground.
_______________
21 Coronel v. Capati, G.R. No. 157836, 26 May 2005, 459 SCRA 205,
213.
740

Section 4, Republic Act No. 7353, otherwise known as The

Rural Banks Act of 1992, provides:
Section 4. x x x. With the exception of shareholdings of

corporations organized primarily to hold equities in rural banks
as provided for under Section 12C of Republic Act No. 337, as
amended, and of Filipinocontrolled domestic banks, the capital
stock of any rural bank shall be fully owned and held
directly or indirectly by citizens of the Philippines or
corporations, associations or cooperatives qualified under
Philippine laws to own and hold such capital stock: x x x.
(Emphasis supplied.)
Given the foregoing provision of law, this Court agrees with

the Court of Appeals that the respondent, being a
foreigner, is not qualified to own capital stock in the Rural
Bank of Paraaque. This renders the assignment of shares
of stocks in the Rural Bank of Paraaque in favor of
respondent void. As previously stated, the assignment of
the shares of stocks in the rural bank was not accepted by
the respondent precisely because of the prohibition 22
stated
under Republic Act No. 7353, which was explained to him
by his counsel, the late Atty. Timario, Jr.
Moreover, petitioner mentioned in his testimony before
the trial court that all the shares of stocks of the Rural
Bank of Paraaque had already been fully subscribed and,
for shares to be made available, additional capital should
be infused and the SEC should approved the additional
shares for subscription. Here we quote that part of the
petitioners testimony:
Q: Now, you have stated a while ago Mr. Witness, that the
balance be paid by shares of stocks and as a matter of
fact the [respondent] has accepted that preposition,
what happened if any, afterwards?
A: In my case, I transferred 330 something shares of
stocks in the name of [the respondent] and I believe
[Atty.] Tabalingcos have done the same.
_______________
22 TSN, 29 July 1992, pp. 1920.
741
VOL. 527, JULY 17, 2007 741

Q: Did you find out for yourselves what happened

afterwards if any?
A: However we have transferred in their name however
there are technicalities in the issuance, Central Bank

technicalities.
Q: What are these Central Bank technicalities?
A: Issuance of shares of stocks certificate, during that
period we have to increase our authorized capital stock
with the [SEC] because the original one were
already fully subscribed and fully paid. [Emphasis
supplied].
Q: Then what happened?
A: The only way for us, for the bank to issue additional
shares of stocks certificate is to wait for the approval of
the increase of capitalization from the [SEC] so that
these assigned shares to [Atty.] Tabalingcos can be
lodge.
Q: What did you do if any afterwards?
A: We informed the [respondent] about that.
x x x x.
Q: What was his reply if any?
A: He started complaining and said,23just return to me my
money that is how it all started.
From the aforesaid testimony of the petitioner, it is highly

impossible for respondent to have acquired by assignment
any shares of stocks in the Rural Bank of Paraaque. Thus,
the obligation of the petitioner to pay the balance of the
loan remains subsisting.
In the face of all of the above, this Court nevertheless
sustains the assertion of the petitioner that the imposition
of 21% interest on the outstanding loan obligation of
P2,240,000.00 has no legal and factual bases.
According to the promissory note executed by Dr. Lim,
and agreed to by all the parties, in case of the borrowers
failure to pay the loan obligation within the stipulated
period, the extended period shall be considered running
monthly under the
_______________
23 TSN, 31 March 1995, pp. 1619.
742

same terms and rate of interest, which is 4% per month,

until the principal has been fully paid. Thus, the remaining
balance of P2,240,000.00
24
is still subject to the interest rate
of 4% per month or 48% per annum. To our mind such
rate of interest is highly unconscionable and 25
inordinate.
In the case of Ruiz v. Court 26
of Appeals, citing the cases 27
of Medel v. Court of Appeals, Garcia v. Court of Appeals, 28
Spouses Bautista v. Pilar Development Corporation 29
and
the recent case of Spouses Solangon v. Salazar, this Court
considered the 3% interest per month or 36% interest per
annum as excessive and unconscionable. Thereby, the
Court, in the said case, equitably reduced the rate of
interest to 1% interest per month or 12% interest per
annum. The Court also held that while the Usury Law has
been suspended by Central Bank Circular No. 905, s. 1982,
effective on 1 January 1983, and parties to a loan
agreement have been given wide latitude to agree on any
interest rate, still stipulated interest rates are illegal if
they are unconscionable. Nothing in the said circular
grants lenders carte blanche authority to raise interest
rates to levels which will either enslave 30
their borrowers or
lead to a hemorrhaging of their assets. Surely, it is
_______________
24 In the promissory note which was signed solely by Dr. Lim per
agreement among the petitioner, Dr. Lim and Atty. Tabalingcos, the
stipulated rate of interest was 4%. When the loan obligation became due
and demandable and the borrowers failed to pay on the agreed period they
sought extension of their loan obligation and promised to increase the rate
of interest to 5% to which the respondent agreed. But, when the
respondent filed his Complaint for collection of sum of money, the rate of
interest which he prayed for was 4% as what was stated in the promissory
note.
25 449 Phil. 419, 433434 401 SCRA 410, 421 (2003).
26 359 Phil. 820, 829830 299 SCRA 481, 490 (1998).
27 G.R. Nos. L8228283, 24 November 1988, 167 SCRA 815, 830831.
28 371 Phil. 533, 543544 312 SCRA 611, 619 (1999).
29 412 Phil. 816, 822823 360 SCRA 379, 385 (2001).
30 Ruiz v. Court of Appeals, supra note 25 at p. 434 p. 421.
743
VOL. 527, JULY 17, 2007 743

more consonant with justice that the rate of interest in the

present case, which is 4% per month or 48% per annum, be
reduced equitably. We find, that the reduction of the

interest rate by the trial court, pegged at 21% per annum,
was not proper. 31
In Eastern Shipping Lines, Inc. v. Court of Appeals, the
Court formulated the following rules of thumb to guide the
lower courts in the imposition of the proper interest on the
amounts due, to wit:
I. x x x.
II. With regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in

the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169
of the Civil Code.
2. x x x x.
money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction,
this interim period being deemed to be32 by then an
equivalent to a forbearance of credit. [Emphasis
supplied].
_______________
31 G.R. No. 97412, 12 July 1994, 234 SCRA 78.

32 Id., at pp. 9597.
744

The agreed interest rate of 4% per month or 48% per

annum is unconscionable and must be mitigated. Following
established jurisprudence, the legal interest rate of 12%

should apply, computed from the date of judicial demand,
that is, 7 April 1990. The aforequoted paragraph 3 of the
guidelines is also appropriate herein, and a 12% interest
per annum is imposed on petitioners monetary liability to
respondent from the date of the finality of this Decision
until it is fully paid.
As regards the argument of the petitioner that the
award of attorneys fees equivalent to 20% of P2,240,000.00
is excessive, this Court finds the same specious. The lower
courts found that by reason of the acts of the petitioner and
his cohorts, the respondent had to secure the services of
counsel in order to preserve and protect his rights. If not
for the refusal of the petitioner to settle his obligation, the
respondent would not have incurred expenses in filing a
case which dragged on for more than a decade in order to
recover the loan which he extended to the petitioner, Dr.
Lim and Atty. Tabalingcos. Hence, the award of 20% of
P2,240,000.00 as attorneys fees is only reasonable.
Conspicuously, there appears to be a variation as to the
percentage of attorneys fees awarded in the dispositive
portion and in the body of the RTC decision. In the
dispositive portion of the RTC decision, the attorneys fees
awarded was 20% of P2,240,000.00 while in the body of the 33
same decision, the rate referred to 10% of P2,240,000.00.
The general rule is that, where there is conflict
between the dispositive portion or the fallo and the body of
a decision, the fallo controls. This rule rests on the theory
that the fallo is the final order while the opinion in the
body is merely a statement ordering nothing. However,
where the inevitable conclusion from the body of the
decision is so clear as to show that there was a mistake in
the dispositive portion, the body
_______________
33 Rollo, p. 163.
745
VOL. 527, JULY 17, 2007 745

34
of the decision prevails. In his complaint before the RTC,
the respondent prayed for 20% of P2,240,000.00 as
attorneys fees. In the body of the RTC decision, the trial
court awarded outright respondents prayer for attorneys
fees without any discussion that it found the 20%
respondent prayed for as excessive and that it was

reducing the percentage of the attorneys fees to 10%. This
court is more inclined to believe that the 10% attorneys
fees in the body of the RTC decision is merely a
typographical error. Consequently, the general rule applies
to this case, and the 20% attorneys fees ordered paid by
the fallo of the RTC decision controls.
WHEREFORE, premises considered, the instant
Petition is PARTIALLY GRANTED. The Decision and
Resolution of the Court of Appeals dated 5 January 2004
and 11 June 2004, respectively, in CAG.R. CV No. 54969,
which affirmed the Decision, dated 30 August 1996, of the
Makati City RTC, Branch 148, in Civil Case No. 901053,
are hereby AFFIRMED with the MODIFICATION that an
interest rate of 12% per annum shall be applied to the
balance of the loan amounting to P2,240,000.00, computed
from the date of judicial demand, i.e., 7 April 1990 and of
12% interest per annum on the amount due from the date
of the finality of this Decision until fully paid. Costs
against the petitioner.
SO ORDERED.
YnaresSantiago (Chairperson), AustriaMartinez

and Nachura, JJ., concur.
Petition partially granted, judgment and resolution

affirmed with modification.
Notes.C.B. Circular No. 905 could not be properly

invoked to justify the escalation clauses requiring that the
in
_______________
34 Poliand Industrial Limited v. National Development Company, G.R.

No. 143866, 22 August 2005, 467 SCRA 500, 550.
746

Tondo Medical Center Employees Association vs. Court of
Appeals
crease be within the limits allowed by law, such circular

not being a grant of specific authority. (Almeda vs. Court of
Appeals, 256 SCRA 292 [1996])
A combined interest and penalty rate at 10% per month
or 120% per annum should be deemed iniquitous,
unconscionable, and inordinate. (Dio vs. Japor, 463 SCRA

170 [2005])
o0o

Chan vs. Maceda, Jr.
*
G.R. No. 142591. April 30, 2003.
JOSEPH CHAN, WILSON CHAN and LILY CHAN,**

petitioners, vs. BONIFACIO S. MACEDA, JR.,
respondent.
Remedial Law Certiorari Court is not a trier of facts and

does not normally undertake the reexamination of the evidence
submitted by the contending parties during the trial of the case
considering that findings of fact of the Court of Appeals are
generally binding and conclusive on the Court Jurisdiction of the
Court in a petition for review on certiorari limited to reviewing
only errors of law not of fact Exception.Succinct is the rule that
this Court is not a trier of facts and does not normally undertake
the reexamination of the evidence submitted by the contending
parties during the trial of the case considering that findings of
fact of the Court of Appeals are generally binding and conclusive
on this Court. The jurisdiction of this Court in a petition for
review on certiorari is limited to reviewing only errors of law, not
of fact, unless it is shown, inter alia, that: (1) the conclusion is a
finding grounded on speculations, surmises or conjectures (2) the
inference is manifestly mistaken, absurd and impossible (3) there
is grave abuse of discretion (4) the judgment is based on
misapprehension of facts (5) the findings of fact are conflicting
and (6) the Court of Appeals, in making its findings went beyond
the issues of the case and the same is contrary to the admission of
both parties.
Civil Law Obligations and Contracts Deposits In an action
against the depositary, the burden is on the plaintiff to prove the
bailment or deposit and the performance of conditions precedent to
the right of action A depositary is obliged to return the thing to the
depositor, or to his heirs or
_______________
* THIRD DIVISION.
http://central.com.ph/sfsreader/session/0000015cd9e9955bed27067d003600fb002c009e/t/?o=False 1/16
** Presently Executive Judge, Regional Trial Court, Las Pias City and
Presiding Judge, RTC, Branch 275, Las Pias City.
353
VOL. 402, APRIL 30, 2003 353
successors, or to the person who may have been designated in the

contract.Under Article 1311 of the Civil Code, contracts are
binding upon the parties (and their assigns and heirs) who
execute them. When there is no privity of contract, there is
likewise no obligation or liability to speak about and thus no
cause of action arises. Specifically, in an action against the
depositary, the burden is on the plaintiff to prove the bailment or
deposit and the performance of conditions precedent to the right
of action. A depositary is obliged to return the thing to the
depositor, or to his heirs or successors, or to the person who may
have been designated in the contract.
Same Damages Actual or compensatory damages cannot be
presumed but must be proved with reasonable degree of certainty.
Anent the issue of damages, petitioners are still not liable
because, as expressly provided for in Article 2199 of the Civil
Code, actual or compensatory damages cannot be presumed, but
must be proved with reasonable degree of certainty. A court
cannot rely on speculations, conjectures, or guesswork as to the
fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the
best obtainable evidence of the actual amount thereof. It must
point out specific facts which could afford a basis for measuring
whatever compensatory or actual damages are borne.

Court of Appeals.

Retired Justice Alicia V. SempioDiy & Associates for
petitioners.
Eddie U. Tamondong for respondent.
SANDOVALGUTIERREZ, J.:
A judgment of default does not automatically imply

admission by the defendant of the facts and causes of
action of the plaintiff. The Rules of Court require the latter
to adduce evidence in support of his allegations as an

indispensable condition
1
before final judgment could be
given in his favor. The trial judge has to evaluate the
allegations with the highest degree of objectivity and
certainty. He may sustain an allegation for which the
plaintiff has adduced
_______________
1 Monarch Insurance Co., Inc. vs. Court of Appeals, 333 SCRA 71

(2000).
354

sufficient evidence, otherwise, he has to reject it. In the

case at bar, judicial review is imperative to avert the award
of damages that is unreasonable and without evidentiary
support.
Assailed in this petition for review under Rule 45 of the2
1997 Rules of Civil Procedure, as amended, is the Decision
dated June 17, 1999 of the Court of Appeals in CAG.R. CV
No. 57323, entitled Bonifacio S. Maceda, 3Jr. versus Joseph
Chan, et al. affirming in toto the Decision dated December
26, 1996 of the Regional Trial Court, Branch 160, Pasig
City, in Civil Case No. 53044.
The essential antecedents are as follows:
On July 28, 1976, Bonifacio S. Maceda, Jr., herein
respondent, obtained a P7.3 million loan from the
Development Bank of the Philippines for the construction
of his New Gran Hotel Project in Tacloban City.
Thereafter, on September 29, 1976, respondent entered
into a building construction contract with Moreman
Builders Co., Inc. (Moreman). They agreed that the
construction would be finished not later than December 22,
1977.
Respondent purchased various construction materials
and equipment in Manila. Moreman, in turn, deposited
them in the warehouse of Wilson and Lily Chan, herein
petitioners. The deposit was free of charge.
Unfortunately, Moreman failed to finish the
construction of the hotel at the stipulated time. Hence, on
February 1, 1978, respondent filed with the then Court of
First Instance (CFI, now Regional Trial Court), Branch 39,
Manila, an action for rescission and damages against
Moreman, docketed as Civil Case No. 113498.
4
On November 28, 1978, the CFI rendered
http://central.com.ph/sfsreader/session/0000015cd9e9955bed27067d003600fb002c009e/t/?o=False its Decision 3/16
4
On November 28, 1978, the CFI rendered its Decision
rescinding the contract between Moreman and respondent
and awarding to the latter P445,000.00 as actual, moral
and liquidated damages P20,000.00 representing the
increase in the construction materials and P35,000.00 as
attorneys fees. Moreman interposed an appeal to the Court
of Appeals but the same was dismissed on March 7,
_______________
2 Penned by Associate Justice Artemio G. Tuquero and concurred in by

Associate Justices Eubolo G. Verzola and Candido V. Rivera (retired),
Rollo at pp. 3236.
3 Penned by Judge Mariano M. Umali, Records at pp. 206213.
4 Rollo at pp. 4076.
355
VOL. 402, APRIL 30, 2003 355

1989 for being dilatory. He elevated the case to this5 Court

via a petition for review on certiorari. In a Decision dated
February
6
21, 1990, we denied the petition. On April 23,
1990, an Entry of Judgment was issued.
Meanwhile, during the pendency of the case, respondent
ordered petitioners to return to him the construction
materials and equipment which Moreman deposited in
their warehouse. Petitioners, however, told them that
Moreman withdrew those construction materials in 1977.
Hence, on December 11, 1985, respondent filed with the
Regional Trial Court, Branch 160, Pasig City, an action for
damages with an application 7 for a writ of preliminary
attachment against petitioners, docketed as Civil Case No.
53044.
In the meantime, on October 30, 1986, respondent was
appointed Judge of 8
the Regional Trial Court, Branch 12,
San Jose Antique.
On August 25, 1989, or after almost four (4) years, the
trial court dismissed respondents complaint
9
for his failure
to prosecute and for lack of interest. On September 6,
1994, or five years thereafter, respondent filed a motion for
reconsideration, but the same was denied in the Order
dated September 9, 1994 because of the failure of
respondent
10
and his counsel to appear on the scheduled
hearing.
On October 14, 1994, respondent filed a second motion
for reconsideration. This time, the motion was granted and
the case was ordered reinstated on January 10, 1995, or ten11

(10) years from the time the action was originally filed.
Thereafter, summons, together with the copies of the
complaint and its annexes, were served on petitioners.
On March 2, 1995, counsel for
12
petitioners filed a motion
to dismiss on several grounds. Respondent, on the other
hand, moved
_______________
5 G.R. No. 88310.

6 Rollo at p. 112.
7 Records at pp. 115.
8 Id., at p. 34.
9 Id., at p. 32.
10 Id., at p. 39.
11 Id., at p. 45.
12 Id., at pp. 6167.
356

to declare petitioners in default on the ground that their

motion to dismiss was filed out13
of time and that it did not
contain any notice of hearing.
On April 27, 1995, the trial 14
court issued an order
declaring petitioners in default.
Petitioners
15
filed with the Court of Appeals a petition for
certiorari to annul the trial courts order16
of default, but
the same was dismissed in its Order dated August 31,
1995. The case reached17 this Court, and in a Resolution
dated October 25, 1995, we affirmed the assailed order 18
of
the Court of Appeals. On November 29, 1995, the
corresponding Entry of Judgment was issued.
Thus, upon the return of the records to the RTC, Branch
160, Pasig City, respondent was allowed to present his
evidence ex parte.
Upon motion of respondent, which was granted by 19
the
trial court in its Order dated April 29, 1996, the
depositions of his witnesses, namely, Leonardo Conge,
Alfredo Maceda and Engr. Damiano Nadera were taken in
the Metropolitan
20
Trial Court in Cities, Branch 2, Tacloban
City. Deponent Leonardo Conge, a labor contractor,
testified that on December 14 up to December 24, 1977, he
was contracted by petitioner Lily Chan to get bags of
cement from the New Gran Hotel construction site and to
store the same into the latters warehouse in Tacloban City.

Aside from those bags of cement, deponent also hauled
about 400 bundles of steel bars from the same construction
site, upon order of petitioners. Corresponding delivery
receipts were presented21
and marked as Exhibits A, A1,
A2, A3 and A4.
Deponent Alfredo Maceda testified that he was
respondents Disbursement and Payroll Officer who
supervised the construction
_______________
13 Id., at pp. 6970.

14 Id., at p. 78.
15 CAG.R. No. SP37328.
17 Id., at p. 122.
18 Id., at p. 121.
19 Id., at p. 124.
21 Id., at pp. 152A152E TSN, September 6, 1996 at pp. 410 Id., at
pp. 131137.
357
VOL. 402, APRIL 30, 2003 357

and kept inventory of the properties of the New Gran

Hotel. While conducting the inventory on November 23,
1977, he found that the approximate total value of the
materials stored in petitioners warehouse was
P214,310.00. This amount was accordingly reflected in the
certification signed by Mario Ramos, store clerk and
representative
22
of Moreman who was present during the
inventory.
Deponent Damiano Nadera testified on the current cost
of the architectural and structural requirements 23needed to
complete the construction of the New Gran Hotel.
On December 26, 1996, the trial court rendered a
decision in favor of respondent, thus:
WHEREFORE, foregoing considered, judgment is hereby

rendered ordering defendants to jointly and severally pay
plaintiff:
1) P1,930,000.00 as actual damages

2) P2,549,000.00 as actual damages
3) Moral damages of P150,000.00 exemplary damages of

P50,000.00 and attorneys fees of P50,000.00 and to pay
the costs.
SO ORDERED.
The trial court ratiocinated as follows:
The inventory of other materials, aside from the steel bars and
cement is found highly reliable based on first, the affidavit of
Arthur Edralin dated September 15, 1979, personnel officer of
Moreman Builders that he was assigned with others to guard the
warehouse (Exhs. M & O) secondly, the inventory (Exh. C)
dated November 23, 1977 shows (sic) deposit of assorted
materials thirdly, that there were items in the warehouse as of
February 3, 1978 as shown in the balance sheet of Moremans
stock clerk Jose Cedilla.
Plaintiff is entitled to payment of damages for the overhauling
of materials from the construction site by Lily Chan without the
knowledge and consent of its owner. Article 20 of the Civil Code
provides:
Art. 20. Every person who contrary to law, willfully or negligently caused
damage to another, shall indemnify the latter for the same.
_______________
22 Exhs. C, C1, C2, C3, C4 Records at p. 154A.

358

As to the materials stored inside the bodega of defendant Wilson

Chan, the inventory (Exh. C) show (sic), that the same were
owned by the New Gran Hotel. Said materials were stored by
Moreman Builders Co., Inc. since it was attested to by the
warehouseman as without any lien or encumbrances, the
defendants are duty bound to release it. Article 21 of the Civil
Code provides:
Art. 21. Any person who willfully caused loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
Plaintiff is entitled to payment of actual damages based on the

inventory as of November 23, 1977 amounting to P1,930,080.00
(Exhs. Q & Q1). The inventory was signed by the agent

Moreman Builders Corporation and defendants.
Plaintiff is likewise entitled to payment of 12,500 bags of
cement and 400 bundles of steel bars totaling P2,549,000.00
(Exhs. S & S1 Exhs. B & B3).
Defendants should pay plaintiff moral damages of
P150,000.00 exemplary damages of P50,000.00 and attorneys
fees of P50,000.00 and to pay the costs.
The claim of defendant for payment of damages with respect
to the materials appearing in the balance sheets as of February 3,
1978 in the amount of P3,286,690.00, not having been established24
with enough preponderance of evidence cannot be given weight.
Petitioners then elevated the case to the Court of Appeals,

docketed as CAG.R. CV No. 57323. On June 17, 25
1999, the
Appellate Court rendered the assailed Decision affirming
in toto the trial courts judgment, ratiocinating as follows:
Moreover, although the prayer in the complaint did not specify

the amount of damages sought, the same was satisfactorily
proved during the trial. For damages to be awarded, it is essential
that the claimant satisfactorily prove during the trial the
existence of the factual basis thereof and its causal connection
with the adverse partys act (PAL, Inc. vs. NLRC, 259 SCRA 459).
In sustaining appellees claim for damages, the court a quo held
as follows:
The Court finds the contention of plaintiff that materials and equipment
of plaintiff were stored in the warehouse of defendants and admitted by
defendants in the certification issued to Sheriff Borja. x x x
_______________
24 Rollo at pp. 211213.

25 Supra.
359
VOL. 402, APRIL 30, 2003 359

Evidence further revealed that assorted materials owned by the New

Gran Hotel (Exh. C) were deposited in the bodega of defendant Wilson
Chan with a total market value of P1,930,000.00, current price.
The inventory of other materials, aside from the steel bars and
cement, is highly reliable based on first, the affidavit of Arthur Edralin
dated September 15, 1979, personnel officer of Moreman Builders that
he was assigned, with others to guard the warehouse (Exhs. M & O)
secondly, the inventory (Exh. C) November 23, 1977 shows deposit of
assorted materials thirdly, that there were items in the warehouse as of

February 3, 1978, as shown in the balance sheet of Moremans stock
clerk, Jose Cedilla (pp. 6061, Rollo).
The Court affirms the above findings.

Well settled is the rule that absent any proper reason to
depart from the rule, factual conclusions reached by the trial
court are not to be disturbed (People vs. Dupali, 230 SCRA 62).
Hence, in the absence of any showing that serious and substantial
errors were committed by the lower court in the appraisal of the
evidence, the trial judges assessment of the credibility of the
witnesses is accorded great weight and respect (People vs. Jain,
254 SCRA 686). And, there being absolutely nothing on record to
show that the court a quo overlooked, disregarded, or
misinterpreted facts of weight and significance, its factual
findings and conclusions must be given great weight and should
not be disturbed on appeal.
WHEREFORE, being in accord with law and evidence, the
appealed decision is hereby AFFIRMED in toto.
Hence, this petition for review on certiorari anchored on

the following grounds:
The Court of Appeals acted with grave abuse of discretion and

under a misapprehension of the law and the facts when it
affirmed in toto the award of actual damages made by the trial
court in favor of respondent in this case.
II
The awards of moral and exemplary damages of the trial court

to respondent in this case and affirmed in toto by the Court of
Appeals are unwarranted by the evidence presented by
respondent at the ex parte hearing of this case and should,
therefore, be eliminated or at least reduced.
360

III
The award of attorneys fees by the trial court to respondent in

this case and affirmed by the Court of Appeals should be deleted
because of the failure of the trial court to state the legal and
factual basis of such award.
Petitioners contend inter alia that the actual damages

claimed by respondent in the present case 26were already
awarded to him in Civil Case No. 113498 and hence,
cannot be recovered by him
_______________
26 The dispositive portion of the trial courts decision reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court, hereby renders

judgment, declaring the building contract (Exh. A), rescinded and all subsequent
contracts and agreements entered into by the parties relative thereto and,
consequently, orders the defendants, jointly and severally, to pay the plaintiffs:
1. The amount of P30,000.00 for liquidated damages

2. The amount of P365,000.00 for actual damages
3. The amount of P25,000.00 for moral damages
4. The amount of P25,000.00 for exemplary damages
5. The amount of P20,000.00 representing increase in the construction
materials to finish the construction and
6. The amount of P35,000.00 for attorneys fees, and to pay the costs of these
proceedings.
Consequently, the counterclaim for damages is hereby dismissed.

In addition, the Court, in the supreme interest of justice and equity, considers
as suspended the running of the period of availment of the proceeds of the loan of
the plaintiffs, from February 3, 1978, and directs that the amount of P1,003,000.00
as already granted for release before the restraining order of this Court was
issued, be released to the plaintiffs lifting the restraining order partially, insofar
as the release of the said amount to the plaintiffs is concerned, who may resume
construction of the New Gran Hotel, and such other amounts still pending release
by the Development Bank of the Philippines from the loan of the plaintiffs,
pursuant to the provisions of the loan agreement. The restraining order, however,
is converted into a permanent injunction, insofar as it enjoins the defendants,
their agents, representatives, personnel and employees from continuing with the
project or participating in any manner therein, after the plaintiffs have posted a
bond to be approved, in the amount of P100,000.00, within five days from receipt
of a copy of this decision. (Rollo at pp. 7576).
361
VOL. 402, APRIL 30, 2003 361

again. Even assuming that respondent is entitled to

damages, he can not recover P4,479,000.00 which is eleven
(11) times more than the total actual damages 27
of
P365,000.00 awarded to him in Civil Case No. 113498.
In his comment on the petition, respondent maintains

that petitioners, as depositaries under the law, have both
the fiduciary and extraordinary obligations not only to
safely keep the construction material deposited, but also to
return them with all their products, 28
accessories
29 30
and
accessions,
31
pursuant to Articles 1972, 1979, 1983, and
1988 of the Civil Code. Considering that petitioners duty
to return the construction materials in question has
already become impossible, it is only proper that the prices
of those construction materials in 1996 should be the basis
of the award of actual damages. This is the only way to
fulfill the duty to return
_______________
27 Rollo at p. 40.
28 Art. 1972. The depositary is obliged to keep the thing safely and to
return it, when required, to the depositor, or to his heirs and successors,
or to the person who may have been designated in the contract. His
responsibility, with regard to the safekeeping and the loss of the thing,
shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
29 Art. 1979. The depositary is liable for the loss of the thing through a
fortuitous event:
1. If it is so stipulated
2. If he uses the thing without the depositors permission
3. If he delays its return
4. If he allows others to use it, even though he himself may have
been authorized to use the same.
30 Art. 1983. The thing deposited shall be returned with all its products,
accessories and accessions.
Should the deposit consist of money, the provisions relative to agents in
article 1896 shall be applied to the depositary.
31 Art. 1988. The thing deposited must be returned to the depositor
upon demand, even though a specified period or time for such return may
have been fixed.
This provision shall not apply when the thing is judicially attached
while in the depositarys possession, or should he have been notified of the
opposition of a third person to the return or removal of the thing
deposited. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition.
362
32
contemplated in the applicable laws. Respondent further
claims that petitioners must bear the increase in market
prices from 1977 to 1996 because liability, for fraud
includes all damages which may be reasonably attributed
to the nonperformance of the obligation. Lastly,
respondent insists that there can be33 no double recovery
because in Civil Case No. 113498, the parties were
respondent himself and Moreman and the cause of action
was the rescission of their building contract. In the present
case, however, the parties are respondent and petitioners
and the cause of action between them is for recovery of
damages arising from petitioners failure to return the
construction materials and equipment.
Obviously, petitioners assigned errors call for a review
of the lower courts findings of fact.
Succinct is the rule that this Court is not a trier of facts
and does not normally undertake the reexamination of the
evidence submitted by the contending parties during the
trial of the case considering that findings of fact of the
Court of Appeals
34
are generally binding and conclusive on
this Court. The jurisdiction of this Court in a petition for
review
35
on certiorari is limited to reviewing only errors of
law, not of fact, unless it is shown, inter alia, that: (1) the
conclusion is a finding grounded on speculations, surmises
or conjectures (2) the inference is manifestly mistaken,
absurd and impossible (3) there is grave abuse of
discretion (4) the judgment is based on misapprehension of
facts (5) the findings of fact are conflicting and (6) the
Court of Appeals, in making its findings went beyond the
issues of the case
36
and the same is contrary to the admission
of both parties.
Petitioners submit that this case is an exception to the
general rule since both the trial court and the Court of
Appeals based their judgments on misapprehension of
facts.
We agree.
_______________
32 Rollo at p. 122.
33 Rollo at pp. 4076.
34 Congregation of the Religious of the Virgin Mary vs. Court of Appeals,
G.R. No. 126363, June 26, 1998, 291 SCRA 385, citing Dela Cerna vs.
Court of Appeals, 233 SCRA 325 (1994).
35 Section 1, Rule 45, Revised Rules of Court.
36 Fule vs. Court of Appeals, G.R. No. 112212, March 2, 1998, 286 SCRA
698.
363
VOL. 402, APRIL 30, 2003 363

At the outset, the case should have been dismissed outright

by the trial court because of patent procedural infirmities.
It bears stressing that the case was originally filed on
December 11, 1985. Four (4) years thereafter, or on August
25, 1989, the case was dismissed for respondents failure to
prosecute. Five (5) years after, or on September 6, 1994,
respondent filed his motion for reconsideration. From here,
the trial court already erred in its ruling because it should
have dismissed the motion for reconsideration outright as
it was37 filed far beyond the fifteenday reglementary
period. Worse, when respondent filed his second motion
for reconsideration
38
on October 14, 1994, a prohibited
pleading, the trial court still granted the same and
reinstated the case on January 10, 1995. This is a glaring
gross procedural error committed by both the trial court
and the Court of Appeals.
Even without such serious procedural flaw, the case
should also be dismissed for utter lack of merit.
It must be stressed that respondents claim for damages
is based on petitioners failure to return or to release to him
the construction materials and equipment deposited by
Moreman to their warehouse. Hence, the essential issues to
be resolved are: (1) Has respondent presented proof that
the construction materials and equipment were actually in
petitioners warehouse when he asked that the same be
turned over to him? (2) If so, does respondent have the
right to demand the release of the said materials and
equipment or claim for damages?
Under Article 1311 of the Civil Code, contracts are
binding upon the parties (and their assigns and heirs) who
execute them. When there is no privity of contract, there is
likewise no obligation or liability to speak about and thus
no cause of action arises. Specifically, in an action against
the depositary, the burden is on the plaintiff to prove the
bailment or deposit and the 39performance of conditions
precedent to the right of action. A depositary is obliged to
return the thing to the depositor, or to his heirs or
successors, or to40 the person who may have been designated
in the contract.
_______________
37 Section 3, Rule 41 in relation to Sec. 1, Rule 37 of the 1997 Rules of

Civil Procedure, as amended.
38 Section 5(2), Rule 37, id.
39 26 C.J.S. 6.
364

In the present case, the record is bereft of any contract of

deposit, oral or written, between petitioners and
respondent. If at all, it was only between petitioners and
Moreman. And granting arguendo that there was indeed a
contract of deposit between petitioners and Moreman, it is
still incumbent upon respondent to prove its existence and
that it was executed in his favor. However, respondent
miserably failed to do so. The only pieces of evidence
respondent presented 41
to prove the contract of deposit were
the delivery receipts. Significantly, they are unsigned and
not duly received or authenticated by either Moreman,
petitioners or respondent or any of their authorized
representatives. Hence, those delivery receipts have no
probative value at all. While our laws grant a person the
remedial right to prosecute or institute a civil action
against another for the enforcement or protection
42
of a right,
or the prevention or redress of a wrong, every cause of
action excontractu must be founded upon a contract, oral or
written, express or implied.
Moreover, respondent also failed to prove that there
were construction materials and equipment in petitioners
warehouse at the time he made a demand for their return.
Considering that respondent failed to prove (1) the
existence of any contract of deposit between him and
petitioners, nor between the latter and Moreman in his
favor, and (2) that there were construction materials in
petitioners warehouse at the time of respondents demand
to return the same, we hold that petitioners have no
corresponding obligation or liability to respondent with
respect to those construction materials.
Anent the issue of damages, petitioners are still not
liable because,43as expressly provided for in Article 2199 of
the Civil Code, actual or compensatory damages cannot be
presumed, but must be proved with reasonable degree of
certainty. A court cannot rely on speculations, conjectures,
or guesswork as to the fact and amount of damages, but

must depend upon competent proof that they have been
suffered by the injured party and on the best obtainable
evi
_______________
41 Record at pp. 152A to 152E.

42 Section 3 (a), Rule 1, 1997 Rules of Civil Procedure, as amended.
43 Article 2199. Except as provided by law or by stipulation, one is
entitled to an adequate compensation only for such pecuniary loss suffered
by him as he has duly proved. Such compensation is referred to as actual
or compensatory damages.
365
VOL. 402, APRIL 30, 2003 365

dence of the actual amount thereof. It must point out

specific facts which could afford a basis for measuring
44
Considering our findings that there was no contract of
deposit between petitioners and respondent or Moreman
and that actually there were no more construction
materials or equipment in petitioners warehouse when
respondent made a demand for their return, we hold that
he has no right whatsoever to claim for damages.
As we stressed in the beginning, a judgment of default
does not automatically imply admission by the defendant of
plaintiffs causes of action. Here, the trial court merely
adopted respondents allegations in his complaint and
evidence without evaluating them with the highest degree
of objectivity and certainty.
WHEREFORE, the petition is GRANTED. The
challenged Decision of the Court of Appeals dated June 17,
1999 is REVERSED and SET ASIDE. Costs against
respondent.
SO ORDERED.
Puno (Chairman), Panganiban, Corona and Carpio

Morales, JJ., concur.
Petition granted, challenged decision reversed and set

aside.
Note.It is a settled rule that there must be proof that

actual or compensatory damages have been suffered and
evidence of its actual amount. (People vs. Nablo, 319 SCRA

784 [1999])
o0o
_______________
44 Development Bank of the Philippines vs. Court of Appeals, G.R. No.

118342, January 5, 1998, 284 SCRA 14.
366
6/24/2017 TripleVvsFilMerchants:160544:February21,2005:AttyAbjelinaSoriano:ThirdDivision
[G.R.No.160544.February21,2005]
TRIPLEVvs.FILIPINOMERCHANTS
THIRDDIVISION
Gentlemen:
Quotedhereunder,foryourinformation,isaresolutionofthisCourtdatedFEB212005.
G.R.No.160544(TripleVFoodServices,Inc.vs.FilipinoMerchantsInsuranceCompany,Inc.)
Assailedinthispetitionforreviewoncertiorariisthedecision[1] datedOctober21,2003oftheCourtofAppealsinCAG.R.
c r a la w
CVNo.71223,affirminganearlierdecisionoftheRegionalTrialCourtatMakatiCity,Branch148,initsCivilCaseNo.98838,
anactionfordamagesthereatfiledbyrespondentFilipinoMerchantsInsurance,Company,Inc.,againstthehereinpetitioner,
TripleVFoodServices,Inc.
On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary JoAnne De Asis (De Asis) dined at
petitioner'sKamayanRestaurantat15WestAvenue,QuezonCity.DeAsiswasusingaMitsubishiGalantSuperSaloonModel
1995withplatenumberUBU955,assignedtoherbyheremployerCrispaTextileInc.(Crispa).Onsaiddate,DeAsisavailed
of the valet parking service of petitioner and entrusted her car key to petitioner's valet counter. A corresponding parking
ticketwasissuedasreceiptforthecar.Thecarwasthenparkedbypetitioner'svaletattendant,acertainMadridano,atthe
designatedparkingarea.Fewminuteslater,Madridanonoticedthatthecarwasnotinitsparkingslotanditskeynolongerin
the box where valet attendants usually keep the keys of cars entrusted to them. The car was never recovered. Thereafter,
Crispa filed a claim against its insurer, herein respondent Filipino Merchants Insurance Company, Inc. (FMICI). Having
indemnifiedCrispaintheamountofP669.500forthelossofthesubjectvehicle,FMICI,assubrogeetoCrispa'srights,filed
with the RTC at Makati City an action for damages against petitioner TripleV Food Services, Inc., thereat docketed as Civil
CaseNo.98838whichwasraffledtoBranch148.
In its answer, petitioner argued that the complaint failed to aver facts to support the allegations of recklessness and
negligence committed in the safekeeping and custody of the subject vehicle, claiming that it and its employees wasted no
timeinascertainingthelossofthecarandininformingDeAsisofthediscoveryoftheloss.Petitionerfurtherarguedthatin
accepting the complimentary valet parking service, De Asis received a parking ticket whereunder it is so provided that "
[Managementandstaffwillnotberesponsibleforanylossofordamageincurredonthevehiclenorofvaluablescontained
therein",aprovisionwhich,topetitioner'smind,isanexplicitwaiverofanyrighttoclaimindemnityforthelossofthecar
and that De Asis knowingly assumed the risk of loss when she allowed petitioner to park her vehicle, adding that its valet
parkingservicedidnotincludeextendingacontractofinsuranceorwarrantyforthelossofthevehicle.
Duringtrial,petitionerchallengedFMICI'ssubrogationtoCrispa'srighttofileaclaimforthelossofthecar,arguingthattheft
isnotariskinsuredagainstunderFMICI'sInsurancePolicyNo.PC5975forthesubjectvehicle.
InadecisiondatedJune22,2001,thetrialcourtrenderedjudgmentforrespondentFMICI,thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff (FMICI) and against the defendant
TripleV(hereinpetitioner)andthelatterisherebyorderedtopayplaintiffthefollowing:
1.TheamountofP669,500.00,representingactualdamagespluscompounded(sic)
2.TheamountofP30,000.00asacceptancefeeplustheamountequalto25%ofthetotalamountdueasattorney'sfees
3.TheamountofP50,000.00asexemplarydamages
4.Plus,costofsuit.
DefendantTripleVisnotthereforeprecludedfromtakingappropriateactionagainstdefendantArmandoMadridano.
SOORDERED.
Obviouslydispleased,petitionerappealedtotheCourtofAppealsreiteratingitsargumentthatitwasnotadepositaryofthe
subject car and that it exercised due diligence and prudence in the safe keeping of the vehicle, in handling the carnapping
incident and in the supervision of its employees. It further argued that there was no valid subrogation of rights between
CrispaandrespondentFMICI.
In a decision dated October 21, 2003,[2] the Court of Appeals dismissed petitioner's appeal and affirmed the appealed
c r a la w
decisionofthetrialcourt,thus:
WHEREFORE, based on the foregoing premises, the instant appeal is hereby DISMISSED. Accordingly, the assailed June 22,
2001DecisionoftheRTCofMakatiCityBranch148inCivilCaseNo.98838isAFFIRMED.
SOORDERED.
Insodismissingtheappealandaffirmingtheappealeddecision,theappellatecourtagreedwiththefindingsandconclusions
of the trial court that: (a) petitioner was a depositary of the subject vehicle (b) petitioner was negligent in its duties as a
depositarythereofandasanemployerofthevaletattendantand(c)therewasavalidsubrogationofrightsbetweenCrispa
andrespondentFMICI.
Hence,petitioner'spresentrecourse.
http://www.chanrobles.com/scresolutions/resolutions/2005/february/160544.php 1/2
6/24/2017 TripleVvsFilMerchants:160544:February21,2005:AttyAbjelinaSoriano:ThirdDivision
Weagreewiththetwo(2)courtsbelow.
WhenDeAsisentrustedthecarinquestiontopetitionersvaletattendantwhileeatingatpetitioner'sKamayanRestaurant, the
former expected the car's safe return at the end of her meal. Thus, petitioner was constituted as a depositary of the same
car.Petitionercannotevadeliabilitybyarguingthatneitheracontractofdepositnorthatofinsurance,guarantyorsuretyfor
thelossofthecarwasconstitutedwhenDeAsisavailedofitsfreevaletparkingservice.
In a contract of deposit, a person receives an object belonging to another with the obligation of safely keeping it and
returningthesame.[3] Adepositmaybeconstitutedevenwithoutanyconsideration.Itisnotnecessarythatthedepositary
c r a la w
receivesafeebeforeitbecomesobligatedtokeeptheitementrustedforsafekeepingandtoreturnitlatertothedepositor.
Speciousispetitioner'sinsistencethatthevaletparkingclaimstubitissuedtoDeAsiscontainsaclearexclusionofitsliability
andoperatesasanexplicitwaiverbythecustomerofanyrighttoclaimindemnityforanylossofordamagetothevehicle.
Theparkingclaimstubembodyingthetermsandconditionsoftheparking,includingthatofrelievingpetitionerfromanyloss
or damage to the car, is essentially a contract of adhesion, drafted and prepared as it is by the petitioner alone with no
participation whatsoever on the part of the customers, like De Asis, who merely adheres to the printed stipulations therein
appearing.Whilecontractsofadhesionarenotvoidinthemselves,yetthisCourtwillnothesitatetoruleoutblindadherence
theretoiftheyprovetobeonesidedundertheattendantfactsandcircumstances.[4] c r a la w
Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be allowed to use its parking claim stub's
exclusionarystipulationasashieldfromanyresponsibilityforanylossordamagetovehiclesortothevaluablescontained
therein.Here,itisevidentthatDeAsisdepositedthecarinquestionwiththepetitioneraspartofthelatter'senticementfor
customers by providing them a safe parking space within the vicinity of its restaurant. In a very real sense, a safe parking
space is an added attraction to petitioner's restaurant business because customers are thereby somehow assured that their
vehiclearesafelykept,ratherthanparkingthemelsewhereattheirownrisk.Havingentrustedthesubjectcartopetitioner's
valetattendant,customerDeAsis,likeallofpetitioner'scustomers,fullyexpectsthesecurityofhercarwhileatpetitioner's
premises/designatedparkingareasanditssafereturnattheendofhervisitatpetitioner'srestaurant.
Petitioner's argument that there was no valid subrogation of rights between Crispa and FMICI because theft was not a risk
insuredagainstunderFMICI'sInsurancePolicyNo.PC5975holdsnowater.
Insurance Policy No. PC5975 which respondent FMICI issued to Crispa contains, among others things, the following item:
"Insured'sEstimateofValueofScheduledVehicleP800.000".[5] Onthebasisofsuchitem,thetrialcourtconcludedthatthe
c r a la w
coverageincludesafullcomprehensiveinsuranceofthevehicleincaseofdamageorloss.Besides,Crispapaidapremium
of P10,304 to cover theft. This is clearly shown in the breakdown of premiums in the same policy.[6] Thus, having c r a la w
indemnified CRISPA for the stolen car, FMICI, as correctly ruled by the trial court and the Court of Appeals, was properly
subrogatedtoCrispa'srightsagainstpetitioner,pursuanttoArticle2207oftheNewCivilCode [7].
Anentthetrialcourt'sfindingsofnegligenceonthepartofthepetitioner,whichfindingswereaffirmedbytheappellatecourt,
wehaveconsistentlyruledthatfindingsoffactsoftrialcourts,moresowhenaffirmed,ashere,bytheCourtofAppeals,are
conclusive on this Court unless the trial court itself ignored, overlooked or misconstrued facts and circumstances which, if
considered, warrant a reversal of the outcome of the case.[8] This is not so in the case at bar. For, we have ourselves
c r a la w
reviewedtherecordsandfindnojustificationtodeviatefromthetrialcourt'sfindings.
WHEREFORE,petitionisherebyDENIEDDUECOURSE.
SOORDERED.
Verytrulyyours,
(Sgd.)LUCITAABJELINASORIANO
ClerkofCourt
http://www.chanrobles.com/scresolutions/resolutions/2005/february/160544.php 2/2
[No. 6913. November 21, 1913.]
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff

and appellee, vs. GREGORIO DE LA PEA, administrator
of the estate of Father Agustin de la Pea, defendant and
appellant.
1. TRUST FUNDS LIABILITY OF TRUSTEE.One who,

having in his possession trust funds, deposits them in his
personal account in a bank and mixes them with his own
funds, does not thereby assume an obligation different
from that under which he would have lain if such deposit
had not been made nor does he thereby become liable to
repay the money at all hazards and where such funds are
taken from the bank by fuerza mayor, he is relieved from
responsibility in relation thereto.
2. ID. ID. ENGLISH AND AMERICAN LAW OF TRUSTS

NOT APPLICABLE.That branch of the law, known in
England and America as the law of trusts, has no
counterpart in the Roman law and none under the
Spanish aw.

Iloilo. Powell, J.
J. Lopez Vito, for appellant.
Arroyo & Horrilleno, for appellee.
145
VOL. 26, NOVEMBER 21, 1913. 145

Roman Catholic Bishop of Jaro vs. De la Pea.
MORELAND, J.:
This is an appeal by the defendant from a judgment of the

Court of First Instance of Iloilo, awarding to the plaintiff
the sum of P6,641, with interest at the legal rate from the
beginning of the action.
http://central.com.ph/sfsreader/session/0000015cd9ff68e802eebed9003600fb002c009e/t/?o=False 1/6
It is established in this case that the plaintiff is the

trustee of a charitable bequest made for the construction of
a leper hospital and that Father Agustin de la' Pea was
the duly authorized representative of the plaintiff to
receive the legacy. The defendant is the administrator of
the estate of Father De la Pea.
In the year 1898 the books of Father De la Pea, as
trustee, showed that he had on hand as such trustee the
sum of P6,641, collected by him for the charitable purposes
aforesaid. In the same year he deposited in his personal
account P19,000 in the Hongkong and Shanghai Bank at
Iloilo. Shortly thereafter and during the war of the
revolution, Father De la Pea was arrested by the military
authorities as a political prisoner, and while thus detained
made an order on said bank in favor of the United States
Army officer under whose charge he then was for the sum
thus deposited in said bank. The arrest of Father De la
Pea and the confiscation of the f unds in the bank were
the result of the claim of the military authorities that he
was an insurgent and that the funds thus deposited had
been collected by him for revolutionary purposes. The
money was taken from the bank by the military authorities
by virtue of such order, was confiscated and turned over to
the Government.
While there is considerable dispute in the case over the
question whether the P6,641 of trust funds was included in
the P19,000 deposited as aforesaid, nevertheless, a careful
examination of the case leads us to the conclusion that said
trust funds were a part of the funds deposited and which
were removed and confiscated by the military authorities of
the United States.
That branch of the law known in England and America
as the law of trusts had no exact counterpart in the Roman
146

law and has none under the Spanish law. In this

jurisdiction, therefore, Father De la Pea's liability is
determined by those portions of the Civil Code which relate
to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to
give something is also bound to preserve it with the
diligence pertaining to a good father of a family" (art.
1094), it also provides, following the principle of the Roman
law, major casus est, cui humana infirmitas resistere non
potest, that "no one shall be liable for events which could
not be foreseen, or which having been foreseen were
inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so
declares." (Art. 1105.)
By placing the money in the bank and mixing it with his
personal funds De la Pea did not thereby assume an
obligation different from that under which he would have
lain if such deposit had not been made, nor did he thereby
make himself liable to repay the money at all hazards. If
the money had been forcibly taken from his pocket or from
his house by the military forces of one of the combatants
during a state of war, it is clear that under the provisions
of the Civil Code he would have been exempt from
responsibility. The fact that he placed the trust fund in the
bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who
must respond at all hazards.
We do not enter into a discussion for the purpose of
determining whether he acted more or less negligently by
depositing the money in the bank than he would if he had
left it in his home or whether he was more or less
negligent by depositing the money in his personal account
than he would have been if he had deposited it in a
separate account as trustee. We regard such discussion as
substantially fruitless, inasmuch as the precise question is
not one of negligence. There was no law prohibiting him
from depositing it as he did and there was no law which
changed
147
VOL. 26, NOVEMBER 21, 1913. 147

his responsibility by reason of the deposit. While it may be

true that one who is under obligation to do or give a thing
is in duty bound, when he sees events approaching the
results of which will be dangerous to his trust, to take all
reasonable means and measures to escape or, if
unavoidable, to temper the effects of those events, we do
not feel constrained to hold that, in choosing between two
means equally legal, he is culpably negligent in selecting
one whereas he would not have been if he had selected the
other.
The court, therefore, finds and declares that the money
which is the subject matter of this action was deposited by
Father De la Pea in the Hongkong and Shanghai Banking
Corporation of Iloilo that said money was forcibly taken f

rom the bank by the armed f orces of the United Sates
during the war of the insurrection and that said Father De
la Pea was not responsible for its loss.
The judgment is therefore reversed, and it is decreed
that the plaintiff shall take nothing by his complaint.
Arellano, C. J., Torres and Carson, JJ., concur.
TRENT, J., dissenting:
I dissent. Technically speaking, whether Father De la Pea

was a trustee or an agent of the plaintiff his books showed
that in 1898 he had in his possession as trustee or agent
the sum of P6,641 belonging to the plaintiff as the head of
the church. This money was then clothed with all the
immunities and protection with which the law seeks to
invest trust funds. But when De la Pea mixed this trust
fund with his own and deposited the whole in the bank to
his personal account or credit, he by this act stamped on
the said fund his own private marks and unclothed it of all
the protection it had. If this money had been deposited in
the name of De la Pea as trustee or agent of the plaintiff, I
think that it may be presumed that the military authorities
would not have confiscated it for the reason that they were
looking for insurgent funds only. Again, the plaintiff had no
reason to suppose that
148

De la Pea would attempt to strip the fund of its identity,

nor had he said or done anything which tended to relieve
De la Pea from the legal responsibility which pertains to
the care and custody of trust funds.
The Supreme Court of the United States in United
States vs. Thomas (82 U. S., 337), at page 343, said:
"Trustees are only bound to exercise the same care and
solicitude with regard to the trust property which they
would exercise with regard to their own. Equity will not
exact more of them. They are not liable for a loss by theft
without their fault. But this exemption ceases when they
mix the trustmoney with their own, whereby it loses its
identity, and they become mere debtors."
If this proposition is sound and is applicable to cases
arising in this jurisdiction, and I entertain no doubt on this
point, the liability of the estate of De la Pea cannot be

doubted. But this court in the majority opinion says: "The
fact that he (Agustin de la Pea) placed the trust fund in
the bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who
must respond at all hazards. * * * There was no law
prohibiting him from depositing it as he did, and there was
no law which changed his responsibility, by reason of the
deposit."
I assume that the court in using the language which
appears in the latter part of the above quotation meant to
say that there was no statutory law regulating the
question. Questions of this character are not usually
governed by statutory law. The law is to be found in the
very nature of the trust itself, and, as a general rule, the
courts say what facts are necessary to hold the trustee as a
debtor.
If De la Pea, after depositing the trust fund in his
personal account, had used this money for speculative
purposes, such as the buying and selling of sugar or other
products of the country, thereby becoming a debtor, there
would have been no doubt as to the liability of his estate.
Whether he used this money for that purpose the record is
silent, but it will be noted that a considerable length of
149
VOL. 26, NOVEMBER 21, 1913. 149

United States vs. Hart.
time intervened from the time of the deposit until the funds
were confiscated by the military authorities. In fact the
record shows that De la Pea deposited on June 27, 1898,
P5,259, on June 28 of that year P3,280, and on August 5 of
the same year P6,000. The record also shows that these
funds were withdrawn and again deposited all together on
the 29th of May, 1900, this last deposit amounting to
P18,970. These facts strongly indicate that De la Pea had
as a matter of fact been using the money in violation of the
trust imposed in him.
If the doctrine announced in the majority opinion be
followed in cases hereafter arising in this jurisdiction trust
funds will be placed in a precarious condition. The position
of the trustee will cease to be one of trust.
Judgment reversed.
_______________

CA AgroIndustrial Development Corp. vs. Court of Appeals
*
G.R. No. 90027. March 3, 1993.
CA AGROINDUSTRIAL DEVELOPMENT CORP.,

petitioner, vs. THE HONORABLE COURT OF APPEALS
and SECURITY BANK AND TRUST COMPANY,
respondents.
Civil Law Deposit Commercial Law Banks and Banking A

contract for the rent of a safety deposit box is not an ordinary
contract of lease but a special kind of deposit.We agree with the
peti tioner's contention that the contract for the rent of the safety
deposi t box is not an ordinary contract of lease as defined in
Article 1643 of the Civil Code. However, We do not fully subscribe
to its view that the same is a contract of deposit that is to be
strictly governed by the provisions in the Civil Code on deposit
the contract in the case at bar is a special kind of deposit. It
cannot be characterized as an ordinary contract of lease under
Article 1643 because the full and absolute possession and control
of the safety deposit box Was not given to the joint renters.
Same Same Same Same Primary function of banking
institutions authorized to rent out safety deposit box, within the
parameters of contract of deposit in accord with General Banking
Act which adopts prevailing rule in American jurisprudence.In
the context of our laws which authorize banking institutions to
rent out safety deposit boxes, it is clear that in this jurisdiction,
the prevailing rule in the United States has been adopted. Section
72 of the General Banking Act pertinently provides: xxx Note that
the primary function is still found within the parameters of a
contract of deposit. i.e., the receiving in custody of funds,
documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from,
but related to or in conjunc
________________
* THIRD DIVISION.
http://central.com.ph/sfsreader/session/0000015cda013dbab4068502003600fb002c009e/t/?o=False 1/15
427
VOL. 219, MARCH 5, 1993 427
tion with, this principal function.

Same Same Same Same Any stipulation exempting
depository from liability for loss of thing deposited on account of
fraud, negligence or delay considered void for being contrary to
law and public policy.The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed
by Title I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in perform: ng its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the
agreement. In the absence of any s tipulation prescribing the
degree of diligence required, that of a good father of a family is to
be observed. Hence, any stipulation exempting ng the depositary
from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being
contrary to law and public policy.
Same Same Same Same Liability of lessor in contract of
lease of safety deposit box can be limited by stipulation but any
stipulation for exemption shall be held ineffective.With respect
to property deposited in a safedeposit box by a customer of a
safedeposit company, the parties, since the relation is a
contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the
deposit company, provided such contract is not in violation of law
or public policy. xxx The company, in renting safedeposit boxes,
cannot exempt itself from liability for loss of the contents by its
own fraud or negligence or that of its agents or servants, and if a
provision of the contract may be construed as an attempt to do so,
it will be held ineffective for the purpose. Although it has been
held that the lessor of a safedeposit box cannot limit its liability
for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limit its liability to
some extent by agreement or stipulation.
Same Same Same Same Bank's exoneration from liability
not by virtue of characterization of impugned contract as a
contract of lease but by reason of the absence of proof as to its
knowledge about existing\agreement between the other parties, as
well as, that the loss of certificates not attributable to its negligence
or fraud.In the instant case, the respondent Bank's exoneration
cannot, contrary to the holding of the Court of Appeals, be based
on or proceed from a characterization of the impugned contract as
a contract of lease, but rather on the fact that no competent proof

was presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect
that the certificates of title
428
were withdrawable from the safety deposit box only upon both
parties' joint signatures, and that no evidence was submitted to
reveal that the loss of the certificates of title was due to the fraud
or negligence of the respondent Bank. This in turn flows re om
this Court's determination that the contract involved was one of
deposit.
PETITION for review on certiorari to set aside the decision

of the Court of Appeals.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and

another party in a contract of rent of a safety deposit box
with respect to its contents placed by the latter one of
bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio
Aguirre) and the spouses Ramon and Paula Pugao entered
into an agreement whereby the former purchased from the
latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as
downpayment while the balance was covered by three (3)
postdated checks. Among the terms and conditions of the
agreement embodied in a Memorandum of True and Actual
Agreement of Sale of Land were that the titles to the lots
shall be transferred. to the petitioner upon full payment of
the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title
(TCT) Nos. 284655 and 292434, shall be deposited in a
safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a
representative of the petitioner and the Pugaos upon full
payment of the purchase price. Petitioner, through Sergio

Aguirre, and the Pugaos then rented Safety Deposit Box
No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter
referred to as the res spondent Bank. For this purpose,
both signed a contract of lease (Ex
429
VOL. 219, MARCH 3, 1993 429

hibit "2") which contains, inter alia, the following

conditions:
"13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents,
except herein expressly provided, 1
and it assumes absolutely no
liability in connection therewith."
After the execution of the contract, two (2) renter's keys

were given to the rentersone to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key
remained in the possession of the respondent Bank. The
safety deposit box has two (2) keyholes, one for the guard
key and the other for the renter's key, and can be opened
only with the use of both keys. Petitioner claims that the
certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to
buy from the petitioner the two (2) lots at a price of
P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square
meter or a total of P280,500.00 for the entire property. Mrs.
Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of
title. In view thereof, Aguirre, accompanied by the Pugaos,
then proceeded to the respondent Bank on 4 October 1979
to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates.
Because of the delay in the reconstitution of the title, Mrs.
Ramos withdrew her earlier offer to purchase the lots as a
consequence thereof, the petitioner allegedly failed to
realize the expected profit of P280,500.00.
2
Hence, the latter
filed on 1 September 1980 a complaint for damages against
the respondent Bank with the Court of First Instance (now
Regional Trial Court) of Pasig, Metro Manila which

docketed the same as Civil Case No. 38382.
3
In its Answer with Counterclaim, respondent Bank
alleged
_______________
1 Rollo, 102.
2 Annex "A" of Petition Rollo, 2832.
3 Annex "B", Id Id., 3335.
430

CA AgroIndustrial Development Corp. us. Court of Appeals
that the petitioner has no cause of action because of

paragraphs 13 and 14 of the contract of lease (Exhibit "2")
corollarily, loss of any of the items or articles contained in
the box could not give rise to an action against it. It then
interposed a counterclaim for exemplary damages as well
as attorney's fees in the amount of P20,000.00. Petitioner
4
subsequently filed an answer to the counterclaim.
In due course, the trial court, now designated as Branch
161 of the Regional Trial 5 Court (RTC) of Pasig, Metro
Manila, rendered a decision adverse to the petitioner on 8
December 1986, the dispositive portion of which reads:
"WHEREFORE, premises considered, judgment is hereby

rendered dismissing plaintiffs complaint.
On defendant's counterclaim, judgment is hereby rendered
ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS 6
as attorney's fees.
With costs against plaintiff." :
The unfavorable verdict is based on the trial court's

conclusion that under paragraphs 13 and 14 of the contract
of lease, the Bank has no liability for the loss of the
certificates of title. The court declared that the said
provisions are binding on the parties.7
Its motion for reconsideration having been denied]
petitioner appealed from the adverse decision to the
respondent Court of Appeals which docketed the appeal as
CAG.R. CV No. 15150. Petitioner urged the respondent
Court to reverse the challenged decision because the trial
court erred in (a) absolving the respondent Bank from
liability from the loss, (b) not declaring as null and void, for
being contrary to law, public order and public policy, the
provisions in the contract for lease of the safety deposit box

absolving the Bank from any liability for loss, (c) not
concluding that in this jurisdiction. as Well as
________________
4 Annex "C". Id Id., 36.

5 Annex "D" of Petition Rollo, 3854. Per Judge Cicero C. Jurado.
6 Id., 54.
7 Annex "E", Id Id., 5568.
431
VOL. 219, MARCH 3, 1993 431

under American jurisprudence, the liability of the Bank is

settled and (d) awarding attorney's fees to the Bank and
denying the petitioner's prayer
8
for nominal and exemplary
damages and attorney's fees. 9
In its Decision promulgated on 4 July 1989, respondent
Court affirmed the appealed decision principally on the
theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its
corenter were given control over the safety deposit box and
its contents while the Bank retained no right to open the
said box because it had neither the possession nor control
over it and its contents. As such,
10
the contract is governed
by Article 1643 of the Civil Code which provides:
"ART. 1643. In the lease of things, one of the parties binds himself
to give to another the enjoyment or use of a thing for a price
certain, and for a period which may be definite or indefinite.
However, no lease for more than ninetynine years shall be valid."
11
It invoked Tolentino vs. Gonzales which held that the
owner of the property loses his control over the property
leased during the period of the contractand Article 1975
of the Civil Code which provides:
"ART. 1975. The depositary holding certificates, bonds, securities

or instruments which earn interest shall be bound to collect the
latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value
and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes."
_______________
8 Rollo, 100101.
9 Per Associate Justice Felipe B. Kalalo, concurred in by Associate
Justices Bienvenido C. Ejercito and Luis L. Victor, Annex "I" of Petition
Id., 89105.
10 Citing PARAS, E.L., Civil Code of the Philippines, vol. 5 1982 ed.,
717.
11 50 Phil. 558 [1927].
432

and then concluded that "[c]learly, the defendantappellee

is not under any duty to maintain the contents of the box.
The stipulation absolving the defendantappellee from
liability is in accordance with the nature of the contract of
lease and cannot be regarded
12
as contrary to law, public
order and public policy." The appellate court was quick to
add, however, that under the contract of lease of the safety
deposit box, respondent Bank is not completely free from
liability as it may still be made answerable in case
unauthorized personsenter into the vault area or when the
rented box is forced open. Thus, as expressly provided for
in stipulation number 8 of the contract in question:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will13 not be responsible for the contents of any safe rented from
it."
14
Its motion for reconsideration having been denied in15 the
respondent Court's Resolution of 28 August 1989, pe
titioner took this recourse under Rule 45 of the Rules of
Court and urges Us to review and set aside the respondent
Court's ruling. Petitioner avers that both the respondent
Court and the trial court (a) did not properly and legally
apply the correct law in this case, (b) acted with grave
abuse of discretion or in excess of jurisdiction amounting to
lack thereof and (c) set a precedent that is contrary to, or is
a departure from precedents adhered to and affirmed by
decisions of this Court and precepts in American
jurisprudence adopted in the Philippines. It reiterates the
arguments it had raised in its motion to reconsider the trial
court's decision, the brief submitted to the respondent
Court and the motion to reconsider the latter's decision. In
a nutshell, petitioner maintains that regardless of

nomenclature, the contract for the rent of the safety deposit
box (Exhibit "2") is actually a contract of deposit governed
by
_________________
12 Rollo, 103.
13 Id.
14 Annex "J" of Petition Rollo, 106113.
15 Annex "K", Id. Id., 114115.
433
VOL. 219, MARCH 3, 1993 433

16
Title XII, Book IV of the Civil Code of the Philippines.
Accordingly, it is claimed that the respondent Bank is
liable for the loss of the certificates of title pursuant to
Article 1972 of the Said Code which provides:
"ART. 1972. The depositary is obliged to keep the thing safely and
to return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and
the loss of the thing, shall be governed by the provisions of Title l
of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe."
Petitioner then17
quotes a passage from American
Jurisprudence which is supposed to expound on the
prevailing rule in the United States, to wit:
"The prevailing rule appears to be that where a safedeposit

company leases a safedeposit box or safe and the lessee takes
possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bailor is created
between the parties to the transaction as to such securities or
other valuables the fact that the safedeposit company does not
know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safe
deposit box or safe does not change that relation. That access to
the contents of the safedeposit box can be had only by the use of a
key retained by the lessee (whether it is the sole key or one to be
used in connection with one retained by the lessor) does not
operate to alter the foregoing rule. The argument that there is

not, in such a case, a delivery of exclusive possession and control
to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in
the former, since the company is, by the nature of the contract,
given absolute control of access to the property, and the
_______________
16 Articles 1962 to 2009, inclusive.

17 10 Am Jur 2d., 440441.
434

CA Agrolndustrial Development Corp. vs. Court of Appeals
depositor cannot gain access thereto without the consent and

active participation of the company. x x x." (citations omitted)
18
and a segment from Words and Phrases which states that
a contract for the rental of a bank safety deposit box in
consideration of a fixed amount at stated periods is a
bailment for hire. Petitioner further argues that conditions
13 and 14 of the questioned contract are contrary to law
and public policy and should be declared null and void. In
support thereof, it cites Article 1306 of the Civil Code
which provides that parties to a contract may establish
such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court
gave due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the
contract for the rent of the safety deposit box is not an
ordinary contract of lease as defined in Article 1643 of the
Civil Code. However, We do not fully subscribe to its view
that the same is a contract of deposit that is to be strictly 19
governed by the provisions in the Civil Code on deposit
the contract in the case at bar is a special kind of deposit. It
cannot be characterized as an ordinary contract of lease
under Article 1643 because the full and absolute possession
and control of the safety deposit box was not given to the
joint rentersthe pe titioner and the Pugaos. The guard

key of the box remained with the respondent Bank without
this key, neither of the renters could open the box. On the
other hand, the respondent Bank could not likewise open
the box without the renter's key. In this case, the said key
had a duplicate which was made so that both renters could
have access to the box. 20
Hence, the authorities cited by the respondent Court on
______________
18 While the citation is 5 Words and Phrases Permanent Edition, 7172,

We failed to locate this in the said work and volume
19 Title XII, Book IV, Civil Code.
20 PARAS, E.L., op. cit., and Tolentino vs. Gonzales, supra.
435
VOL. 219, MARCH 3, 1993 435

this point do not apply. Neither could Article 1975, also

relied upon by the respondent Court, be invoked as an
argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety
deposit box. It is clear that the depositary cannot open the
box without the renter being present.
We observe, however, that the deposit theory itself does
not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a
bank renting out safedeposit boxes and its customer with
respect to the contents of the box is that of a bailor and 21
bailee, the bailment being for hire and mutual benefit.
This is just the prevailing view because:
"There is, however, some support for the view that the
relationship in question might be more properly characterized as
that of landlord and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of licensor and
licensee. The relation between a bank, safedeposit company, or
storage company, and the renter of a safedeposit box therein, is
often described as contractual, express or implied, oral or written,
in whole or in part. But there is apparently no jurisdiction in
which any rule other than that applicable to bailments governs
questions of the liability and rights of22 the parties in respect of loss
of the contents of safedeposit boxes" (citations omitted)
In the context of our laws which authorize banking

institutions to rent out safety deposit boxes, it is clear that
in this jurisdiction, the prevailing rule in the United States23
has been adopted. Section 72 of the General Banking Act
pertinently provides:
"SEC. 72. In addition to the operations specifically authorized

elsewhere in this Act, banking institutions other than building
________________
21 10 Am Jur 2d., 441.

22 10 Am Jur 2d., 442443.
23 R.A. No. 337, as amended.
436

and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent
safety deposit boxes for the safeguarding of such effects.
xxx
The banks shall perform the services permitted under

subsections (a),
24
(b) and (c) of this section as depositories or as
agents. x x x." (emphasis supplied)
Note that the primary function is still found within the

parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is
not independent from, but related to or in conjunction with,
this principal function. A contract
25
of deposit may be
entered into orally or in writing and, pursuant to Article
1306 of the Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy.
The depositary's responsibility for the safekeeping of the
objects deposited in the case at bar is governed by Title I,
Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the
26
tenor of the agreement. In the absence of
http://central.com.ph/sfsreader/session/0000015cda013dbab4068502003600fb002c009e/t/?o=False any stipulation 11/15
26
tenor of the agreement. In the absence of any stipulation
prescribing the degree of diligence required,
27
that of a good
father of a family is to be observed. Hence, any stipu
lation exempting the depositary from any liability arising
from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law
and public policy. In the instant case, petitioner maintains
that conditions 13 and 14 of the questioned contract of
lease of the safety deposit box, which read:
_________________
24 "Agents" refers to paragraphs (b) and (c) while "depositories' refers to

paragraph (a).
25 Article 1969, Civil Code.
26 Article 1170, Id.
27 Article 1173, Id.
437
VOL. 219, MARCH 3, 1993 437

"13. The bank is not a depositary of the contents of the safe and it
has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents,
except herein expressly provided, 28
and it assumes absolutely no
liability in connection therewith."
are void as they are contrary to law and public policy. We

find Ourselves in agreement with this proposition for
indeed, said provisions are inconsistent with the
respondent Bank's responsibility as a depositary under
Section 72(a) of the General Banking Act. Both exempt the
latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will29 not be responsible for the contents of any safe rented from
it."
Furthermore, condition 13 stands on a wrong premise and

is contrary to the actual practice of the Bank. It is not
correct to assert that the Bank has neither the possession
nor control of the contents of the box since in fact, the
safety deposit box itself is located in its premises and is

under its absolute control moreover, the respondent Bank
keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the Bank
cooperates by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing conditions in
the contract in question are void and ineffective. It has
been said:
"With respect to property deposited in a safedeposit box by a

customer of a safedeposit company, the parties, since the relation
is a contractual one, may by special contract define their
respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation
of law or public policy. It must clearly appear that there actually
was such a
_______________
28 Supra.
29 Supra.
438

special contract, however, in order to vary the ordinary

obligations implied by law from the relationship of the parties
liability of the deposit company will not be enlarged or restricted
by words of doubtful meaning. The company, in renting safe
deposit boxes, cannot exempt itself from liability for loss of the
contents by its own fraud or negligence or that of its agents or
servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose.
Although it has been held that the lessor of a safedeposit box
cannot limit its liability f for loss of the contents thereof through
its own negligence, the view has been taken that such a lessor
may limits 30 its liability to some extent by agreement or
stipulation." (citations omitted)
Thus, we reach the same conclusion which the Court of

Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the
holding of the Court of Appeals, be based on or proceed
from a characterization of the impugned contract as a
contract of lease, but rather on the fact that no competent

proof was presented to show that respondent Bank was
aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both
parties' joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title
was due to the fraud or negligence of the respondent Bank.
This in turn flows from this Court's determination that the
contract involved was one of deposit. Since both the
petitioner and the Pugaos agreed that each should have
one (1) renter's key, it was obvious that either of them
could ask the Bank for access to the safety deposit box and,
with the use of such key and the Bank's own guard key,
could open the said box, without the other renter being
present.
Since, however, the petitioner cannot be blamed for the
filing of the complaint and no bad faith on its part had been
established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To
this extent, the
_______________
30 10 Am Jur 2d., 448.
439
VOL. 219, MARCH 3, 1993 439

Decision (dispositive portion) of public respondent Court of

Appeals must be modified.
WHEREFORE, the Petition for Review is partially
GRANTED by deleting the award for attorney's fees from
the 4 July 1989 Decision of the respondent Court of
Appeals in CAG.R. CV No. 15150. As modified, and subject
to the pronouncement We made above on the nature of the
relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said
Decision is hereby AFFIRMED and the instant Petition for
Review is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
Feliciano (Acting Chairman), Bidin, Romero and

Melo, JJ., concur.
Gutierrez, Jr., (J., Chairman), Is on terminal leave.
Petition denied but partially granted on issue of

attorney's fees. Decision affirmed.
Notes.The increases of interest rate imposed by PNB

contravene Art. 1956 of the New Civil Code (PNB vs. Court
of Appeals, 196 SCRA 536).
The capacity of a bank to file action in this jurisdiction is
governed by the Central Bank Act (Hang Lung Bank Ltd.,
Inc. vs. Saulog, 201 SCRA 137).
o0o
440
[No. 4015. August 24, 1908.]
ANGEL JAVELLANA, plaintiff and appellee, vs. JOSE

LIM ET AL,., defendants and appellants.
1. CONTRACT BAILMENT OR DEPOSIT LOAN.Where

money, consisting of coins of legal tender, is deposited
with a person and the latter is authorized by the depositor
to use and dispose of the same, the agreement thus
entered into between the depositor and the depositary is
not a contract of deposit, but a loan.
2. ID. ID. ID. SUBSEQUENT AGREEMENT AS TO

INTEREST NOVATION.A subsequent agreement
between the parties as to interest on the amount said to
have been deposited, because the same could not be
returned at the time fixed therefor, does not constitute a
renewal of an agreement of deposit, but is the best
evidence that the original contract entered into between
the parties therein was for a loan under the guise of a
deposit.

Iloilo. (No. 858. January 15, 1907.)
R. Zaldarriaga, for appellants.
B. Montinola, for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, filed a

complaint on the 30th of October, 1906, with the Court of
First Instance of Iloilo, praying that the defendants, Jose
Lim and Ceferino Domingo Lim, be sentenced to jointly and
severally pay the sum of P2,686.58, with interest thereon
at the rate of 15 per cent per annum from the 20th of
January, 1898, until full payment should be made,
deducting from the amount of interest due the sum of
P1,102.16, and to pay the costs of the proceedings.
Authority from the court having been previously
obtained, the complaint was amended on the 10th of
January, 1907 it was then alleged, that on the 26th of
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May, 1897, the defendants executed and subscribed a

document in favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without

interest, the sum of two thousand six hundred and eightysix
pesos and fiftyeight cents of pesos fuertes,
142

JAVELLANA VS. LIM ET AL.
which we will return to the said gentleman, jointly and severally,

on the 20th of January, 1898.Jaro, 26th of May, 1897.Signed:
Jose Lim.Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants

begged the plaintiff for an extension of time for the
payment thereof, binding themselves to pay interest at the
rate of 15 per cent on the amount of their indebtedness, to
which the plaintiff acceded that on the 15th of May, 1902,
the debtors paid on account of interest due the sum of 1,000
pesos, with the exception of which they had not paid any
other sum on account of either capital or interest,
notwithstanding the requests made by the plaintiff, who
had thereby been subjected to loss and damages.
A demurrer to the original complaint was overruled, and
on the 4th of January, 1907, the defendants answered the
original complaint before its amendment, setting forth that
they acknowledged the facts stated in Nos. 1 and 2 of the
complaint that they admitted the statements of the
plaintiff relative to the payment of 1,102.16 pesos made on
the 15th of November, 1902, not, however, as payment of
interest on the amount stated in the foregoing document,
but on account of the principal, and denied that there had
been any agreement as to an extension of the time for
payment and the payment of interest at the rate of 15 per
cent per annum as alleged in paragraph 3 of the complaint,
and also denied all the other statements contained therein.
As a counterclaim, the defendants alleged that they had
paid to the plaintiff sums which, together with the
P1,102.16 acknowledged in the complaint, aggregated the
total sum of P5,602.16, and that, deducting therefrom the
P2,686.58 stated in the document transcribed in the
complaint, the plaintiff still owed the defendants
P2,915.58 therefore, they asked that judgment be entered
absolving them, and sentencing the plaintiff to pay them
the sum of P2,915.58 with the costs.
Evidence was adduced by both parties and, upon their

exhibits, together with an account book having been made
of record, the court below rendered judgment on the 15th
143
VOL. 11, AUGUST 24, 1908 143

of January, 1907, in favor of the plaintiff for the recovery of

the sum of P5,714.44 and costs.
The defendants excepted to the above decision and
moved for a new trial. This motion was overruled and was
also excepted to by them the bill of exceptions presented by
the appellants having been approved, the same was in due
course submitted to this court.
The document of indebtedness inserted in the complaint
states that the plaintiff left on deposit with the defendants
a given sum of money which they were jointly and severally
obliged to return on a certain date fixed in the document
but that, nevertheless, when the document appearing as
Exhibit 2, written in the Visayan dialect and followed by a
translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November,
1902, that the amount deposited had not yet been returned
to the creditor, whereby he was subjected to losses and
damages amounting to 830 pesos since the 20th of January,
1898, when the return was again stipulated with the
further agreement that the amount deposited should bear
interest at the rate of 15 per cent per annum from the
aforesaid date of January 20, and that the 1,000 pesos paid
to the depositor on the 15th of May, 1900, according to the
receipt issued by him to the debtors, would be included,
and that the said rate of interest would obtain until the
debtors paid the creditor the said amount in full. In this
second document the contract between the parties, which is
a real loan of money with interest, appears perfectly
defined, notwithstanding the fact that in the original
document executed by the debtors on the 26th of May,
.1897, it is called a deposit so that when they bound
themselves jointly and severally to refund the sum of
2,686.58 pesos to the depositor, Javellana, they did not
engage to return the same coins received and of which the
amount deposited consisted, and they could have
accomplished the return agreed upon by the delivery of a
sum equal to the one received by them. For this reason it
must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which
they have done, as subsequently shown when asking for an

extension of the
144

time for the return thereof, inasmuch as, acknowledging

that they have subjected the lender, their creditor, to losses
and damages for not complying with what had been
stipulated, and being conscious that they had used, for
their own profit and gain, the money that they received
apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the
refund should be made. Such conduct on the part of the
debtors is unquestionable evidence that the transaction
entered into between the interested parties was not a
deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that

The depositary can not make use of the thing deposited
without the express permission of the depositor.
Otherwise he shall be liable for losses and damages. Article
1768 also provides that
When the depositary has permission to make use of the thing
deposited, the contract loses the character of a deposit and
becomes a loan or bailment.
The permission shall not be presumed, and its existence must
be proven.
When on one of the latter days of January, 1898, Jose Lim

went to the office of the creditor asking for an extension of
one year, in view of the fact that money was scarce, and
because neither himself nor the other defendant were able
to return the amount deposited, for which reason he agreed
to pay interest at the rate of 15 per cent per annum, it was
because, as a matter of fact, he did not have in his
possession the amount deposited, he having made use of
the same in his business and for his own profit and the
creditor, by granting them the extension, evidently
confirmed the express permission previously given them to
use and dispose of the amount stated as having been
deposited, which, in accordance with the terms of the law,
must be considered as given them on loan, to all intents
and purposes gratuitously, until the 20th of January, 1898,
and from that date with interest at 15 per cent per annum
until its full payment, deducting from the total amount of
interest the sum of 1,000 pesos, in accordance with the

provisions of article 1173 of the Civil Code.
145
VOL. 11, AUGUST 24, 1908 145

Notwithstanding the fact that it does not appear that Jose

Lim signed the document (Exhibit 2) executed in the
presence of three witnesses on the 15th of November, 1902,
by Ceferino Domingo Lim on behalf of himself and the
former, nevertheless, the said document has not been
contested as false, either by a criminal or by a civil
proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who attested
the execution of the same and from the evidence in the
case one is sufficiently convinced that the said Jose Lim
was perfectly aware of and had authorized his joint
codebtor to liquidate the interest, to pay the sum of 1,000
pesos, on account thereof, and to execute the aforesaid
document No. 2. A true ratification of the original
document of deposit was thus made, and not the least proof
is shown in the record that Jose Lim had ever paid the
whole or any part of the capital stated in the original
document, Exhibit 1.
If the amount, together with interest claimed in the
complaint, less 1,000 pesos appears as fully established,
such is not the case with the defendants counterclaim. for
P5,602.16, because the existence and certainty of said
indebtedness imputed to the plaintiff has not been proven,
and the defendants, who call themselves creditors for the
said amount, have not proven in a satisfactory manner that
the plaintiff had received partial payments on account of
the same the latter alleges with good reason, that they
should produce the receipts which he may have issued, and
which he did issue whenever they paid him any money on
account. The plaintiffs allegation that the two amounts of
400 and 1,200 pesos, referred to in documents marked C"
and D" offered in evidence by the defendants, had been
received from Ceferino Domingo Lim on account of other
debts of his, has not been contradicted, and the fact that in
the original complaint the sum of 1,102.16 pesos, was
expressed in lieu of 1,000 pesos, the only payment made on
account of interest on the amount deposited according to
documents No. 2 and letter B" above referred to, was due
to a mistake.
Moreover, for the reasons above set forth it may, as a

matter of course, be inferred that there was no renewal
146

ANG TOA VS. ALVAREZ ET AL.
of the contract of deposit converted into a loan, because, as

has already been stated, the defendants received said
amount by virtue of a real loan contract under the name of
a deposit, since the socalled bailees were forthwith
authorized to dispose of the amount deposited. This they
have done, as has been clearly shown.
The original joint obligation contracted by the defendant
debtors still exists, and it has not been shown or proven in
the proceedings that the creditor had released Jose Lim
from complying with his obligation in order that he should
not be sued for or sentenced to pay the amount of capital
and interest together with his codebtor, Ceferino Domingo
Lim, because the record offers satisfactory evidence against
the pretension of Jose Lim, and it further appears that
document No. 2 was executed by the other debtor, Ceferino
Domingo Lim, for himself and on behalf of Jose Lim and it
has also been proven that Jose Lim, being fully aware that
his debt had not yet been settled, took steps to secure an
extension of the time for payment, and consented to pay
interest in return for the concession requested from the
creditor.
In view of the foregoing, and adopting the findings in the
judgment appealed from, it is our opinion that the same
should be and is hereby affirmed with the costs of this
instance against the appellant, provided that the interest
agreed upon shall be paid until the complete liquidation of
the debt. So ordered.
Arellano, C.J., Carson, Willard, and Tracey, JJ.,

concur.
Judgment affirmed.
_____________
VOL. 1, NOVEMBER 14, 1901 71

Gavieres vs, Tavera
[No. 6. November 14, 1901.]
MANUEL GARCIA GAVIERES, plaintiff and appellant, vs.

T. H. PARDO DE TAVERA, defendant and appellee.
1. INTERPRETATION OF CONTRACTS LOAN DEPOSIT.

An instrument acknowledging receipt of a sum of money
as a deposit returnable two months after notice with
interest is evidence of a contract of loan and not of deposit.
2. EVIDENCE LOAN PAYMENT.Where plaintiff's

receipt for a sum of money, paid by defendant in
satisfaction of an unidentified balance, is introduced to
prove payment of an obligation sued upon, it will be
regarded after a lapse of thirty years as satisfaction of the
obligation in question in the absence of showing of other
obligations between the parties.
3. ID.Laches in the commencement of an action causing a

possible failure of proof will prevent court from applying
strict rules of evidence.

Manila.
The facts fully appear in the opinion.

E. M. Llanos, for appellant.
Simplicio del Rosario, for appellee.
COOPER, J.:
The present appeal has been interposed in the declarative

action of greater import filed in the Court of First Instance
of Tondo, commenced on January 10, 1900, by Don Manuel
Garcia Gavieres as plaintiff and successor in interest of the
deceased Doa Ignacia de Gorricho against Don Trinidad
H. Pardo de Tavera as universal heir of the deceased Don
Felix Pardo de Tavera for the collection of a balance of
1,423 pesos 75 cents, remaining due on an original
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obligation of 3,000 pesos which, as the plaintiff alleges, was

the amount of a deposit delivered by Doa Ignacia
Gorricho, deceased, to Don Felix Pardo de Tavera,
deceased, on the 31st day of October, 1859. The agreement
between the parties appears in the following writing:
"Received of Senorita Ignacia, de Gorricho the sum of
3,000 pesos, gold (3,000 pesos), as a deposit payable on two
months' notice in advance, with interest at 6 per cent
72

Gavieres vs. Tavera
per annum with an hypothecation of the goods now owned

by me or which may be owned hereafter, as security of the
payment.
"In witness whereof I sign in Binondo, January 31, 1859.
"FELIX PARDO DE TAVERA."
The defendant answering complaint of plaintiff alleges
among other things as a defense, that the document upon
which the complaint is based was not a contract of deposit
as alleged in the complaint, but a contract of loan, and
setting forth furthermore the payment of the original
obligation as well as the prescription of the action. The
defendant contends that the document upon which the
action is based is not evidence of a deposit, as the plaintiff
maintains, but of a contract of loan, and that the
prescription applicable to loans has extinguished the right
of action. Although in the document in question a deposit is
spoken of, nevertheless from an examination of the entire
document it clearly appears that the contract was a loan
and that such was the intention of the parties. It is
unnecessary to recur to the canons of interpretation to
arrive at this conclusion. The obligation of the depositary to
pay interest at the rate of 6 per cent to the depositor
suffices to cause the obligation to be considered as a loan
and makes it likewise evident that it was the intention of
the parties that the depositary should have the right to
make use of the amount deposited, since it was stipulated
that the amount could be collected after notice of two
months in advance. Such being the case, the contract lost
the character of a deposit and acquired that of a loan. (Art.
1768, Civil Code.)
All personal actions, such as those which arise from a
contract of loan, cease to have legal effect after twenty
years according to the former law and after fifteen years
according to the Civil Code now in force. The date of the
document is January 31, 1859. The proof of payment in

support of the defense we consider likewise sufficient to
establish such defense. The document dated January 8,
1869, executed by Don Felix Garcia Gavieres, husband and
legal representative of Doa Ignacia Gorricho,
acknowledges the receipt of 1,224 pesos from Don Manuel
Darvin,
73
VOL. 1, NOVEMBER 16, 1901 73

United States vs. Abalos
representative of the deceased Don Felix Pardo de Tavera.

This sum is declared in said document to be the balance
due upon the debt of 2,000 pesos. This was slightly more or
less the amount which remained as due upon the original
obligation after deducting the payments which are
admitted to have been made. In the absence of evidence
disclosing that there were other claims in favor of Gavieres
it is reasonably to be supposed that this payment was made
to satisfy the balance due upon the original obligation.
The original contract between the parties was celebrated
nearly a half century ago the contracting parties have
ceased to exist long since it may be that there exists or
may have existed documents proving a total payment
between the parties and that this document has some time
ago suffered the common fate of perishable things. He who
by laches in the exercise of his rights has caused a failure
of proof has no right to complain if the court does not apply
the strict rules of evidence which are applicable in ordinary
cases, and admits to a certain extent the presumption to
which the conduct of the interested party himself naturally
gives rise.
It is our opinion that the judgment of the Court of First
Instance should be affirmed, and it is so ordered, with costs
of appeal taxed against the appellant.
Arellano, C. J., Torres, Willard., and Mapa, JJ.,

concur.
Ladd, J., did not sit in this case.
Judgment affirmed.
________________
[Nos. 26948 and 26949. October 8, 1927.]
SILVESTRA BARON, plaintiff and appellant, vs. PABLO

DAVID, defendant and appellant,
And
GUILLERMO BARON, plaintiff and appellant, vs. PABLO

DAVID, defendant and appellant.
1. DEPOSIT USE OF THING DEPOSITED LIABILITY OF

DEPOSITARY.The owner of a rice mill who, in
conformity with custom prevailing in the trade, receives
palay and converts it into rice, selling the product for his
own benefit, must account for the palay to the owner at
the price prevailing at the time demand is made.
2. ID. ID. ID. DESTRUCTION OF RICE MILL BY FIRE.

The destruction of a rice mill, with its contents, by fire
after palay thus deposited has been milled and marketed
does not affect the liability of the miller.
3. ATTACHMENT DAMAGES RESULTING FROM

WRONGFUL ATTACHMENT.A plaintiff who, by means
of a false affidavit, procures an attachment to be issued
and levied upon a rice mill belonging to his debtor is liable
in damages for the loss of profits resulting from the
closure of the mill, as well as for compensation for the loss
occasioned to the goodwill of the business in driving away
customers.
4. DEPOSITION READING OF DEPOSITION IN COURT.

When a deposition as presented at the trial and
admitted by the court, it is competent evidence for the
party in whose behalf it was taken, although it may not
have been actually read when introduced in evidence.

Pampanga. Reyes, J.
2
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Baron vs. David

Jose Gutierrez David for plaintiffappellant in case No.
26948.
Gregorio Perfecto for defendantappellant in both cases.
Francisco, Lualhati & Lopez and Jose Gutierrez David
for plaintiffappellant in case No. 26949.
STREET, J.:
These two actions were instituted in the Court of First

Instance of the Province of Pampanga by the respective
plaintiffs, Silvestra Baron and Guillermo Baron, for the
purpose of recovering from the defendant, Pablo David, the
value of palay alleged to have been sold by the plaintiffs to
the defendant in the year 1920. Owing to the fact that the
defendant is the same in both cases. and that the two cases
depend in part upon the same facts, the cases were heard
together in the trial court and determined in a single
opinion. The same course will accordingly be followed here.
In the first case, i. e., that in which Silvestra Baron is
plaintiff, the court gave judgment for her to recover of the
defendant the sum of P5,238.51, with costs. From this
judgment both the plaintiff and the defendant appealed.
In the second case, i. e., that in which Guillermo Baron
is plaintiff, the court gave judgment for him to recover of
the defendant the sum of P5,734.60, with costs, from which
judgment both the plaintiff and the defendant also
appealed. In the same case the defendant interposed a
counterclaim in which he asked credit for the sum of
P2,800 which he had advanced to the plaintiff Guillermo
Baron on various occasions. This credit was admitted by
the plaintiff and allowed by the trial court. But the
defendant also interposed a crossaction against Guillermo
Baron in which the defendant claimed compensation for
damages alleged to have been suffered by him by reason of
the alleged malicious and false statements made by the
VOL. 51, OCTOBER 8, 1927 3

Baron vs. David
plaintiff against the defendant in suing out an attachment

against the defendant's property soon after the institution
of the action. In the same crossaction the defendant also
sought compensation for damages incident to the shutting

down of the defendant's rice mill for the period of one
hundred seventy days during which the abovementioned
attachment was in force. The trial judge disallowed these
claims for damages, and from this feature of the decision
the defendant appealed. We are therefore confronted with
five distinct appeals in this record.
Prior to January 17,1921, the defendant Pablo David
had been engaged in running a rice mill in the municipality
of Magalang, in the Province of Pampanga, a mill which
was well patronized by the rice growers of the vicinity and
almost constantly running. On the date stated a fire
occurred that destroyed the mill and its contents, and it
was some time before the mill could be rebuilt and put in
operation again. Silvestra Baron, the plaintiff in the first of
the actions before us, is an aunt of the defendant while
Guillermo Baron, the plaintiff in the other action, is his
uncle. ln the months of March, April, and May, 1920,
Silvestra Baron placed a quantity of palay in the
defendant's mill and this, in connection with some that she
took over from Guillermo Baron, amounted to 1,012 cavans
and 24 kilos. During approximately the same period
Guillermo Baron placed other 1,865 cavans and 43 kilos of
palay in the mill. No compensation has ever been received
by Silvestra Baron upon account of the palay thus placed
with the defendant. As against the palay delivered by
Guillermo Baron, he has received from the defendant
advancements amounting to P2,800 but apart from this he
has not been compensated. Both the plaintiffs claim that
the palay which was delivered by them to the defendant
was sold to the defendant while the defendant, on the
other hand, claims that the palay was deposited subject to
future withdrawal by the depositors or subject to some
future sale which was never effected. He therefore
supposes himself

Baron vs. David
to be relieved from all responsibility by virtue of the fire of

January 17, 1921, already mentioned.
The plaintiffs further say that their palay was delivered
to the defendant at his special request, coupled with a
promise on his part to pay for the same at the highest price
per cavan at which palay would sell during the year 1920
and they say that in August of that year the defendant
promised to pay them severally the price of P8.40 per

cavan, which was about the top of the market for the
season, provided they would wait for payment until
December. The trial judge found that no such promise had
been given and the incredulity of the court upon this point
seems to us to be justified. A careful examination of the
proof, however, leads us to the conclusion that the plaintiffs
did, some time in the early part of August, 1920, make
demand upon the defendant for a settlement, which he
evaded or postponed, leaving the exact amount due to the
plaintiffs undetermined.
It should be stated that the palay in question was placed
by the plaintiffs in the defendant's mill with the
understanding that the defendant was at liberty to convert
it into rice and dispose of it at his pleasure. The mill was
actively running during the entire season, and as palay
was daily coming in from many customers and as rice was
being constantly shipped by the defendant to Manila, or
other rice markets, it was impossible to keep the plaintiffs'
palay segregated. In fact the defendant admits that the
plaintiffs' palay was mixed with that of others. In view of
the nature of the defendant's activities and the way in
which the palay was handled in the defendant's mill, it is
quite certain that all of the plaintiffs' palay, which was put
in before June 1, 1920, had been milled and disposed of
long prior to the fire of January 17, 1921. Furthermore, the
proof shows that when the fire occurred there could not
have been more than about 360 cavans of palay in the mill,
none of which by any reasonable probability could have
been any part of the palay delivered by the plaintiffs.
Considering
VOL. 51, OCTOBER 8, 1927 5

Baron vs. David
the fact that the defendant had thus milled and doubtless
sold the plaintiffs' palay prior to the date of the fire, it
results that he is bound to account for its value, and his
liability was not extinguished by the occurrence of the fire.
In the briefs before us it seems to have been assumed by
the opposing attorneys that in order for the plaintiffs to
recover, it is necessary that they should be able to establish
that the plaintiffs' palay was delivered in the character of a
sale, and that if, on the contrary, the defendant should
prove that the delivery was made in the character of
deposit, the defendant should be absolved. But the case
does not depend precisely upon this explicit alternative for

even supposing that the palay may have been delivered in
the character of deposit, subject to future sale or
withdrawal at plaintiffs' election, nevertheless if it was
understood that the defendant might mill the palay and he
has in fact appropriated it to his own use, he is of course
bound to account for its value. Under article 1768 of the
Civil Code, when the depositary has permission to make
use of the thing deposited, the contract loses the character
of mere deposit and becomes a loan or a commodatum and
of course by appropriating the thing, the bailee becomes
responsible for its value. In this connection we wholly reject
the defendant's pretense that the palay delivered by the
plaintiffs or any part of it was actually consumed in the fire
of January, 1921. Nor is the liability of the defendant in
any wise affected by the circumstance that, by a custom
prevailing among rice millers in this country, persons
placing palay with them without special agreement as to
price are at liberty to withdraw it later, proper allowance
being made for storage and shrinkage, a thing that is
sometimes done, though rarely.
In view of what has been said it becomes necessary to
discover the price which the defendant should be required
to pay for the plaintiffs' palay. Upon this point the trial
judge fixed upon P6.15 per cavan and although we are not
exactly in agreement with him as to the propriety of the
6

Baron vs. David
method by which he arrived at this figure, we are

nevertheless of the opinion that, all things considered, the
result is approximately correct. It appears that the price of
palay during the months of April, May, and June, 1920,
had been excessively high in the Philippine Islands, and
even prior to that period the Government of the Philippine
Islands had been attempting to hold the price in check by
executive regulation. The highest point which was touched
in this season was apparently about P8.50 per cavan, but
the market began to sag in May or June and presently
entered upon a precipitate decline. As we have already
stated, the plaintiffs made demand upon the defendant for
settlement in the early part of August and, so far as we are
able to judge from the proof, the price of P6.15 per cavan,
fixed by the trial court, is about the price at which the
defendant should be required to settle as of that date. It
was the date of the demand of the plaintiffs for settlement

that determined the price to be paid by the defendant, and
this is true whether the palay was delivered in the
character of sale with price undetermined or in the
character of deposit subject to use by the defendant. It
results that the plaintiffs are respectively entitled to
recover the value of the palay which they had placed with
the defendant during the period referred to, with interest
from the date of the filing of their several complaints.
As already stated, the trial court found that at the time
of the fire there were about 360 cavans of palay in the mill
and that this palay was destroyed. His Honor assumed that
this was part of the palay delivered by the plaintiffs, and
he held that the defendant should be credited with said
amount. His Honor therefore deducted from the claims of
the plaintiffs their respective proportionate shares of this
amount of palay. We are unable to see the propriety of this
feature of the decision. There were many customers of the
defendant's rice mill who had placed their palay with, the
defendant under the same conditions as the plaintiffs, and
nothing can be more certain than that the palay which
VOL. 51, OCTOBER 8, 1927 7

Baron vs. David
was burned did not belong to the plaintiffs. That palay

without a doubt had long been sold and marketed. The
assignments of error of each of the plaintiffsappellants in
which this feature of the decision is attacked are therefore
well taken and the appealed judgments must be modified
by eliminating the deductions which the trial court allowed
from the plaintiffs' claims.
The trial judge also allowed a deduction from the claim
of the plaintiff Guillermo Baron of 167 cavans of palay, as
indicated in Exhibits 12, 13, 14, and 16. This was also
erroneous. These exhibits relate to transactions that
occurred nearly two years after the transactions with
which we are here concerned, and they were offered in
evidence merely to show the character of subsequent
transactions between the parties, it appearing that at the
time said exhibits came into existence the defendant had
reconstructed his mill and that business relations with
Guillermo Baron had been resumed. The transactions
shown by these exhibits (which relate to palay withdrawn
by the plaintiff from the defendant's mill) were not made
the subject of controversy in either the complaint or the
crosscomplaint of the defendant in the second case. They

therefore should not have been taken into account as a
credit in favor of the .defendant. Said credit must therefore
be likewise disallowed, though this feature of our decision
will of course be without prejudice to any proper
adjustment of the rights of the parties with respect to these
subsequent transactions that they have heretofore or may
hereafter effect.
The preceding discussion disposes of all vital contentions
relative to the liability of the defendant upon the causes of
action stated in the complaints. We proceed therefore now
to consider the question of the liability of the plaintiff
Guillermo Baron upon the crosscomplaint of Pablo David
in case R. G. No. 26949. In this crossaction the defendant
seeks, as stated in the third paragraph of this opinion, to
recover damages for the wrongful suing out of an
attachment by the plaintiff and the levy of the same upon
the
8

Baron vs. David
defendant's rice mill. It appears that about two and onehalf

months after said action was begun, the plaintiff,
Guillermo Baron, asked for an attachment to be issued
against the property of the defendant and to procure the
issuance of said writ the plaintiff made affidavit to the
effect that the defendant was disposing, or attempting to
dispose of his property for the purpose of defrauding the
plaintiff. Upon this affidavit an attachment was issued as
prayed, and on March 27, 1924, it was levied upon the
defendant's rice mill, and other property, real and personal.
Upon attaching the property the sheriff closed the mill
and placed it in the care of a deputy. Operations were not
resumed until September 13, 1924, when the attachment
was dissolved by an order of the court and the defendant
was permitted to resume control. At the time the
attachment was levied there were, in the bodega, more
than 20,000 cavans of palay belonging to persons who held
receipts therefor and in order to get this grain away from
the sheriff, twentyfour of the depositors found it necessary
to submit thirdparty claims to the sheriff. When these
claims were put in the sheriff notified the plaintiff that a
bond in the amount of P50,000 must be given, otherwise
the grain would be released. The plaintiff, being unable or
unwilling to give this bond, the sheriff surrendered the
palay to the claimants but the attachment on the rice mill

was maintained until September 13, as above stated,
covering a period of one hundred seventy days during
which the mill was idle. The ground upon which the
attachment was based, as set forth in the plaintiffs
affidavit, was that the defendant was disposing or
attempting to dispose of his property for the purpose of
defrauding the plaintiff. That this allegation was false is
clearly apparent, and not a word of proof has been
submitted in support of the assertion., On the contrary, the
defendant testified that at the time this attachment was
secured he was solvent and could have paid his
indebtedness to the plaintiff if judgment had been rendered
against him in ordinary course. His financial condi
VOL. 51, OCTOBER 8, 1927 9

Baron vs. David
tion was of course well known to the plaintiff, who is his

uncle. The defendant also states that he had not conveyed
away any of his property, nor had intended to do so, for the
purpose of defrauding the plaintiff. We have before us
therefore a case of a baseless attachment, recklessly sued
out upon a false affidavit and levied upon the defendant's
property to his great and needless damage. That the act of
the plaintiff in suing out the writ was wholly unjustifiable
is perhaps also indicated in the circumstance that the
attachment was finally dissolved upon the motion of the
plaintiff himself.
The defendant testified that his mill was accustomed to
clean from 400 to 450 cavans of palay per day, producing
225 cavans of rice, of 57 kilos each. The price charged for
cleaning each cavan of rice was 30 centavos. The defendant
also stated that the expense of running the mill per day
was from P18 to P25, and that the net profit per day on the
mill was more than P40. As the mill was not accustomed to
run on Sundays and holidays, we estimate that the
defendant lost the profit that would have been earned on
not less than one hundred forty work days. Figuring his
profits at P40 per day, which would appear to be a
conservative estimate, the actual net loss resulting from
his failure to operate the mill during the time stated could
not have been less than P5,600. The reasonableness of
these figures is also indicated in the fact that the
twentyfour customers who intervened with thirdparty
claims took out of the camarn 20,000 cavans of palay,
practically all of which, in the ordinary course of events,

would have been milled in this plant by the defendant. And
of course other grain would have found its way to this mill
if it had remained open during the one hundred forty days
when it was closed.
But this is not all. When the attachment was dissolved
and the mill again opened, the defendant found that his
customers had become scattered and could not be easily
gotten back. So slow, indeed, was his patronage in re
10

Baron vs. David
turning that during the remainder of the year 1924 the

defendant was able to mill scarcely more than the grain
belonging to himself and his brothers and even after the
next season opened many of his old customers did not
return. Several of these individuals, testifying as witnesses
in this case, stated that, owing to the unpleasant
experience which they had had in getting back their grain
from the sheriff in the thirdparty proceedings, they had
not come back to the mill of the defendant, though they had
previously had much confidence in him.
As against the defendant's proof showing the facts above
stated the plaintiff submitted no evidence whatever. We
are therefore constrained to hold that the defendant was
damaged by the attachment to the extent of P5,600, in
profits lost by the closure of the mill, and to the extent of ?
1,400 for injury to the goodwill of his business, making a
total of P7,000. For this amount the defendant must
recover judgment on his crosscomplaint.
The trial court, in dismissing the defendant's cross
complaint for damages resulting from the wrongful suing
out of the attachment, suggested that the closure of the rice
mill was a mere act of the sheriff for which the plaintiff
was not responsible and that the defendant might have
been permitted by the sheriff to continue running the mill
if he had applied to the sheriff for permission to operate it.
This singular suggestion will not bear a moment's
criticism. It was of course the duty of the sheriff, in levying
the attachment, to take the attached property into his
possession, and the closure of the mill was a natural, and
even necessary, consequence of the attachment. For the
damage thus inflicted upon the defendant the plaintiff is
undoubtedly responsible.
One feature of the crosscomplaint consists in the claim

of the defendant (crosscomplainant) for the sum of P20,000
as damages caused to the defendant by the false and
alleged malicious statements contained in the affidavit
upon which the attachment was procured. The additional
sum
11
VOL. 51, OCTOBER 8, 1927 11

Baron vs. David
of P5,000 is also claimed as exemplary damages. It is clear

that with respect to these damages the crossaction cannot
be maintained, for the reason that the affidavit in question
was used in course of a legal proceeding for the purpose of
obtaining a legal remedy, and it is therefore privileged. But
though, the affidavit is not actionable as a libelous
publication, this f act is no obstacle to the maintenance of
an action to recover the damage resulting from the levy of
the attachment.
Before closing this opinion a word should be said upon
the point raised in the first assignment of error of Pablo
David as defendant in case R. G. No. 26949, In this
connection it appears that the deposition of Guillermo
Baron was presented in court as evidence and was
admitted as an exhibit, without being actually read to the
court. It is supposed in the assignment of error now under
consideration that the deposition is not available as
evidence to the plaintiff because it was not actually read
out in court. This contention is not well founded. It is true
that in section 364 of the Code of Civil Procedure it is said
that a deposition, once taken, may be read by either party
and will then be deemed the evidence of the party reading
it. The use of the word "read" in this section finds its
explanation of course in the American practice of trying
cases for the most part before juries. When a case is thus
tried the actual reading of the deposition is necessary in
order that the jurymen may become acquainted with its
contents. But in courts of equity, and in all courts where
judges have the evidence before them for perusal at their
pleasure, it is not necessary that the deposition should be
actually read when presented as evidence.
From what has been said it results that the judgment of
the court below must be modified with respect to the
amounts recoverable by the respective plaintiffs in the two
actions R. G. Nos. 26948 and 26949 and must be reversed
in respect to the disposition of the crosscomplaint
interposed by the defendant in case R. G. No. 26949, with

the following
12

Baron vs. David
results: In case R. G. No. 26948 the plaintiff Silvestra

Baron will recover of the defendant Pablo David the sum of
P6,227.24, with interest from November 21, 1923, the date
of the filing of her complaint, and with costs. In case R. G.
No. 26949 the plaintiff Guillermo Baron will recover of the
defendant Pablo David the sum of P8,669.75, with interest
from January 9, 1924. In the same case the defendant
Pablo David, as plaintiff in the crosscomplaint, will
recover of Guillermo Baron the sum of P7,000, without
costs. So ordered.
Avancea, C. J., Johnson, Malcolm, Villamor,

Romualdez, and VillaReal, JJ., concur.
JOHNS, J., dissenting and concurring:
The plaintiff Silvestra Baron is the aunt of the defendant,

and Guillermo Baron, the plaintiff in the other action, is
his uncle. There is no dispute as to the amount of palay
which each delivered to the mill of the defendant. Owing to
the fact that they were relatives and that the plaintiffs
reposed special trust and confidence in the defendant, who
was their nephew, they were not as careful and prudent in
their business dealings with him as they should have been.
Plaintiffs allege that their respective palay was delivered to
the defendant at his mill with the understanding and
agreement between them that they should receive the
highest market price for the palay for that season, which
was P8.50 per cavan. They further allege that about
August first they made another contract in and by which
he promised and agreed to pay them P8.40 per cavan for
their palay, in consideration of which they agreed to extend
the time for payment to the first of December of that year.
The amount of palay is not in dispute, and the defendant
admits that it was 'delivered to his mill, but he claims that
he kept it on deposit and as bailee without hire for the
plaintiffs and at their own risk, and that the mill was
burned down, and that at the time of the fire, plaintiffs'
palay was in the mill. The lower court found as a fact
13
VOL. 51, OCTOBER 8, 1927 13

Baron vs. David
that there was no merit in that def ense, and that there
was but little, if any, palay in the mill at the time of the
fire and that in truth and in fact that defense was based
upon perjured testimony.
The two cases were tried separately in the court below,
but all of the evidence in the one case was substituted and
used in the other. Both plaintiffs testified to the making of
the respective contracts as alleged in their complaint to
wit, that they delivered the palay to the defendant with the
express understanding and agreement that he would pay
them for the palay the highest market price for the season,
and to the making of the second contract about the first of
August, in which they had a settlement, and that the
defendant then agreed to pay them P8.40 per cavan, such
payment to be made on December first. It appears that the
highest market price for palay for that season was P8.50
per cavan. The defendant denied the making of either one
of those contracts, and offered no other evidence on that
question. That is to say, we have the evidence of both
Silvestra Baron and Guillermo Baron to the making of
those contracts, which is denied by the defendant only.
Plaintiffs' evidence is also corroborated by the usual and
customary manner in which the growers sell their palay.
That is to say, it is their custom to sell the palay at or
about the time it is delivered at the mill and as soon as it is
made ready for market in the form of rice. As stated the
lower court found as a fact that the evidence of the def
endant as to plaintiffs' palay being in the mill at the time of
the fire was not worthy of belief, and that in legal effect it
was a manufactured defense. Yet, strange as it may seem,
both the lower court and this court have found as a fact
that upon the question of the alleged contracts, the
evidence for the defendant is true and entitled to more
weight than the evidence of both plaintiffs which is false.
It appears that the plaintiff Silvestra Baron is an old
lady about 80 years of age and the aunt of the defendant,
and
14

Baron vs. David
Guillermo Baron is the uncle. Under the theory of the lower

court and of this court, both of them at all the time during
the high prices held their palay in defendant's mill at their
own risk, and that upon that point the evidence of the
defendant, standing alone, is entitled to more weight and is
more convincing than the combined evidence of the two
plaintiffs. In the very nature of things, if defendant's
evidence upon that point is true, it stands to reason that,
following the custom of growers, the plaintiffs would have
sold their palay during the period of high prices, and would
not have waited until it dropped from P8.50 per cavan to
P6.15 per cavan about the first of August. Upon that
question, both the weight and the credibility of the
evidence is with the plaintiffs, and they should have
judgment for the full amount of their palay on the basis of
P8.40 per cavan. For such reason, I vigorously dissent from
the majority opinion.
I frankly concede that the attachment was wrongful, and
that it should never have been levied. It remained in f orce
for a period of one hundred and seventy days at which time
it was released on motion of the plaintiffs. .The def endant
now claims, and the majority opinion has allowed him,
damages for that full period, exclusive of Sundays, at the
rate of P40 per day, found to be the net profit for the
operation of the rice mill. It further appears, and this court
finds, that the defendant was a responsible man, and that
he had ample property out of which to satisfy plaintiffs'
claim. Assuming that to be true, there was no valid reason
why he could not have given a counter bond and released
the attachment. Upon the theory of the majority opinion, if
the plaintiffs had not released the attachment, they would
still be liable to the defendant at the rate of P40 per day up
to the present time. When the mill was attached, if he was
in a position to do so, it was the duty of the defendant to
give a, counter bond and release the attachment and
resume its operation. The majority opinion also allowed the
defendant P1,400 "for injury to the good
15
VOL. 51, OCTOBER 8, 1927 15

Gonzalez vs. Banzon
will of his business." The very fact that after a delay of

about four years, both of the plaintiffs were compelled to
bring their respective actions against the defendant to
recover from him on a just and meritorious claim, as found
by this court and the lower court, and the further fact that
after such long delay, the defendant has sought to defeat

the actions by a sham and manufactured defense, as found
by this and the lower court, would arouse the suspicion of
any customers the defendant ever had, and shake their
confidence in his business honor and integrity, and destroy
any goodwill which he ever did have. Under such
conditions, it would be strange that the defendant would
have any customers left. He is not entitled to any
compensation for the loss of goodwill, and P5,000 should be
the very limit of the amount of his damages for the
wrongful attachment, and upon that point I vigorously
dissent. In all other respects, I agree with the majority
opinion.
Judgment modified.
________________
[No. 7593. March 27, 1913.]
THE UNITED STATES, plaintiff and appellee, vs. JOSE

M. IGPUARA, defendant and appellant.
1. "ESTAFA" MISAPPROPRIATION OF DEPOSIT BY

AGENT.The balance of a commission account remaining
in possession of the agent at the principal's disposal
acquires at once the character of a deposit which the
former must return or restore to the latter at any time it is
demanded, nor can he lawfully dispose of it without
incurring criminal responsibility for appropriating or
diverting to his own use another's property.
2. ID. ID.It could only become his as a loan, if so

expressly agreed by its owner, who would then be
obligated not to demand it until the expiration of the legal
or stipulated period for a loan.
3. ID. ID. He undoubtedly commits the crime of estafa who,

having
620
United States vs. Igpuara.
in his possession a certain amount of another's money on

deposit at its owner's disposal, appropriates or diverts it to
his own use, with manifest damage to its owner, for he has
not restored it and has so acted willfully and wrongfully in
abuse of the confidence reposed in him.

Iloilo. Powell, J.
W. A. Kincaid, Thos. L. Hartigan, and Jos Robles
Lahesa for appellant.
SolicitorGeneral Harvey for appellee.
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ARELLANO, C. J.:
The defendant herein is charged with the crime of estafa,

for having swindled Juana Montilla and Eugenio Veraguth
out of P2,498 Philippine currency, which he had taken on
deposit from the former to be at the latter's disposal. The
document setting forth the obligation reads:
"We hold at the disposal of Eugenio Veraguth the sum of
two thousand four hundred and ninetyeight pesos
(P2,498), the balance from Juana Montilla's sugar.Iloilo,
June 26, 1911.Jose Igpuara, for Ramirez & Co."
The Court of First Instance of Iloilo sentenced the
defendant to two years of presidio correccional, to pay
Juana Montilla P2,498 Philippine currency, and in case of
insolvency to subsidiary imprisonment at P2.50 per day,
not to exceed onethird of the principal penalty, and the
costs.
The defendant appealed, alleging as errors: (1) Holding
that the document executed by him was a certificate of
deposit (2) holding the existence of a deposit, without
precedent transfer or delivery of the P2,498 and (3)
classifying the facts in the case as the crime of estafa.
"A deposit is constituted from the time a person receives
a thing belonging to another with the obligation of keeping
and returning it." (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The
defendant drew up a document declaring that they
621
VOL. 27, MARCH 27, 1913. 621

remained in his possession, which he could not have said

had he not received them. They remained in his possession,
surely in no other sense than to take care of them, for they
remained has no other purpose. They remained in the
defendant's possession at the disposal of Veraguth but on
August 23 of the same year Veraguth demanded of him
through a notarial instrument restitution of them, and to
date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily
accepted the sum of P2,498 in an instrument payable on
demand, and as no attempt was made to cash it until
August 23, 1911, he could indorse and negotiate it like any
other commercial instrument. There is no doubt that if
Veraguth accepted the receipt for P2,498 it was because at
that time he agreed with the defendant to consider the
operation of sale on commission closed, leaving the

collection of said sum until later, which sum remained as a
loan payable upon presentation of the receipt." (Brief, 3 and
4.)
Then, after averring the true facts: (1) That a sales
commission was precedent (2) that this commission was
settled with a balance of P2,498 in favor of the principal,
Juana Montilla and (3) that this balance remained in the
possession of the defendant, who drew up an instrument
payable on demand, he has drawn two conclusions, both
erroneous: One, that the instrument drawn up in the form
of a deposit certificate could be indorsed or negotiated like
any other commercial instrument and the other, that the
sum of P2,498 remained in defendant's possession as a
loan.
It is erroneous to assert that the certificate of deposit in
question is negotiable like any other commercial
instrument: First, because every commercial instrument is
not negotiable and, second, because only instruments
payable to order are negotiable. Hence, this instrument not
being to order but to bearer, it is not negotiable.
It is also erroneous to assert that the sum of money set
forth in said certificate is, according to it, in the defendant's
possession as a loan. In a loan the lender transmits to the
622

borrower the use of the thing lent, while in a deposit the

use of the thing is not transmitted, but merely possession
for its custody or safekeeping.
In order that the depositary may use or dispose of the
things deposited, the depositor's consent is required, and
then:
"The rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions
applicable to commercial loans, commission, or contract
which took the place of the deposit shall be observed." (Art.
309, Code of Commerce.)
The defendant has shown no authorization whatsoever
or the consent of the depositary for using or disposing of
the P2,498, which the certificate acknowledges, or any
contract entered into with the depositor to convert the
deposit into a loan, commission, or other contract.
That demand was not made for restitution of the sum
deposited, which could have been claimed on the same or
the next day after the certificate was signed, does not
operate against the depositor, or signify anything except
the intention not to press it. Failure to claim at once or
delay for some time in demanding restitution of the thing
deposited, which was immediately due, does not imply such
permission to use the thing deposited as would convert the
deposit into a loan,
Article 408 of the Code of Commerce of 1829, previous to
the one now in force, provided:
"The depositary of an amount of money cannot use the
amount, and if he makes use of it, he shall be responsible
for all damages that may accrue and shall respond to the
depositor for the legal interest on the amount."
Whereupon the commentators say:
"In this case the deposit becomes in fact a loan, as a just
punishment imposed upon him who abuses the sacred
nature of a deposit and as a means of preventing the desire
of gain from leading him into speculations that may be
disastrous to the depositor, who is much better secured
623
VOL. 27, MARCH 27, 1913. 623

while the deposit exists than when he only has a personal

action for recovery.
"According to article 548, No. 5, of the Penal Code, those
who to the prejudice of another appropriate or abstract for
their own use money, goods, or other personal property
which they may have received as a deposit, on commission,
or for administration, or for any other purpose which
produces the obligation of delivering it or returning it, and
deny having received it, shall suffer the penalty of the
preceding article," which punishes such act as the crime of
estafa. The corresponding article of the Penal Code of the
Philippines is 535, No. 5.
In a decision of an appeal, September 28, 1895, the
principle was laid down that: "Since he commits the crime
of estafa under article 548 of the Penal Code of Spain who
to another's detriment appropriates to himself or abstracts
money or goods received on commission for delivery, the
court rightly applied this article to the appellant, who, to
the manifest detriment of the owner or owners of the
securities, since he has not restored them, willfully and
wrongfully disposed of them by appropriating them to
himself or at least diverting them from.the purpose to
which he was charged to devote them."
It is unquestionable that in no sense did the P2,498

which he willfully and wrongfully disposed of to the
detriment of his principal, Juana Montilla, and of the
depositor, Eugenio Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently
attempted to be given to two decisions of this Supreme
Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs.
Morales and Morco, 15 Phil. Rep., 236) as implying that
what constitutes estafa is not the disposal of money
deposited, but denial of having received same. In the first
of said cases there was no evidence that the defendant had
appropriated the grain deposited in his possession.
"On the contrary, it is entirely probable that, after the
departure of the defendant from Libmanan on September
624

Jimenez vs. Lozada.
20, 1898, two days after the uprising of the civil guard in
Nueva Caceres, the rice was seized by the revolutionists
and appropriated to their own uses."
In this connection it was held that failure to return the
thing deposited was not sufficient, but that it was
necessary to prove that the depositary had appropriated it
to himself or diverted the deposit to his own or another's
benefit. He was accused of refusing to restore, and it was
held that the code does not penalize refusal to restore but
denial of having received. So much for the crime of
omission now with reference to the crime of commission, it
was not held in that decision that appropriation or
diversion of the thing deposited would not constitute the
crime of estafa.
In the second of said decisions, the accused "kept none of
the proceeds of the sales. Those, such as they were, he
turned over to the owner" and there being no proof of the
appropriation, the agent could not be found guilty of the
crime of estafa.
Being in accord with law and the merits of the case, the
judgment appealed from is affirmed, with costs.
Torres, Johnson, and Trent, JJ., concur.
Judgment affirmed.
______________
G.R. No. 179419. January 12, 2011.*
DURBAN APARTMENTS CORPORATION, doing business

under the name and style of City Garden Hotel, petitioner,
vs. PIONEER INSURANCE AND SURETY
CORPORATION, respondent.
Appeals Wellentrenched in jurisprudence is the rule that

factual findings of the trial court, especially when affirmed by the
appellate court, are accorded the highest degree of respect and are
considered conclusive between the parties Exceptions.Well
entrenched in jurisprudence is the rule that factual findings of the
trial court, especially when affirmed by the appellate court, are
accorded the highest degree of respect and are considered
conclusive between the parties. A review of such findings by this
Court is not warranted except upon a showing of highly
meritorious circumstances, such as: (1) when the findings of a
trial court are grounded entirely on speculation, surmises, or
conjectures (2) when a lower courts inference from its factual
findings is manifestly mistaken, absurd, or impossible (3) when
there is grave abuse of discretion in the appreciation of facts (4)
when the findings of the appellate court go beyond the issues of
the case, or fail to notice certain relevant facts which, if properly
considered, will justify a different conclusion (5) when there is a
misappreciation of facts (6) when the findings of fact are
conclusions without mention of the specific evidence on which
they are based, are premised on the absence of evidence, or are
contradicted by evidence on record. None of the foregoing
exceptions permitting a reversal of the assailed decision exists in
this instance.
PreTrial Appearance of parties and their counsel at the pre
trial conference, along with the filing of a corresponding pretrial
brief, is mandatory, nay, their dutytheir nonappearance cannot
be excused as Section 4, in relation to Section 6, allows only two
exceptions: (1) a valid excuse and (2) appearance of a
representative on behalf of a party who is fully authorized in
writing to enter into an amicable settlement, to submit to
alternative modes of dispute resolution, and to enter into
stipulations or admissions of facts and documents.Rule 18 of the
Rules of Court leaves no room for equivoca
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_______________
*SECOND DIVISION.
442
Durban Apartments Corporation vs. Pioneer Insurance and

Surety Corporation
tion appearance of parties and their counsel at the pretrial

conference, along with the filing of a corresponding pretrial brief,
is mandatory, nay, their duty. Thus, Section 4 and Section 6
thereof provide: SEC. 4. Appearance of parties.It shall be the
duty of the parties and their counsel to appear at the pretrial.
The nonappearance of a party may be excused only if a valid
cause is shown therefor or if a representative shall appear in his
behalf fully authorized in writing to enter into an amicable
settlement, to submit to alternative modes of dispute resolution,
and to enter into stipulations or admissions of facts and
documents. SEC. 6. Pretrial brief.The parties shall file with the
court and serve on the adverse party, in such manner as shall
ensure their receipt thereof at least three (3) days before the date
of the pretrial, their respective pretrial briefs which shall
contain, among others: x x x x Failure to file the pretrial brief
shall have the same effect as failure to appear at the pretrial.
Contrary to the foregoing rules, petitioner and its counsel of
record were not present at the scheduled pretrial conference.
Worse, they did not file a pretrial brief. Their nonappearance
cannot be excused as Section 4, in relation to Section 6, allows
only two exceptions: (1) a valid excuse and (2) appearance of a
representative on behalf of a party who is fully authorized in
writing to enter into an amicable settlement, to submit to
alternative modes of dispute resolution, and to enter into
stipulations or admissions of facts and documents.
Contract of Deposit Hotels and Inns The contract of deposit
was perfected when the hotel guest handed over to the hotels
parking attendant the keys to his vehicle, which the latter received
with the obligation of safely keeping and returning it.Article
1962, in relation to Article 1998, of the Civil Code defines a
contract of deposit and a necessary deposit made by persons in
hotels or inns: Art. 1962. A deposit is constituted from the
moment a person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal purpose of
the contract, there is no deposit but some other contract. Art.
1998. The deposit of effects made by travelers in hotels or inns

shall also be regarded as necessary. The keepers of hotels or inns
shall be responsible for them as depositaries, provided that notice
was given to them, or to their employees, of the effects brought by
the guests and that, on the part of the latter, they take the
precautions which said hotelkeepers or their substitutes advised
relative to the care and vigilance of their effects. Plainly, from the
443
VOL. 639, JANUARY 12, 2011 443

Surety Corporation
facts found by the lower courts, the insured See deposited his
vehicle for safekeeping with petitioner, through the latters
employee, Justimbaste. In turn, Justimbaste issued a claim stub
to See. Thus, the contract of deposit was perfected from Sees
delivery, when he handed over to Justimbaste the keys to his
vehicle, which Justimbaste received with the obligation of safely
keeping and returning it. Ultimately, petitioner is liable for the
loss of Sees vehicle.
Same Same Damages Attorneys fees may be awarded when
a party is compelled to litigate or incur expenses to protect its
interest, or when the court deems it just and equitable.Petitioner
assails the lower courts award of attorneys fees to respondent in
the amount of P120,000.00. Petitioner claims that the award is
not substantiated by the evidence on record. We disagree. While it
is a sound policy not to set a premium on the right to litigate, we
find that respondent is entitled to reasonable attorneys fees.
Attorneys fees may be awarded when a party is compelled to
litigate or incur expenses to protect its interest, or when the court
deems it just and equitable. In this case, petitioner refused to
answer for the loss of Sees vehicle, which was deposited with it
for safekeeping. This refusal constrained respondent, the insurer
of See, and subrogated to the latters right, to litigate and incur
expenses. However, we reduce the award of P120,000.00 to
P60,000.00 in view of the simplicity of the issues involved in this
case.

Court of Appeals.
Emiliano T. De Asis for petitioner.
June C. Reyes for respondent.
NACHURA, J.:
For review is the Decision1 of the Court
http://central.com.ph/sfsreader/session/0000015cda0acf6f80c3984f003600fb002c009e/t/?o=False of Appeals (CA) 3/15
For review is the Decision1 of the Court of Appeals (CA)

in
_______________
1 Penned by Associate Justice Remedios A. SalazarFernando, with

Associate Justices Rosalinda AsuncionVicente and Enrico A. Lanzanas,
concurring Rollo, pp. 93109.
444

Surety Corporation
CAG.R. CV No. 86869, which affirmed the decision2 of the

Regional Trial Court (RTC), Branch 66, Makati City, in
Civil Case No. 03857, holding petitioner Durban
Apartments Corporation solely liable to respondent Pioneer
Insurance and Surety Corporation for the loss of Jeffrey
Sees (Sees) vehicle.
The facts, as found by the CA, are simple.
On July 22, 2003, [respondent] Pioneer Insurance and Surety

Corporation x x x, by right of subrogation, filed [with the RTC of
Makati City] a Complaint for Recovery of Damages against
[petitioner] Durban Apartments Corporation, doing business
under the name and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste x x x. [Respondent averred]
that: it is the insurer for loss and damage of Jeffrey S. Sees [the
insureds] 2001 Suzuki Grand Vitara x x x with Plate No. XBH
510 under Policy No. MCCVHO01000384600D in the amount
of P1,175,000.00 on April 30, 2002, See arrived and checked in at
the City Garden Hotel in Makati corner Kalayaan Avenues,
Makati City before midnight, and its parking attendant,
defendant x x x Justimbaste got the key to said Vitara from See to
park it[. O]n May 1, 2002, at about 1:00 oclock in the morning,
See was awakened in his room by [a] telephone call from the
Hotel Chief Security Officer who informed him that his Vitara
was carnapped while it was parked unattended at the parking
area of Equitable PCI Bank along Makati Avenue between the
hours of 12:00 [a.m.] and 1:00 [a.m.] See went to see the Hotel
Chief Security Officer, thereafter reported the incident to the
Operations Division of the Makati City Police AntiCarnapping
Unit, and a flash alarm was issued the Makati City Police Anti
Carnapping Unit investigated Hotel Security Officer, Ernesto T.
Horlador, Jr. x x x and defendant x x x Justimbaste See gave his
Sinumpaang Salaysay to the police investigator, and filed a
Complaint Sheet with the PNP Traffic Management Group in

Camp Crame, Quezon City the Vitara has not yet been recovered
since July 23, 2002 as evidenced by a Certification of Non
Recovery issued by the PNP TMG it paid the P1,163,250.00
money claim of See and mortgagee ABN AMRO Savings Bank,
Inc. as indemnity for the loss of the Vitara the Vitara was lost
due to the negligence of [petitioner]
_______________
2Penned by Pairing Judge Rommel O. Baybay id., at pp. 3335.
445
VOL. 639, JANUARY 12, 2011 445

Surety Corporation
Durban Apartments and [defendant] Justimbaste because it was

discovered during the investigation that this was the second time
that a similar incident of carnapping happened in the valet
parking service of [petitioner] Durban Apartments and no
necessary precautions were taken to prevent its repetition
[petitioner] Durban Apartments was wanting in due diligence in
the selection and supervision of its employees particularly
defendant x x x Justimbaste and defendant x x x Justimbaste
and [petitioner] Durban Apartments failed and refused to pay its
valid, just, and lawful claim despite written demands.
Upon service of Summons, [petitioner] Durban Apartments and
[defendant] Justimbaste filed their Answer with Compulsory
Counterclaim alleging that: See did not check in at its hotel, on
the contrary, he was a guest of a certain Ching Montero x x x
defendant x x x Justimbaste did not get the ignition key of Sees
Vitara, on the contrary, it was See who requested a parking
attendant to park the Vitara at any available parking space, and
it was parked at the Equitable Bank parking area, which was
within Sees view, while he and Montero were waiting in front of
the hotel they made a written denial of the demand of
[respondent] Pioneer Insurance for want of legal basis valet
parking services are provided by the hotel for the convenience of
its customers looking for a parking space near the hotel premises
it is a special privilege that it gave to Montero and See it does not
include responsibility for any losses or damages to motor vehicles
and its accessories in the parking area and the same holds true
even if it was See himself who parked his Vitara within the
premises of the hotel as evidenced by the valet parking customers
claim stub issued to him the carnapper was able to open the
Vitara without using the key given earlier to the parking
attendant and subsequently turned over to See after the Vitara
was stolen defendant x x x Justimbaste saw the Vitara speeding

away from the place where it was parked he tried to run after it,
and blocked its possible path but to no avail and See was duly
and immediately informed of the carnapping of his Vitara the
matter was reported to the nearest police precinct and defendant
x x x Justimbaste, and Horlador submitted themselves to police
investigation.
During the pretrial conference on November 28, 2003, counsel
for [respondent] Pioneer Insurance was present. Atty. Monina Lee
x x x, counsel of record of [petitioner] Durban Apartments and
Justimbaste was absent, instead, a certain Atty. Nestor Mejia ap
446

Surety Corporation
peared for [petitioner] Durban Apartments and Justimbaste, but

did not file their pretrial brief.
On November 5, 2004, the lower court granted the motion of
[respondent] Pioneer Insurance, despite the opposition of
[petitioner] Durban Apartments and Justimbaste, and allowed
[respondent] Pioneer Insurance to present its evidence ex parte
before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the
evening, he drove his Vitara and stopped in front of City Garden
Hotel in Makati Avenue, Makati City a parking attendant, whom
he had later known to be defendant x x x Justimbaste,
approached and asked for his ignition key, told him that the latter
would park the Vitara for him in front of the hotel, and issued
him a valet parking customers claim stub he and Montero,
thereafter, checked in at the said hotel on May 1, 2002, at around
1:00 in the morning, the Hotel Security Officer whom he later
knew to be Horlador called his attention to the fact that his
Vitara was carnapped while it was parked at the parking lot of
Equitable PCI Bank which is in front of the hotel his Vitara was
insured with [respondent] Pioneer Insurance he together with
Horlador and defendant xxx Justimbaste went to Precinct 19 of
the Makati City Police to report the carnapping incident, and a
police officer came accompanied them to the AntiCarnapping
Unit of the said station for investigation, taking of their sworn
statements, and flashing of a voice alarm he likewise reported
the said incident in PNP TMG in Camp Crame where another
alarm was issued he filed his claim with [respondent] Pioneer
Insurance, and a representative of the latter, who is also an
adjuster of Vesper Insurance AdjustersAppraisers [Vesper],
investigated the incident and [respondent] Pioneer Insurance
required him to sign a Release of Claim and Subrogation Receipt,

and finally paid him the sum of P1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims evaluator of
[petitioner] Pioneer Insurance tasked, among others, with the
receipt of claims and documents from the insured, investigation of
the said claim, inspection of damages, taking of pictures of
insured unit, and monitoring of the processing of the claim until
its payment he monitored the processing of Sees claim when the
latter reported the incident to [respondent] Pioneer Insurance
[respondent] Pioneer Insurance assigned the case to Vesper who
verified Sees report, conducted an investigation, obtained the
necessary documents for
447
VOL. 639, JANUARY 12, 2011 447

Surety Corporation
the processing of the claim, and tendered a settlement check to

See they evaluated the case upon receipt of the subrogation
documents and the adjusters report, and eventually
recommended for its settlement for the sum of P1,163,250.00
which was accepted by See the matter was referred and
forwarded to their counsel, R.B. Sarajan & Associates, who
prepared and sent demand letters to [petitioner] Durban
Apartments and [defendant] Justimbaste, who did not pay
[respondent] Pioneer Insurance notwithstanding their receipt of
the demand letters and the services of R.B. Sarajan & Associates
were engaged, for P100,000.00 as attorneys fees plus P3,000.00
per court appearance, to prosecute the claims of [respondent]
Pioneer Insurance against [petitioner] Durban Apartments and
Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper
[respondent] Pioneer Insurance assigned to Vesper the
investigation of Sees case, and he was the one actually assigned
to investigate it he conducted his investigation of the matter by
interviewing See, going to the City Garden Hotel, required
subrogation documents from See, and verified the authenticity of
the same he learned that it is the standard procedure of the said
hotel as regards its valet parking service to assist their guests as
soon as they get to the lobby entrance, park the cars for their
guests, and place the ignition keys in their safety key box
considering that the hotel has only twelve (12) available parking
slots, it has an agreement with Equitable PCI Bank permitting
the hotel to use the parking space of the bank at night he also
learned that a Hyundai Starex van was carnapped at the said
place barely a month before the occurrence of this incident
because Liberty Insurance assigned the said incident to Vespers,

and Horlador and defendant x x x Justimbaste admitted the
occurrence of the same in their sworn statements before the Anti
Carnapping Unit of the Makati City Police upon verification with
the PNP TMG [Unit] in Camp Crame, he learned that Sees
Vitara has not yet been recovered upon evaluation, Vesper
recommended to [respondent] Pioneer Insurance to settle Sees
claim for P1,045,750.00 See contested the recommendation of
Vesper by reasoning out that the 10% depreciation should not be
applied in this case considering the fact that the Vitara was used
for barely eight (8) months prior to its loss and [respondent]
Pioneer Insurance acceded to Sees contention, tendered the sum
of P1,163,250.00 as settlement, the former accepted it, and signed
a release of claim and subrogation receipt.
448

Surety Corporation
The lower court denied the Motion to Admit PreTrial Brief and
Motion for Reconsideration field by [petitioner] Durban
Apartments and Justimbaste in its Orders dated May 4, 2005 and
October 20, 2005, respectively, for being devoid of merit.3
Thereafter, on January 27, 2006, the RTC rendered a

decision, disposing, as follows:
WHEREFORE, judgment is hereby rendered ordering

[petitioner Durban Apartments Corporation] to pay [respondent
Pioneer Insurance and Surety Corporation] the sum of
P1,163,250.00 with legal interest thereon from July 22, 2003 until
the obligation is fully paid and attorneys fees and litigation
expenses amounting to P120,000.00.
SO ORDERED.4
On appeal, the appellate court affirmed the decision of

the trial court, viz.:
WHEREFORE, premises considered, the Decision dated

January 27, 2006 of the RTC, Branch 66, Makati City in Civil
Case No. 03857 is hereby AFFIRMED insofar as it holds
[petitioner] Durban Apartments Corporation solely liable to
[respondent] Pioneer Insurance and Surety Corporation for the
loss of Jeffrey Sees Suzuki Grand Vitara.
SO ORDERED.5
Hence, this recourse by petitioner.

The issues for our resolution are:
1. Whether the lower courts erred in declaring

petitioner as in default for failure to appear at the pretrial
conference and to file a pretrial brief
2. Corollary thereto, whether the trial court correctly
allowed respondent to present evidence exparte
_______________
3Id., at pp. 94101.

4Id., at p. 35.
5Id., at p. 108.
449
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Surety Corporation
3. Whether petitioner is liable to respondent for

attorneys fees in the amount of P120,000.00 and
4. Ultimately, whether petitioner is liable to
respondent for the loss of Sees vehicle.
The petition must fail.
We are in complete accord with the common ruling of
the lower courts that petitioner was in default for failure to
appear at the pretrial conference and to file a pretrial
brief, and thus, correctly allowed respondent to present
evidence exparte. Likewise, the lower courts did not err in
holding petitioner liable for the loss of Sees vehicle.
Wellentrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the
appellate court, are accorded the highest degree of respect
and are considered conclusive between the parties.6 A
review of such findings by this Court is not warranted
except upon a showing of highly meritorious circumstances,
such as: (1) when the findings of a trial court are grounded
entirely on speculation, surmises, or conjectures (2) when a
lower courts inference from its factual findings is
manifestly mistaken, absurd, or impossible (3) when there
is grave abuse of discretion in the appreciation of facts (4)
when the findings of the appellate court go beyond the
issues of the case, or fail to notice certain relevant facts
which, if properly considered, will justify a different
conclusion (5) when there is a misappreciation of facts (6)
when the findings of fact are conclusions without mention
of the specific evidence on which they are based, are
premised on the absence of evidence, or are contradicted by
evidence on record.7 None of the foregoing excep
_______________
6 Titan Construction Corporation v. UniField Enterprises, Inc., G.R.

No. 153874, March 7, 2007, 517 SCRA 180, 186 Sigaya v. Mayuga, 504
Phil. 600, 611 467 SCRA 341, 353 (2005).
7See Child Learning Center, Inc. v. Tagorio, 512 Phil. 618, 623 476
SCRA 236, 241242 (2005) IlaoQuianay v. Mapile, 510 Phil. 736, 744745
474 SCRA 246, 253 (2005).
450

Surety Corporation
tions permitting a reversal of the assailed decision exists in

this instance.
Petitioner urges us, however, that strong [and]
compelling reason[s] such as the prevention of miscarriage
of justice warrant a suspension of the rules and excuse its
and its counsels nonappearance during the pretrial
conference and their failure to file a pretrial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for
equivocation appearance of parties and their counsel at the
pretrial conference, along with the filing of a
corresponding pretrial brief, is mandatory, nay, their duty.
Thus, Section 4 and Section 6 thereof provide:
SEC. 4. Appearance of parties.It shall be the duty of the

parties and their counsel to appear at the pretrial. The non
appearance of a party may be excused only if a valid cause is
shown therefor or if a representative shall appear in his behalf
fully authorized in writing to enter into an amicable settlement,
to submit to alternative modes of dispute resolution, and to enter
into stipulations or admissions of facts and documents.
SEC. 6. Pretrial brief.The parties shall file with the court
and serve on the adverse party, in such manner as shall ensure
their receipt thereof at least three (3) days before the date of the
pretrial, their respective pretrial briefs which shall contain,
among others:
xxxx
Failure to file the pretrial brief shall have the same effect as
failure to appear at the pretrial.
Contrary to the foregoing rules, petitioner and its

counsel of record were not present at the scheduled pre
trial conference. Worse, they did not file a pretrial brief.
Their nonappearance cannot be excused as Section 4, in

relation to Section 6, allows only two exceptions: (1) a valid
excuse and (2) appearance of a representative on behalf of
a party who is fully authorized in writing to enter into an
amicable settlement, to submit to alternative modes of
dispute resolution,
451
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and to enter into stipulations or admissions of facts and

documents.
Petitioner is adamant and harps on the fact that
November 28, 2003 was merely the first scheduled date for
the pretrial conference, and a certain Atty. Mejia appeared
on its behalf. However, its assertion is belied by its own
admission that, on said date, this Atty. Mejia did not have
in his possession the Special Power of Attorney issued by
petitioners Board of Directors.
As pointed out by the CA, petitioner, through Atty. Lee,
received the notice of pretrial on October 27, 2003, thirty
two (32) days prior to the scheduled conference. In that
span of time, Atty. Lee, who was charged with the duty of
notifying petitioner of the scheduled pretrial conference,8
petitioner, and Atty. Mejia should have discussed which
lawyer would appear at the pretrial conference with
petitioner, armed with the appropriate authority therefor.
Sadly, petitioner failed to comply with not just one rule it
also did not proffer a reason why it likewise failed to file a
pretrial brief. In all, petitioner has not shown any
persuasive reason why it should be exempt from abiding by
the rules.
The appearance of Atty. Mejia at the pretrial
conference, without a pretrial brief and with only his bare
allegation that he is counsel for petitioner, was correctly
rejected by the trial court. Accordingly, the trial court, as
affirmed by the appellate court, did not err in allowing
respondent to present evidence exparte.
Former Chief Justice Andres R. Narvasas words
continue to resonate, thus:
_______________
8RULES OF COURT, Rule 18, Sec. 3:
SEC. 3. Notice of pretrial.The notice of pretrial shall be served on

counsel, or on the party who has no counsel. The counsel served with such
notice is charged with the duty of notifying the party represented by him.
452

Surety Corporation
Everyone knows that a pretrial in civil actions is mandatory,

and has been so since January 1, 1964. Yet to this day its place in
the scheme of things is not fully appreciated, and it receives but
perfunctory treatment in many courts. Some courts consider it a
mere technicality, serving no useful purpose save perhaps,
occasionally to furnish ground for nonsuiting the plaintiff, or
declaring a defendant in default, or, wistfully, to bring about a
compromise. The pretrial device is not thus put to full use.
Hence, it has failed in the main to accomplish the chief objective
for it: the simplification, abbreviation and expedition of the trial,
if not indeed its dispensation. This is a great pity, because the
objective is attainable, and with not much difficulty, if the device
were more intelligently and extensively handled.
xxxx
Consistently with the mandatory character of the pretrial, the
Rules oblige not only the lawyers but the parties as well to appear
for this purpose before the Court, and when a party fails to
appear at a pretrial conference (he) may be nonsuited or
considered as in default. The obligation to appear denotes not
simply the personal appearance, or the mere physical
presentation by a party of ones self, but connotes as importantly,
preparedness to go into the different subject assigned by law to a
pretrial. And in those instances where a party may not himself
be present at the pretrial, and another person substitutes for
him, or his lawyer undertakes to appear not only as an attorney
but in substitution of the clients person, it is imperative for that
representative of the lawyer to have special authority to make
such substantive agreements as only the client otherwise has
capacity to make. That special authority should ordinarily be in
writing or at the very least be duly established by evidence other
than the selfserving assertion of counsel (or the proclaimed
representative) himself. Without that special authority, the
lawyer or representative cannot be deemed capacitated to appear
in place of the party hence, it will be considered that the latter
has failed to put in an appearance at all, and he [must] therefore
be nonsuited or considered as in default, notwithstanding his
lawyers or delegates presence.9
_______________
9 Development Bank of the Phils. v. Court of Appeals, 251 Phil. 390,

392395 169 SCRA 409, 411413 (1989). (Citations omitted.)
453
VOL. 639, JANUARY 12, 2011 453

Surety Corporation
We are not unmindful that defendants (petitioners)

preclusion from presenting evidence during trial does not
automatically result in a judgment in favor of plaintiff
(respondent). The plaintiff must still substantiate the
allegations in its complaint.10 Otherwise, it would be
inutile to continue with the plaintiffs presentation of
evidence each time the defendant is declared in default.
In this case, respondent substantiated the allegations in
its complaint, i.e., a contract of necessary deposit existed
between the insured See and petitioner. On this score, we
find no error in the following disquisition of the appellate
court:
[The] records also reveal that upon arrival at the City Garden
Hotel, See gave notice to the doorman and parking attendant of
the said hotel, x x x Justimbaste, about his Vitara when he
entrusted its ignition key to the latter. x x x Justimbaste issued a
valet parking customer claim stub to See, parked the Vitara at
the Equitable PCI Bank parking area, and placed the ignition key
inside a safety key box while See proceeded to the hotel lobby to
check in. The Equitable PCI Bank parking area became an annex
of City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in the
evening after banking hours.11
Article 1962, in relation to Article 1998, of the Civil Code

defines a contract of deposit and a necessary deposit made
by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a

person receives a thing belonging to another, with the obligation
of safely keeping it and returning the same. If the safekeeping of
the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
Art. 1998. The deposit of effects made by travelers in hotels
or inns shall also be regarded as necessary. The keepers of hotels
or
_______________
10See SSS v. Hon. Chaves, 483 Phil. 292, 302 440 SCRA 269, 276 (2004).
11Rollo, p. 105.
454

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inns shall be responsible for them as depositaries, provided that

notice was given to them, or to their employees, of the effects
brought by the guests and that, on the part of the latter, they take
the precautions which said hotelkeepers or their substitutes
advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the

insured See deposited his vehicle for safekeeping with
petitioner, through the latters employee, Justimbaste. In
turn, Justimbaste issued a claim stub to See. Thus, the
contract of deposit was perfected from Sees delivery, when
he handed over to Justimbaste the keys to his vehicle,
which Justimbaste received with the obligation of safely
keeping and returning it. Ultimately, petitioner is liable for
the loss of Sees vehicle.
Lastly, petitioner assails the lower courts award of
attorneys fees to respondent in the amount of P120,000.00.
Petitioner claims that the award is not substantiated by
the evidence on record.
We disagree.
While it is a sound policy not to set a premium on the
right to litigate,12 we find that respondent is entitled to
reasonable attorneys fees. Attorneys fees may be awarded
when a party is compelled to litigate or incur expenses to
protect its interest,13 or when the court deems it just and
equitable.14 In this case, petitioner refused to answer for
the loss of Sees vehicle, which was deposited with it for
safekeeping. This refusal constrained respondent, the
insurer of See, and subrogated to the latters right, to
litigate and incur expenses. However, we reduce the award
of P120,000.00 to P60,000.00 in view of the simplicity of the
issues involved in this case.
_______________
12 Bank of the Philippine Islands v. Casa Montessori International,

G.R. Nos. 149454 & 149507, May 28, 2004, 430 SCRA 261, 296.
13CIVIL CODE, Art. 2208, par. 2.
14CIVIL CODE, Art. 2208, par. 11.

YHT Realty Corporation vs. Court of Appeals
*
G.R. No. 126780. February 17, 2005.
YHT REALTY CORPORATION, ERLINDA LAINEZ and

ANICIA PAYAM, petitioners, vs. THE COURT OF
APPEALS and MAURICE McLOUGHLIN, respondents.
Actions Appeals Pleadings and Practice The thrust of Rule

45 is the resolution only of questions of law and any peripheral
factual question addressed to the Supreme Court is beyond the
bounds of this mode of review.It is worthy of note that the
thrust of Rule 45 is the resolution only of questions of law and any
peripheral factual question addressed to this Court is beyond the
bounds of this mode of review. Petitioners point out that the
evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while
deposited in the safety deposit boxes of Tropicana, the basis of the
trial court and the appellate court being the sole testimony of
McLoughlin as to the contents thereof. Likewise, petitioners
dispute the finding of gross negligence on their part as not
supported by the evidence on record. We are not persuaded. We
adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the
credible testimony in open court by McLoughlin. Such findings
are factual and therefore beyond the ambit of the present petition.
Hotels and Inns Deposits Safety Deposit Boxes Mere close
companionship and intimacy are not enough to warrant the
conclusion that a hotel guest and his companion are husband and
wifeit is no excuse for the hotel to have allowed the latter to open
the safety deposit box of the former.The management contends,
however, that McLoughlin, by his act, made its employees believe
that Tan was his spouse for she was always with him most of the
time. The evidence on record, however, is bereft of any showing
that McLoughlin introduced Tan to the management as his wife.
Such an inference from the act of McLoughlin will not exculpate
the petitioners from liability in the absence of any showing that
he made the management believe that Tan was his wife or was
duly authorized to have access to the safety deposit box. Mere
http://central.com.ph/sfsreader/session/0000015cda0c018d5b38e5a9003600fb002c009e/t/?o=False 1/26
close companionship and intimacy are not enough to warrant such

conclusion considering that what is involved
_______________
* SECOND DIVISION.
639
VOL. 451, FEBRUARY 17, 2005 639
in the instant case is the very safety of McLoughlins deposit. If

only petitioners exercised due diligence in taking care of
McLoughlins safety deposit box, they should have confronted him
as to his relationship with Tan considering that the latter had
been observed opening McLoughlins safety deposit box a number
of times at the early hours of the morning. Tans acts should have
prompted the management to investigate her relationship with
McLoughlin. Then, petitioners would have exercised due diligence
required of them. Failure to do so warrants the conclusion that
the management had been remiss in complying with the
obligations imposed upon hotelkeepers under the law.
Same Same Same QuasiDelicts Torts Where the loss of a
hotel guests money was consummated through the negligence of
the hotel employee in allowing the companion of said guest to open
the safety deposit box without the guests consent, both the
assisting employees and the hotel owner and operator are
solidarily liable.Under Article 1170 of the New Civil Code,
those who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of the
same Code provides that the owners and managers of an
establishment or enterprise are likewise responsible for damages
caused by their employees in the service of the branches in which
the latter are employed or on the occasion of their functions. Also,
this Court has ruled that if an employee is found negligent, it is
presumed that the employer was negligent in selecting and/or
supervising him for it is hard for the victim to prove the
negligence of such employer. Thus, given the fact that the loss of
McLoughlins money was consummated through the negligence of
Tropicanas employees in allowing Tan to open the safety deposit
box without the guests consent, both the assisting employees and
YHT Realty Corporation itself, as owner and operator of
Tropicana, should be held solidarily liable pursuant to Article

2193.
Same Same Same Same Same Catering to the public,
hotelkeepers are bound to provide not only lodging for hotel guests
but also security to their persons and belongingsa twin duty
which the law does not allow to be negated or diluted by any
contrary stipulation in socalled undertakings that ordinarily
appear in prepared forms imposed by hotel keepers on guests for
their signature.The issue of whether the Undertaking For The
Use of Safety Deposit Box exe
640
cuted by McLoughlin is tainted with nullity presents a legal

question appropriate for resolution in this petition. Notably, both
the trial court and the appellate court found the same to be null
and void. We find no reason to reverse their common conclusion.
Article 2003 is controlling, thus: Art. 2003. The hotelkeeper
cannot free himself from responsibility by posting notices to the
effect that he is not liable for the articles brought by the guest.
Any stipulation between the hotelkeeper and the guest whereby
the responsibility of the former as set forth in Articles 1998 to
2001 is suppressed or diminished shall be void. Article 2003 was
incorporated in the New Civil Code as an expression of public
policy precisely to apply to situations such as that presented in
this case. The hotel business like the common carriers business is
imbued with public interest. Catering to the public, hotelkeepers
are bound to provide not only lodging for hotel guests and security
to their persons and belongings. The twin duty constitutes the
essence of the business. The law in turn does not allow such duty
to the public to be negated or diluted by any contrary stipulation
in socalled undertakings that ordinarily appear in prepared
forms imposed by hotel keepers on guests for their signature.
Same Same Same Same Same With greater reason should
the liability of the hotelkeeper be enforced when the missing items
are taken without the guests knowledge and consent from a safety
deposit box provided by the hotel itself.In an early case, the
Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold
hotelkeepers or innkeeper liable for the effects of their guests, it is
not necessary that they be actually delivered to the innkeepers or
their employees. It is enough that such effects are within the hotel
or inn. With greater reason should the liability of the hotelkeeper

be enforced when the missing items are taken without the guests
knowledge and consent from a safety deposit box provided by the
hotel itself, as in this case.
Same Same Same Same Same Article 2002 of the Civil
Code which exempts the hotelkeeper from liability if the loss is due
to the acts of his guest, his family, or visitors presupposes that the
hotelkeeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the lossa
depositary is not responsible for the loss of goods by theft, unless
his actionable negligence contributes to the loss.Petitioners
likewise anchor their defense on
641
VOL. 451, FEBRUARY 17, 2005 641
Article 2002 which exempts the hotelkeeper from liability if the

loss is due to the acts of his guest, his family, or visitors. Even a
cursory reading of the provision would lead us to reject
petitioners contention. The justification they raise would render
nugatory the public interest sought to be protected by the
provision. What if the negligence of the employer or its employees
facilitated the consummation of a crime committed by the
registered guests relatives or visitor? Should the law exculpate
the hotel from liability since the loss was due to the act of the
visitor of the registered guest of the hotel? Hence, this provision
presupposes that the hotelkeeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence
of the loss. A depositary is not responsible for the loss of goods by
theft, unless his actionable negligence contributes to the loss.
Same Same Same Same Same The hotel was guilty of
concurrent negligence in allowing the hotel guests companion, who
was not the registered guest, to open the safety deposit box of the
guest, even assuming that the latter was also guilty of negligence
in allowing another person to use his keyto rule otherwise would
result in undermining the safety of the safety deposit boxes in
hotels for the management will be given imprimatur to allow any
person, under the pretense of being a family member or a visitor of
the guest, to have access to the safety deposit box without fear of
any liability that will attach thereafter in case such person turns
out to be a complete stranger.In the case at bar, the
responsibility of securing the safety deposit box was shared not
only by the guest himself but also by the management since two
keys are necessary to open the safety deposit box. Without the
assistance of hotel employees, the loss would not have occurred.
Thus, Tropicana was guilty of concurrent negligence in allowing
Tan, who was not the registered guest, to open the safety deposit
box of McLoughlin, even assuming that the latter was also guilty
of negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety
deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of being a
family member or a visitor of the guest, to have access to the
safety deposit box without fear of any liability that will attach
thereafter in case such person turns out to be a complete stranger.
This will allow the hotel to evade responsibility for any liability
incurred by its employees in conspiracy with the guests relatives
and visitors.
642
Same Same Same Same Same A tort liability can exist

even if there are already contractual relationsthe act that breaks
the contract may also be tort.Petitioners contend that
McLoughlins case was mounted on the theory of contract, but the
trial court and the appellate court upheld the grant of the claims
of the latter on the basis of tort. There is nothing anomalous in
how the lower courts decided the controversy for this Court has
pronounced a jurisprudential rule that tort liability can exist even
if there are already contractual relations. The act that breaks the
contract may also be tort.
Damages It is within the province of lower courts to settle
factual issues such as the proper amount of damages awarded.
As to damages awarded to McLoughlin, we see no reason to
modify the amounts awarded by the appellate court for the same
were based on facts and law. It is within the province of lower
courts to settle factual issues such as the proper amount of
damages awarded and such finding is binding upon this Court
especially if sufficiently proven by evidence and not
unconscionable or excessive.
Same Although trial courts are given discretion to determine
the amount of moral damages, the appellate court may modify or
change the amount awarded when it is palpably and scandalously
excessive.The amount of P50,000.00 for moral damages is
reasonable. Although trial courts are given discretion to
determine the amount of moral damages, the appellate court may
modify or change the amount awarded when it is palpably and

scandalously excessive. Moral damages are not intended to enrich
a complainant at the expense of a defendant. They are awarded
only to enable the injured party to obtain means, diversion or
amusements that will serve to alleviate the moral suffering he
has undergone, by reason of defendants culpable action.

Court of Appeals.

Bernardo P. Fernandez for petitioners.
Emerito Salva & Associates for respondents.
643
VOL. 451, FEBRUARY 17, 2005 643

TINGA, J.:
The primary question of interest before this Court is the

only legal issue in the case: It is whether a hotel may evade
liability for the loss of items left with it for safekeeping by
its guests, by having these guests execute written waivers
holding the establishment or its employees free from blame
for such loss in light of Article 2003 of the Civil Code which
voids such waivers.
Before1 this Court is a Rule 45 petition for review of the
Decision dated 19 October 1995 2
of the Court of Appeals
which affirmed the Decision dated 16 December 1991 of
the Regional Trial Court (RTC), Branch 13, of Manila,
finding YHT Realty Corporation, Brunhilda MataTan
(Tan), Erlinda Lainez (Lainez) and Anicia Payam (Payam)
jointly and solidarily liable for damages in an action filed
by Maurice McLoughlin (McLoughlin) for the loss of his
American and Australian dollars deposited in the safety
deposit box of Tropicana Copacabana Apartment Hotel,
owned and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian
businessmanphilanthropist, used to stay at Sheraton
Hotel during his trips to the Philippines prior to 1984 when
he met Tan. Tan befriended McLoughlin by showing him
around, introducing him to important people,
accompanying him in visiting impoverished street children
and assisting him in buying gifts for the children and in
distributing the same to charitable institutions for poor
children. Tan convinced McLoughlin to transfer from

Sheraton Hotel to Tropicana where Lainez, Payam and
Danilo Lopez were employed. Lopez served as manager of
the hotel while Lainez and Payam had custody of
_______________
1 Rollo, p. 38. Decision penned by Justice Bernardo LL. Salas and

concurred in by Justices Pedro A. Ramirez and Ma. Alicia Austria
Martinez.
2 Id., at p. 118. Decision penned by Judge Gerardo M.S. Pepito.
644

the keys for the safety deposit boxes of Tropicana. Tan took
care of McLoughlins booking at the Tropicana where he
started staying during his trips to 3
the Philippines from
December 1984 to September 1987.
On 30 October 1987, McLoughlin arrived from Australia
and registered with Tropicana. He rented a safety deposit
box as it was his practice to rent a safety deposit box every
time he registered at Tropicana in previous trips. As a
tourist, McLoughlin was aware of the procedure observed
by Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two
keys, one of which is given to the registered guest, and the
other remaining in the possession of the management of
the hotel. When a registered guest wished to open his
safety deposit box, he alone could personally request the
management who then would assign one of its employees to
accompany the guest and assist 4
him in opening the safety
deposit box with the two keys.
McLoughlin allegedly placed the following in his safety
deposit box: Fifteen Thousand US Dollars (US$15,000.00)
which he placed in two envelopes, one envelope containing
Ten Thousand US Dollars (US$10,000.00) and the other
envelope Five Thousand US Dollars (US$5,000.00) Ten
Thousand Australian Dollars (AUS$10,000.00) which he
also placed in another envelope two (2) other envelopes
containing letters and credit cards two (2) bankbooks and
a checkbook,
5
arranged side by side inside the safety deposit
box.
On 12 December 1987, before leaving for a brief trip to
Hongkong, McLoughlin opened his safety deposit box with
his key and with the key of the management and took
therefrom the envelope containing Five Thousand US

Dollars (US$5,000.00), the envelope containing Ten
Thousand Aus
_______________
3 Id., at p. 119.
4 Id., at p. 120.
5 Ibid.
645
VOL. 451, FEBRUARY 17, 2005 645

tralian Dollars
6
(AUS$10,000.00), his passports and his
credit cards. McLoughlin left the other items in the box as
he did not check out of his room at the Tropicana during
his short visit to Hongkong. When he arrived in Hongkong,
he opened the envelope which contained Five Thousand US
Dollars (US$5,000.00) and discovered upon counting that
only Three Thousand7
US Dollars (US$3,000.00) were
enclosed therein. Since he had no idea whether somebody
else had tampered with his safety deposit box, he thought
that it was just a result of bad accounting
8
since he did not
spend anything from that envelope.
After returning to Manila, he checked out of Tropicana
on 18 December 1987 and left for Australia. When he
arrived in Australia, he discovered that the envelope with
Ten Thousand US Dollars (US$10,000.00) was short of Five
Thousand US Dollars (US$5,000). He also noticed that the
jewelry which he bought in Hongkong and stored in the
safety deposit box upon his return to Tropicana 9
was
likewise missing, except for a diamond bracelet.
When McLoughlin came back to the Philippines on 4
April 1988, he asked Lainez if some money and/or jewelry
which he had lost were found and returned to her or to the
management. However, Lainez told him that no one in the
hotel found such things and none were turned over to the
management. He again registered at Tropicana and rented
a safety deposit box. He placed therein one (1) envelope
containing Fifteen Thousand US Dollars (US$15,000.00),
another envelope containing Ten Thousand Australian
Dollars (AUS$10,000.00) and other envelopes containing
his traveling papers/documents. On 16 April 1988,
McLoughlin requested Lainez and Payam to open his
safety deposit box. He noticed that in the envelope
containing Fifteen Thousand US Dollars
_______________
6 Ibid.
7 Ibid.
8 Ibid.
9 Ibid.
646

(US$15,000.00), Two Thousand US Dollars (US$2,000.00)

were missing and in the envelope previously containing
Ten Thousand Australian Dollars (AUS$10,000.00), Four
Thousand Five Hundred10
Australian Dollars
(AUS$4,500.00) were missing.
When McLoughlin discovered the loss, he immediately
confronted Lainez and Payam who admitted that Tan
opened
11
the safety deposit box with the key assigned to
him. McLoughlin went up to his room where Tan was
staying and confronted her. Tan admitted that she had
stolen McLoughlins key and was able to open the safety
deposit 12 box with the assistance of Lopez, Payam and
Lainez. Lopez also told McLoughlin that Tan stole 13the key
assigned to McLoughlin while the latter was asleep.
McLoughlin requested the management for an
investigation of the incident. Lopez got in touch with Tan
and arranged for a meeting with the police and
McLoughlin. When the police did not arrive, Lopez and Tan
went to the room of McLoughlin at Tropicana and thereat,
Lopez wrote on a piece of paper a promissory note dated 21
April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of

AUS$4,000.00 and US$2,000.00 or 14
its equivalent in Philippine
currency on or before May 5, 1988.
Lopez requested Tan to sign the promissory note which the

latter did and Lopez also signed as a witness. Despite the
execution of promissory note by Tan, McLoughlin insisted
that it must be the hotel who must assume responsibility
for the loss he suffered. However, Lopez refused to accept
the
_______________
10 Id., at pp. 121 and 41. TSN, 9 September 1991, p. 10.
11 Id., at p. 42.
12 Ibid.
13 Id., at p. 121.
14 Exhibit V.
647
VOL. 451, FEBRUARY 17, 2005 647

responsibility relying on the conditions for renting the

safety deposit box entitled
15
Undertaking For the Use Of
Safety Deposit Box, specifically paragraphs (2) and (4)
thereof, to wit:
2. To release and hold free and blameless

TROPICANA APARTMENT HOTEL from any
liability arising from any loss in the contents and/or
use of the said deposit box for any cause
whatsoever, including but not limited to the
presentation or use thereof by any other person
should the key be lost
...
4. To return the key and execute the RELEASE in
favor of TROPICANA APARTMENT 16
HOTEL upon
giving up the use of the box.
On 17 May 1988, McLoughlin went back to Australia and

he consulted his lawyers as to the validity of the
abovementioned stipulations. They opined that the
stipulations are void for being violative of universal hotel
practices and customs. His lawyers prepared a letter dated
30 May 1988 which was signed17
by McLoughlin and sent to
President Corazon Aquino. The Office of the President
referred the letter to the Department of Justice (DOJ)
which forwarded
18
the same to the Western Police District
(WPD).
After receiving a copy of the indorsement in Australia,
McLoughlin came to the Philippines and registered again
as a hotel guest of Tropicana. McLoughlin went to
Malacaang to follow up on his letter but he was instructed
to go to the DOJ. The DOJ directed him to proceed to the
WPD for documentation. But McLoughlin went back to
Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to
attend to his business and came back to the Philippines to
follow up
_______________
15 Exh. W.
16 Rollo, p. 122.
17 Ibid.
18 Ibid.
648

on his letter to the19President but he failed to obtain any

concrete assistance.
McLoughlin left again for Australia and upon his return
to the Philippines on 25 August 1989 to pursue his claims
against petitioners, the WPD conducted an investigation
which resulted in the preparation of an affidavit which was
forwarded to the Manila City Fiscals Office. Said affidavit
became the basis of preliminary investigation. However,
McLoughlin left again for Australia without receiving the
notice of the hearing on 24 November 1989. Thus, the case
at the Fiscals Office was dismissed for failure to prosecute.
McLoughlin requested the reinstatement of the criminal
charge for theft. In the meantime, McLoughlin and his
lawyers wrote letters of demand to those having
responsibility to pay the damage. Then he left again for
Australia.
Upon his return on 22 October 1990, he registered at the
Echelon Towers at Malate, Manila. Meetings were held
between McLoughlin and his lawyer which resulted to the
filing of a complaint for damages on 3 December 1990
against YHT Realty Corporation, Lopez, Lainez, Payam
and Tan (defendants) for the loss of McLoughlins money
which was discovered on 16 April 1988. After filing the
complaint, McLoughlin left again for Australia to attend to
an urgent business matter. Tan and Lopez, however, were
not served with summons, and trial proceeded with only
Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their PreTrial Brief
admitting that they had previously allowed and assisted
Tan to open the safety deposit box, 20
McLoughlin filed an
Amended/Supplemental Complaint dated 10 June 1991
which included another incident of loss of money and
jewelry in the safety deposit box rented by McLoughlin in
the same hotel which took
_______________
19 Id., at p. 123.
20 Records, p. 52.
649
VOL. 451, FEBRUARY 17, 2005 649

21
place prior to 16 April 1988. The trial court admitted the
Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and
out of the country to attend to urgent business in Australia,
and while staying in the Philippines to attend the hearing,
he incurred expenses for hotel bills, airfare and other
transportation expenses, long distance calls to Australia,
Meralco power expenses, 22and expenses for food and
maintenance, among others.
_______________
21 Rollo, p. 125.
22 Exh. CC. Records (Exhibit Folder), pp. 146147. The Itemized
Claims for Damages allegedly incurred by McLoughlin:
I. CLAIMS FOR STOLEN MONIES AND PERSONAL

PROPERTY:
A. US$2,000.00, US$4,500.00.................... P153,200.00
B. US$8,000.00 cash and US$1,200.00 with 257,600.00
jewelry..........................................
II. AIR FARES from Sydney to Manila and back (11trips 308,880.00
up to date of testimony)............
III. PAYMENTS TO TROPICANA APARTMENT 336,207.05
HOTEL................................................
IV. PAYMENTS TO ECHELON TOWER............ 152,683.57
V. Taxes, fees, transportation from residence to Sydney 179,863.20
airport and from MIA to hotel in Manila and vice
versa......................
VI. MERALCO POWER EXPENSES.................... 7,811.94
VII. PLDT EXPENSES (overseas telephone calls)
Paid in the Philippines.......................... 5,597.68
Paid in Australia................................... 166,795.20
VIII. EXPENSES FOR FOOD AND 356,400.00
MAINTENANCE............................................................
IX. BUSINESS/OPPORTUNITY LOSS IN SYDNEY 2,160,000.00
WHILE IN THE PHILIPPINES BECAUSE OF
CASE.........................
X. MORAL DAMAGES...................................... 500,000.00
XI. EXEMPLARY DAMAGES............................ 350,000.00
XII. LITIGATION EXPENSES............................ 200,000.00
650

After trial, the RTC of Manila rendered judgment in favor

of McLoughlin, the dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby

rendered by this Court in favor of plaintiff and against the
defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff

the sum of US$11,400.00 or its equivalent in Philippine
Currency of P342,000.00, more or less, and the sum of
AUS$4,500.00 or its equivalent in Philippine Currency of
P99,000.00, or a total of P441,000.00, more or less, with
12% interest from April 16 1988 until said amount has
been paid to plaintiff (Item 1, Exhibit CC)
2. Ordering defendants, jointly and severally to pay plaintiff
the sum of P3,674,238.00 as actual and consequential
damages arising from the loss of his Australian and
American dollars and jewelries complained against and in
prosecuting his claim and rights administratively and
judicially (Items II, III, IV, V, VI, VII, VIII, and IX, Exh.
CC)
the sum of P500,000.00 as moral damages (Item X, Exh.
CC)
the sum of P350,000.00 as exemplary damages (Item XI,
Exh. CC)
5. And ordering defendants, jointly and severally, to pay
litigation expenses in the sum of P200,000.00 (Item XII,
Exh. CC)
the sum of P200,000.00 as attorneys fees, and a fee of
P3,000.00 for every appearance and
7. Plus costs of suit.
_______________
TOTAL................................................................... P5,135,038.64
ATTORNEYS FEES.................................................. 200,000.00
Plus, appearance
fee of P3,000.00 for
every court appearance.
651
VOL. 451, FEBRUARY 17, 2005 651

23
SO ORDERED.
The trial court found that McLoughlins allegations as to

the fact of loss and as to the amount of money he lost were
sufficiently shown by his direct and straightforward
manner of testifying in court and found him to be credible
and worthy of belief as it was established that
McLoughlins money, kept in Tropicanas safety deposit
box, was taken by Tan without McLoughlins consent. The
taking was effected through the use of the master key
which was in the possession of the management. Payam
and Lainez allowed Tan to use the master key without
authority from McLoughlin. The trial court added that if
McLoughlin had not lost his dollars, he would not have
gone through the trouble and personal inconvenience of
seeking aid and assistance from the Office of the President,
DOJ, police authorities and the City Fiscals Office in his
desire
24
to recover his losses from the hotel management and
Tan.
As regards the loss of Seven Thousand US Dollars
(US$7,000.00) and jewelry worth approximately One
Thousand Two Hundred US Dollars (US$1,200.00) which
allegedly occurred during his stay at Tropicana previous to
4 April 1988, no claim was made by McLoughlin for such
losses in his complaint dated 21 November 1990 because he
was not sure how they were lost and who the responsible
persons were. But considering the admission of the
defendants in their pretrial brief that on three previous
occasions they allowed Tan to open the box, the trial court
opined that it was logical and reasonable to presume that
his personal assets consisting of Seven Thousand US
Dollars (US$7,000.00) and jewelry were taken by Tan from
the safety deposit box without McLoughlins 25
consent
through the cooperation of Payam and Lainez.
_______________
23 Rollo, pp. 141142.

24 Id., at p. 127.
25 Ibid.
652

The trial court also found that defendants acted with gross
negligence in the performance and exercise of their duties
and obligations as innkeepers and were therefore
26
liable to
answer for the losses incurred by McLoughlin.
Moreover, the trial court ruled that paragraphs (2) and
(4) of the Undertaking For The Use Of Safety Deposit Box
are not valid for being contrary to the express mandate of
Article27 2003 of the New Civil Code and against public
policy. Thus, there being fraud or wanton conduct on the
part of defendants, they should be responsible for all
damages which may be attributed 28
to the nonperformance
of their contractual obligations.
The Court of Appeals affirmed the disquisitions made by
the lower court except as to the amount of damages
awarded. The decretal text of the appellate courts decision
reads:
THE FOREGOING CONSIDERED, the appealed Decision is

hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the
plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of

US$2,000.00 and AUS$4,500.00
2) P308,880.80, representing the peso value for the air fares
from Sidney [sic] to Manila and back for a total of eleven
(11) trips
3) Onehalf of P336,207.05 or P168,103.52 representing
payment to Tropicana Apartment Hotel
payment to Echelon Tower
5) Onehalf of P179,863.20 or P89,931.60 for the taxi x x x
transportation from the residence to Sidney [sic] Airport
and from MIA to the hotel here in Manila, for the eleven
(11) trips
_______________
26 Id., at p. 134.
27 Id., at p. 135.
28 Id., at p. 138.
653
VOL. 451, FEBRUARY 17, 2005 653

6) Onehalf of P7,801.94 or P3,900.97 representing Meralco

power expenses
expenses for food and maintenance
8) P50,000.00 for moral damages
9) P10,000.00 as exemplary damages and
10) P200,000 representing attorneys fees.
With costs. 29
SO ORDERED.
Unperturbed, YHT Realty Corporation, Lainez and Payam

went to this Court in this appeal by certiorari.
Petitioners submit for resolution by this Court the
following issues: (a) whether the appellate courts
conclusion on the alleged prior existence and subsequent
loss of the subject money and jewelry is supported by the
evidence on record (b) whether the finding of gross
negligence on the part of petitioners in the performance of
their duties as innkeepers is supported by the evidence on
record (c) whether the Undertaking For The Use of Safety
Deposit Box admittedly executed by private respondent is
null and void and (d) whether the damages awarded to
private respondent, as well as 30the amounts thereof, are
proper under the circumstances.
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the
resolution only of questions of law and any peripheral
factual question addressed to this Court is beyond the
bounds of this mode of review.
Petitioners point out that the evidence on record is
insufficient to prove the fact of prior existence of the dollars
and the jewelry which had been lost while deposited in the
safety deposit boxes of Tropicana, the basis of the trial
court and the
_______________
29 Id., at pp. 6364.

30 Id., at pp. 1920.
654

appellate court being the sole testimony of McLoughlin as

to the contents thereof. Likewise, petitioners dispute the
finding of gross negligence on their part as not supported
by the evidence on record.
We are not persuaded. We adhere to the findings of the
trial court as affirmed by the appellate court that the fact
of loss was established by the credible testimony in open
court by McLoughlin. Such findings are factual and
therefore beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor
of McLoughlin while testifying which reflected the veracity
of the facts testified to by him. On this score, we give full
credence to the appreciation of testimonial evidence by the
trial court especially if what is at issue is the credibility of
the witness. The oftrepeated principle is that where the
credibility of a witness is an issue, the established rule is
that great respect is accorded to the 31evaluation of the
credibility of witnesses by the trial court. The trial court is
in the best position to assess the credibility of witnesses
and their testimonies because of its unique opportunity to
observe the witnesses firsthand and note their 32demeanor,
conduct and attitude under grilling examination.
We are also not impressed by petitioners argument that
the finding of gross negligence by the lower court as
affirmed
_______________
31 People v. Andales, G.R. Nos. 15262425, February 5, 2004, 422 SCRA

253 People v. Fucio, G.R. No. 15118695, February 13, 2004, 422 SCRA
677 People v. Preciados, G.R. No. 122934, January 5, 2001, 349 SCRA 1
People v. Toyco, Sr., G.R. No. 138609, January 17, 2001, 349 SCRA 385
People v. Cabareo, G.R. No. 138645, January 16, 2001, 349 SCRA 297
People v. Valdez, G.R. No. 128105, January 24, 2001, 350 SCRA 189.
32 People v. Dimacuha, G.R. Nos. 15259293, February 13, 2004, 422
SCRA 688 People v. Yang, G.R. No. 148077, February 16, 2004, 423 SCRA
82 People v. Betonio, G.R. No. 119165, September 26, 1997, 279 SCRA
532 People v. Cabel, G.R. No. 121508, 282 SCRA 410.
655
VOL. 451, FEBRUARY 17, 2005 655

by the appellate court is not supported by evidence. The

evidence reveals that two keys are required to open the
safety deposit boxes of Tropicana. One key is assigned to
the guest while the other remains in the possession of the
management. If the guest desires to open his safety deposit
box, he must request the management for the other key to
open the same. In other words, the guest alone cannot open
the safety deposit box without the assistance of the
management or its employees. With more reason that
access to the safety deposit box should be denied if the one
requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the
safety deposit box, it is inevitable to conclude that the
management had at least a hand in the consummation of
the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who
were employees of Tropicana, had custody of the master
key of the management when the loss took place. In fact,
they even admitted that they assisted Tan on three
separate
33
occasions in opening McLoughlins safety deposit
box. This only proves that Tropicana had prior knowledge
that a person aside from the registered guest had access to
the safety deposit box. Yet the management failed to notify
McLoughlin of the incident and waited for him to discover
the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage
suffered by McLoughlin by reason of the negligence of its
employees.
The management should have guarded against the
occurrence of this incident considering that Payam
admitted in open court that she assisted Tan three times in
opening the safety deposit box of McLoughlin at around 34
6:30 A.M. to 7:30 A.M. while the latter was still asleep. In
light of the circumstances surrounding this case, it is
undeniable that without
_______________
33 Id., at p. 125.
34 Id., at p. 128.
656

the acquiescence of the employees of Tropicana to the

opening of the safety deposit box, the loss of McLoughlins
money could and should have been avoided.

The management contends, however, that McLoughlin,
by his act, made its employees believe that Tan was his
spouse for she was always with him most of the time. The
evidence on record, however, is bereft of any showing that
McLoughlin introduced Tan to the management as his wife.
Such an inference from the act of McLoughlin will not
exculpate the petitioners from liability in the absence of
any showing that he made the management believe that
Tan was his wife or was duly authorized to have access to
the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the
very safety of McLoughlins deposit. If only petitioners
exercised due diligence in taking care of McLoughlins
safety deposit box, they should have confronted him as to
his relationship with Tan considering that the latter had
been observed opening McLoughlins safety deposit box a
number of times at the early hours of the morning. Tans
acts should have prompted the management to investigate
her relationship with McLoughlin. Then, petitioners would
have exercised due diligence required of them. Failure to do
so warrants the conclusion that the management had been
remiss in complying with the obligations imposed upon
hotelkeepers under the law.
Under Article 1170 of the New Civil Code, those who, in
the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of
the same Code provides that the owners and managers
of an establishment or enterprise are likewise responsible
for damages caused by their employees in the service of the
branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that
if an employee is found negligent, it is presumed that the
employer was negligent in selecting and/or supervising him
for it is hard for the victim to
657
VOL. 451, FEBRUARY 17, 2005 657

35
prove the negligence of such employer. Thus, given the
fact that the loss of McLoughlins money was consummated
through the negligence of Tropicanas employees in
allowing Tan to open the safety deposit box without the
guests consent, both the assisting employees and YHT
Realty Corporation itself, as owner and operator of

Tropicana, should
36
be held solidarily liable pursuant to
Article 2193.
The issue of whether the Undertaking For The Use of
Safety Deposit Box executed by McLoughlin is tainted with
nullity presents a legal question appropriate for resolution
in this petition. Notably, both the trial court and the
appellate court found the same to be null and void. We find
no reason to reverse their common conclusion. Article 2003
is controlling, thus:
Art. 2003. The hotelkeeper cannot free himself from

responsibility by posting notices to the effect that he is not liable
for the articles brought by the guest. Any stipulation between the
hotelkeeper and the guest whereby the responsibility
37
of the
former as set forth in Articles 1998 to 2001 is suppressed or
diminished shall be void.
_______________
35 Campo, et al. v. Camarote and Gemilga, 100 Phil. 459 (1956).

36 Art. 2194. The responsibility of two or more persons who are liable
for a quasidelict is solidary.
37 Art. 1998. The deposit of effects made by travelers in hotels or inns
shall also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel
keepers or their substitutes advised relative to the care and vigilance of
their effects.
Art. 1999. The hotelkeeper is liable for the vehicles, animals and
articles which have been introduced or placed in the annexes of the hotel.
Art. 2000. The responsibility referred to in the two preceding articles
shall include the loss of, or injury to the personal property of the guests
caused by the servants or employees of the keepers of
658

Article 2003 was incorporated in the New Civil Code as an

expression of public policy precisely to apply to situations
such as that presented in this case. The hotel business like
the common carriers business is imbued with public
interest. Catering to the public, hotelkeepers are bound to
provide not only lodging for hotel guests and security to
their persons and belongings. The twin duty constitutes the
essence of the business. The law in turn does not allow

such duty to the public to be negated or diluted by any
contrary stipulation in socalled undertakings that
ordinarily appear in prepared forms imposed by hotel
keepers on guests for 38
their signature.
In an early case, the Court of Appeals through its then
Presiding Justice (later Associate Justice of the Court) Jose
P. Bengzon, ruled that to hold hotelkeepers or innkeeper
liable for the effects of their guests, it is not necessary that
they be actually delivered to the innkeepers or their
employees. It39 is enough that such effects are within the
hotel or inn. With greater reason should the liability of
the hotelkeeper be enforced when the missing items are
taken without the guests knowledge and consent from a
safety deposit box provided by the hotel itself, as in this
case.
Paragraphs (2) and (4) of the undertaking manifestly
contravene Article 2003 of the New Civil Code for they
allow Tropicana to be released from liability arising from
any loss in the contents and/or
40
use of the safety deposit box
for any cause whatsoever. Evidently, the undertaking was
intended
_______________
hotels or inns as well as by strangers but not that which may proceed
from any force majeure. The fact that travellers are constrained to rely on
the vigilance of the keeper of the hotel or inn shall be considered in
determining the degree of care required of him.
Art. 2001. The act of a thief or robber, who has entered the hotel is not
deemed force majeure, unless it is done with the use of arms or through an
irresistible force.
38 De Los Santos v. Tan Khey, 58 O.G. No. 4553, p. 7693.
39 Ibid., at pp. 76947695.
40 Exh. W.
659
VOL. 451, FEBRUARY 17, 2005 659

to bar any claim against Tropicana for any loss of the

contents of the safety deposit box whether or not negligence
was incurred by Tropicana or its employees. The New Civil
Code is explicit that the responsibility of the hotelkeeper
shall extend to loss of, or injury to, the personal property of
the guests even if caused by servants or employees of the
keepers of hotels or inns as well as by strangers, except as
41
it may proceed from any force majeure. It is the loss
41
it may proceed from any force majeure. It is the loss
through force majeure that may spare the hotelkeeper
from liability. In the case at bar, there is no showing that
the act of the thief or robber was done with the use of arms
or through
42
an irresistible force to qualify the same as force
majeure.
Petitioners
43
likewise anchor their defense on Article
2002 which exempts the hotelkeeper from liability if the
loss is due to the acts of his guest, his family, or visitors.
Even a cursory reading of the provision would lead us to
reject petitioners contention. The justification they raise
would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the
employer or its employees facilitated the consummation of
a crime committed by the registered guests relatives or
visitor? Should the law exculpate the hotel from liability
since the loss was due to the act of the visitor of the
registered guest of the hotel? Hence, this provision
presupposes that the hotelkeeper is not guilty of
concurrent negligence or has not contributed in any degree
to the occurrence of the loss. A depositary is not responsible
for the loss of goods by theft, 44
unless his actionable
negligence contributes to the loss.
_______________
41 Art. 2000, New Civil Code.

42 Art. 2001, supra at note 39.
43 Art. 2002. The hotelkeeper is not liable for compensation if the loss
is due to the acts of the guest, his family, servants or visitors, or if the loss
arises from the character of the things brought into the hotel.
44 26 C.J.S. 731 citing Griffith v. Zipperwick, 28 Ohio St. 388.
660

In the case at bar, the responsibility of securing the safety

deposit box was shared not only by the guest himself but
also by the management since two keys are necessary to
open the safety deposit box. Without the assistance of hotel
employees, the loss would not have occurred. Thus,
Tropicana was guilty of concurrent negligence in allowing
Tan, who was not the registered guest, to open the safety
deposit box of McLoughlin, even assuming that the latter
was also guilty of negligence in allowing another person to
use his key. To rule otherwise would result in undermining
the safety of the safety deposit boxes in hotels for the

management will be given imprimatur to allow any person,
under the pretense of being a family member or a visitor of
the guest, to have access to the safety deposit box without
fear of any liability that will attach thereafter in case such
person turns out to be a complete stranger. This will allow
the hotel to evade responsibility for any liability incurred
by its employees in conspiracy with the guests relatives
and visitors.
Petitioners contend that McLoughlins case was
mounted on the theory of contract, but the trial court and
the appellate court upheld45 the grant of the claims of the
latter on the basis of tort. There is nothing anomalous in
how the lower courts decided the controversy for this Court
has pronounced a jurisprudential rule that tort liability can
exist even if there are already contractual 46relations. The
act that breaks the contract may also be tort.
As to damages awarded to McLoughlin, we see no reason
to modify the amounts awarded by the appellate court for
the same were based on facts and law. It is within the
province of lower courts to settle factual issues such as the
proper amount of damages awarded and such finding is
binding upon this Court especially if sufficiently proven by
evidence and not unconscionable or excessive. Thus, the
appellate court cor
_______________
45 Rollo, pp. 3132.

46 Air France v. Carrascoso, et al., 124 Phil. 722 18 SCRA 155 (1966).
661
VOL. 451, FEBRUARY 17, 2005 661

rectly awarded McLoughlin Two Thousand US Dollars

(US$2,000.00) and Four Thousand Five Hundred
Australian dollars (AUS$4,500.00)
47
or their peso equivalent
at the time
48
of payment, being the amounts duly proven by
evidence. The alleged loss that took place prior to 16 April
1988 was not considered since the amounts alleged to have
been taken were not sufficiently established by evidence.
The appellate court also correctly awarded the sum of
P308,880.80, representing the peso value for the air fares
from 49Sydney to Manila and back for a total of eleven (11)
trips onehalf of P336,207.05
50
or P168,103.52 representing
payment to Tropicana onehalf of P152,683.57 or
51
P76,341.785 representing payment to Echelon
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51
P76,341.785 representing payment to Echelon Tower one
half of P179,863.20 or P89,931.60 for the taxi or
transportation expenses from McLoughlins residence to
Sydney Airport and from MIA52
to the hotel here in Manila,
for the eleven (11) trips onehalf of P7,801.94 53
or
P3,900.97 representing Meralco power expenses onehalf
of P356,400.00 or P178,000.00
54
representing expenses for
food and maintenance.
_______________
47 Zagala v. Jimenez, G.R. No. 33050, July 23, 1987, 152 SCRA 147.
According to the case of Phoenix Assurance Company v. Macondray &
Co., Inc., (64 SCRA 15) a judgment awarding an amount in U.S. dollars
may be paid with its equivalent amount in local currency based on the
conversion rate prevailing at the time of payment. If the parties cannot
agree on the same, the trial court should determine such conversion rate.
Needless to say, the judgment debtor may simply satisfy said award by
paying in full the amount in U.S. dollars.
48 Exh. V.
49 Exh. CC, p. 146.
50 Id. The Court of Appeals noted that during his stay in the
Philippines, McLoughlins time was not totally devoted to following up his
claim as he had business arrangements to look into.
51 Ibid.
52 Ibid.
53 Ibid. Expenses for power and airconditioning were separate from
room payment.
54 Ibid. Business losses were rejected because of lack of proof.
662

The amount of P50,000.00 for moral damages is reasonable.

Although trial courts are given discretion to determine the
amount of moral damages, the appellate court may modify
or change the amount awarded when it is palpably and
scandalously excessive. Moral damages are not intended to
enrich a complainant at the expense of a defendant. They
are awarded only to enable the injured party to obtain
means, diversion or amusements that will serve to alleviate
the moral suffering he has 55
undergone, by reason of
defendants culpable action.
The awards of P10,000.00 as exemplary damages and
P200,000.00 representing attorneys fees are likewise
sustained.
WHEREFORE, foregoing premises considered, the
Decision of the Court of Appeals dated 19 October 1995 is
hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso

equivalent at the time of payment
(2) P308,880.80, representing the peso value for the air
fares from Sydney to Manila and back for a total of
eleven (11) trips
(3) Onehalf of P336,207.05 or P168,103.52
representing payment to Tropicana Copacabana
Apartment Hotel
(4) Onehalf of P152,683.57 or P76,341.785
representing payment to Echelon Tower
(5) Onehalf of P179,863.20 or P89,931.60 for the taxi
or transportation expense from McLoughlins
residence to Sydney Airport and from MIA to the
hotel here in Manila, for the eleven (11) trips
_______________
55 Prudenciado v. Alliance Transport System, Inc., G.R. No. 33836,

March 16, 1987, 148 SCRA 440.
663
VOL. 451, FEBRUARY 17, 2005 663

(6) Onehalf of P7,801.94 or P3,900.97 representing

Meralco power expenses
(7) Onehalf of P356,400.00 or P178,200.00
representing expenses for food and maintenance
(8) P50,000.00 for moral damages
(9) P10,000.00 as exemplary damages and
(10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.
Puno (Chairman), Callejo, Sr. and ChicoNazario,

JJ., concur.
AustriaMartinez, J., No part.
Judgment affirmed.
Notes.Violation of a statutory duty is negligence per

se. (Cipriano vs. Court of Appeals, 263 SCRA 711 [1996])
An ordinary chambermaid does not fall under the two
classes of employees for which loss of confidence, if ably
supported by evidence, would normally apply. (Mabeza vs.
National Labor Relations Commission, 271 SCRA 670
[1997])
o0o
664
[No. 15825. November 5, 1920.]
CARMEN CASTELLVI DE HIGGINS and HORACE L.

HIGGINS, plaintiffs and appellants, vs. GEORGE C.
SELLNER, defendant and appellee.
1. CONTRACTS SURETY AND GUARANTY

COMPARATIVE JURISPRUDENCE CIVIL CODE
TRANSLATION IN ENGLISH "FIANZA,"
TRANSLATION IN ENGLISH.In the original Spanish
of the Civil Code now in force in the Philippine Islands,
Title XIV of Book IV is entitled "De la Fianza." The
Spanish word "fianza" is translated in the Washington
and Walton editions of the Civil Code "security." "Fianza"
appears in the Fisher translation as "suretyship."
2. ID. ID. ID. ID. "FIADOR," TRANSLATION IN

ENGLISH.The Spanish word "fiador" is found in all of
the English translations of the Civil Code as "surety."
3. ID. ID. ID. ID. SURETYSHIP AND GUARANTY IN

THE CIVIL LAW.The law of guaranty is not treated of
by that name in the Civil Code, although indirect
reference to the same is made in the Code of Commerce.
4. ID. ID. ID. ID. ID.In terminology at least, no

distinction is made in the Civil Code between the
obligation of a surety and that of a guarantor.
5. ID. ID. ID. ID. ID.The substantive law of the

Philippines, although having a civil law origin, can be
supplemented by a reference to the precepts of the law
merchant.
6. ID. ID. ID. DIFFERENCES UNDER AMERICAN

LAW.A surety and a guarantor are alike in that each
promises to answer for the debt or default of another.
7. ID. ID. ID. ID.A surety and a guarantor are unlike

in that the surety assumes liability as a regular party to
the undertaking, while the liability of the guarantor
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depends upon an independent agreement to pay the

obligation if the primary payor
143
VOL. 41, NOVEMBER 5, 1920. 143
Castellvi de Higgins and Higgins vs. Sellner.
fails to do so. A surety is charged as an original promissor

the engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary the
obligation of the guarantor is secondary.
8. ID. ID. ID. ID. CIVIL CODE PROVISIONS

COMPARED WITH AMERICAN DOCTRINE.What the
first portion of article 1822 of the Civil Code provides is
somewhat akin to the contract of guaranty, while what is
last provided is practically equivalent to the contract of
suretyship.
9. ID. ID. ID. ID. ID.When, in subsequent articles

found in section 1 of chapter II of the title concerning
fianza, of the Civil Code, the Code speaks of the effects of
suretyship between surety and creditor, it has, in
comparison with the common law, the effect of guaranty
between guarantor and creditor.
10. ID. ID. ID. ID. ID.The civil law suretyship is nearly
synonymous with the common law guaranty and the civil
law relation existing between codebtors liable in solidum
is similar to the common law suretyship.
11. ID. ID. INSTANT CASE.The defendant George C.

Sellner wrote to John T. Macleod, agent of the plaintiff,
Mrs. Horace L. Higgins, on May 31, 1915, a letter of the
following tenor: "Dear Sir: I hereby obligate and bind
myself, my heirs, successors and assigns that if the
promissory note executed the 29th day of May, 1915 by
the Keystone Mining Co., W. H. Clarke, and John Maye,
jointly and severally, in your favor and due six months
after date for P10,000 is not fully paid at maturity with
interest, I will, within .fifteen days after notice of such
default, pay you in cash the sum of P10,000 and interest
upon your surrendering to me the three thousand shares
of stock of the Keystone Mining Co. held by you as security
for the payment of said note." Held: That defendant
Sellner is a guarantor within the meaning of the

provisions of the Civil Code.

Manila. Del Rosario, J.
Wolfson, Wolfson & Schwarzkopf for appellants.
Williams & Ferrier for appellee.
MALCOLM, J.:
This is an action brought by plaintiffs to recover from

defendant the sum of P10,000. The brief decision of the
144

trial court held that the suit was premature, and absolved
the defendant from the complaint, with the costs against
the plaintiffs.
The basis of plaintiffs' action is a letter written by
defendant George C. Sellner to John T. Macleod, agent for
Mrs. Horace L. Higgins, on May 31, 1915, of the following
tenor:
"DEAR SIR: I hereby obligate and bind myself, my heirs,
successors and assigns that if the promissory note executed
the 29th day of May, 1915 by the Keystone Mining Co., W.
H. Clarke, and John Maye, jointly and severally, in your
favor and due six months after date for P10,000 is not fully
paid at maturity with interest, I will, within fifteen days
after notice of such default, pay you in cash the sum of P1
0,000 and interest upon your surrendering to me the three
thousand shares of stock of the Keystone Mining Co. held
by you as security for the payment of said note.
"Respectfully,
(Sgd.) "GEO. C. SELLNER."
Counsel for both parties agree that the only point at
issue is the determination of defendant's status in the
transaction referred to. Plaintiff s contend that he is a
surety defendant contends that he is a guarantor.
Plaintiffs also admit that if defendant is a guarantor,
articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in
the Philippine Islands, Title XIV of Book IV is entitled "De
la, Fianza." The Spanish word "fianza," is translated in the
Washington and Walton editions of the Civil Code as
"security." "Fianza" appears in the Fisher translation as

"suretyship." The Spanish word "fiador" is found in all of
the English translations of the Civil Code as "surety." The
law of guaranty is not treated of by that name in the Civil
Code, although indirect reference to the same is made in
the Code of Commerce. In terminology at least, no
distinction is made in the Civil Code between the obligation
of a surety and that of a guarantor.
145
VOL. 41, NOVEMBER 5, 1920. 145

As has been done in the State of Louisiana, where, like in

the Philippines, the substantive law has a civil law origin,
we f eel f ree to supplement the statutory law by a ref
erence to the precepts of the law merchant.
The points of difference between a surety and a
guarantor are familiar to American authorities. A surety
and a guarantor are alike in that each promises to answer f
or the debt or default of another. A surety and a guarantor
are unlike in that the surety assumes liability as a regular
party to the undertaking, while the liability of the
guarantor depends upon an independent agreement to pay
the obligation if the primary payor fails to do so. A surety is
charged as an original promissor the engagement of the
guarantor is a collateral undertaking. The obligation of the
surety is primary the obligation of the guarantor is
secondary. (See U. S. vs. Varadero de la Quinta [1919], 40
Phil., 48 Lachman vs. Block [1894], 46 La. Ann,, 649
Bedford vs. Kelley [1913], 173 Mich., 492 Brandt, on
Suretyship and Guaranty, sec. 1, cited approvingly by
many authorities.)
Turning back again to our Civil Code, we first note that
according to article 1822 "By fianza (security or suretyship)
one person binds himself to pay or perform for a third
person in case the latter should fail to do so." But "If the
surety binds himself in solidum with the principal debtor,
the provisions of Section fourth, Chapter third, Title first,
shall be applicable." What the first portion of the cited
article provides is, consequently, seen to be somewhat akin
to the contract of guaranty, while what is last provided is
practically equivalent to the contract of suretyship. When
in subsequent articles found in section 1 of Chapter II of
the title concerning fianza, the Code speaks of the effects of
suretyship between surety and creditor, it has, in
comparison with the common law, the effect of guaranty
between guarantor and creditor. The civil law suretyship

is, accordingly, nearly synonymous with the common law
guaranty and the civil law relationship existing between
codebtors liable in solidum is similar to the common law
suretyship.
146

It is perfectly clear that the obligation assumed by

defendant was simply that of a guarantor, or, to be more
precise, of the fiador whose responsibility is fixed in the
Civil Code. The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then, within
fifteen days after notice of such default and upon surrender
to him of the three thousand shares of Keystone Mining
Company stock, he will assume responsibility. Sellner is
not bound with the principals by the same instrument
executed at the same time and on the same consideration,
but his responsibility is a secondary one f ound in an
independent collateral agreement. Neither is Sellner
jointly and severally liable with the principal debtors.
With particular reference, therefore, to appellants'
assignments of error, we hold that defendant Sellner is a
guarantor within the meaning of the provisions of the Civil
Code.
There is also an equitable aspect to the case which
reenforces this conclusion. The note executed by the
Keystone Mining Company matured on November 29,
1915. Interest on the note was not accepted by the makers
until September 30, 1916. When the note became due, it is
admitted that the shares of stock used as collateral security
were selling at par that is, they were worth P30,000.
Notice that the note had not been paid was not given to the
defendant until just about three years, after it matured and
when the Keystone Mining Company stock was worthless.
Defendant, consequently, through the laches of plaintiff,
has lost possible chance to recoup, through the sale of the
stock, any amount which he might be compelled to pay as a
surety or guarantor. The "indulgence," as this word is used
in the law of guaranty, of the creditors of the principal, as
evidenced by the acceptance of interest, and by failure
promptly to notify the guarantor, may thus have served to
discharge the guarantor.
147
VOL. 41, NOVEMBER 10, 1920. 147

Feliciano vs. Limjuco and Calacalzada.
For quite different reasons, which, nevertheless, arrive at

the same result, judgment is affirmed, with costs of this
instance against the appellants. So ordered.
Johnson, Araullo, and Villamor, JJ., concur.

Mapa, C. ,J., and Avancea, J., concur in the result.
Judgment affirmed.
_______________
[No. 5447. March 1, 1910.]
PAUL REISS ET AL., plaintiffs and appellees, vs. JOSE

M.a MEMIJE, defendant and appellant.
STATUTE OF FRAUDS PROMISE TO PAY THE DEBT

OF ANOTHER CREDIT EXTENDED TO PROMISOR.
While, under the provisions of section 335 of the Code of Civil
Procedure, a special promise to answer for the debt of another
is not enforceable by action unless such promise or some note
or memorandum thereof be in writing and subscribed by the
party charged or by his authorized agent, taking into
consideration all the circumstances, as set forth in the opinion:
Held, That, in this case, the credit for the lumber sold and
delivered to the defendant's contractor, was extended solely
and exclusively to the defendant himself, under the verbal
agreement, and that, therefore, the case does not fall within
the provisions of the statute requiring certain agreements to be
made in writing.

Manila. Lobingier, J.

Jose Valera y Calderon, f or appellant.
Gibbs & Gale, for appellees,
CARSON, J.:
Defendant appellant entered into a contract with one

Buenaventura Kabalsa for the repair of a house in the city
of Manila. The contractor undertook to furnish the
necessary materials, including a considerable amount of
lumber, to be used in the repairs. The contractor being a
man of no commercial standing in the community was
unable to secure credit therefor, and was compelled to pay
cash for all purchases. Having no money and no credit he
was unable to continue the purchase of the necessary
lumber, plaintiffs, with whom he was dealing, absolutely
refusing to allow any lumber to leave their yard without
payment in advance. The work on the house being delayed
for the lack of the necessary materials, defendant
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accompanied the contractor to plaintiffs' lumber yard, and

after satisfying plaintiffs as to his own financial
responsibility, and that
351
VOL. 15, MARCH 1, 1910. 351

Reiss vs. Memije.
as a property owner and an attorney in active practice in

the city of Manila, he was good for the amount of lumber
needed in the repair of his house, he entered into an
agreement with them whereby they were to deliver the
necessary lumber to the contractor for use in the repair of
his house.
In pursuance of and in accordance with the directions of
the defendant, plaintiffs delivered to Kabalsa a
considerable amount of lumber which was used in the
repairs upon defendant's house, and judgment in this
action was rendered in favor of the plaintiffs for the proven
amount of the unpaid balance of the purchase price of this
lumber.
Appellant makes various assignments of error, and
contends: First, that the trial court erred in declining to
allow an amendment to defendant's answer for the purpose
of formally denying plaintiffs' allegations as to defendant's
guaranty of payment of the purchase price of the lumber
second, that the trial court erred in failing to set out in its
decision the finding of facts upon which the judgment rests
third, that the evidence of record does not sustain a finding
that the defendant did in fact assume responsibility for the
payment of the purchase price of the lumber delivered to
his contractor and fourth, that even if it be held that he
did so, then since the alleged promise, as set up by
plaintiffs in their evidence, merely guaranteed payment for
the lumber and was not in writing, proof thereof was not
admissible in evidence, and defendant was not bound
thereby, under the provisions of section 335 of the Code of
Civil Procedure.
,The alleged errors of procedure may be dismissed
without much discussion. We think a reading of the
judgment itself clearly discloses that the trial judge did in
fact make the necessary findings of fact, and that he
expressly held that, admitting all the evidence offered by
both parties, the evidence of record establishes the
existence of defendant's promise to pay for the lumber, and
discloses the existence of a balance due on account of the
lumber delivered to defendant's contractor. Without
considering whether, under the pleadings, the defendant's

evidence should have
352

Reiss vs. Memije.
.been stricken out of the record and his motion to amend

his answer denied, as appears to have been the opinion of
the trial court, we agree with the trial court that even if the
evidence be admitted and the complaint amended, the
weight of all the evidence, including the evidence thus
admitted, supports the plaintiffs' allegations touching
defendant's promise to pay for the lumber in question, and
establishes his contention that this lumber was in fact
delivered to the defendant's contractor, and by him used in
the construction of the house under the directions of the
defendant, and that the amount for which the judgment
was given in the court below was the amount of the unpaid
purchase price of the lumber thus delivered. If, therefore, it
was error of the trial court to rule that defendant's
evidence should be stricken from the record and that
defendant's answer should not be amended in accordance
with a motion for that purpose made three weeks after
judgment was rendered, it was at most error without
prejudice.
The only question that remains is defendant's contention
that his alleged guaranty of payment of the purchase price
of the lumber furnished at his request to his contractor
Kabalsa not being in writing, it is unenforceable in this
action.
Section 335 of Act No. 190 is as follows:
"In the following cases an agreement hereafter made
shall be unenforceable by action unless the same, or some
note or memorandum thereof, be in writing, and subscribed
by the party charged, or by his agent evidence, therefore,
of the agreement can not be received without the writing,
or secondary evidence of its contents:
* * * * * * *
"2. A special promise to answer for the debt, default, or

miscarriage of another"
* * * * * * *
An immense amount of litigation has arisen in England

and the United States over the construction of similar
provisions which are found in most, if not all, of the so

called
353
VOL. 15, MARCH 1, 1910. 353

Reiss vs. Memije.
statutes of fraud which have been enacted in those j

urisdictions, and many courts and text writers have
acknowledged their inability to find anything like uniform
rules of construction in the conflicting decisions which have
been rendered, applying the statute to the infinite variety
of facts which have presented themselves so that it has
been said by some that the law upon the subject is in a
state of hopeless confusion.
The true test as to whether a promise is within the
statute has been said to lie in the answer to the question
whether the promise is an original or a collateral one. If the
promise is an original or an independent one that is, if the
promisor becomes thereby primarily liable for the payment
of the debt, the promise is not within the statute. But, on
the other hand, if the promise is collateral to the agreement
of another and the promisor becomes thereby merely a
surety, the promise must be in writing. (Gull vs. Lindsay, 4
Exch. 45 and other cases cited under note 2, p. 906,
Encyclopedia of Law, vol. 29.)
Just what is the character of a promise as original or
collateral is a question of law and fact which must in each
case be determined from the evidence as to the language
used in making the promise, and the circumstances under
which the promise was made and, since as a general rule
the parties making a promise of this nature rarely
understand the legal and technical difference between an
original and a collateral promise, the precise form of words
used, even when established by undisputed testimony is
not always conclusive. So that it is said that "While, as a
matter of law, a promise, absolute in f orm, to pay or to be
'responsible' or to be the 'paymaster/ is an original promise,
and while, on the other hand, if the promisor says, 'I will
see you paid/ or 'I will pay if he does not/ or uses equivalent
words, the promise standing alone is collateral, yet under
all the circumstances of the case, an absolute promise to
pay, or a promise to be 'responsible/ may be found to be
collateral, or promises deemed prima facie collateral may
be adjudged
354

Reiss vs. Memije.
original." (Encyclopedia of Law, 2d ed., vol. 29, p. 907, and

many cases there cited.)
If goods are sold upon the sole credit and responsibility
of the party who makes the promise, then, even though
they be delivered to a third person, there is no liability of
the third person to which that of the party promising can
be collateral, and consequently such a promise to pay does
not 'require a memorandum in writing and on the same
principle it has been held that when one advances money
at the request of another (on his promise to repay it) to pay
the debt of a third party, as the payment creates no debt
against such third party, not being made at all upon his
credit, the liability of the party on whose request and
promise it was made is original and not collateral, and not
within the Statute of Frauds. (Pearce vs. Blagrave, 3 Com
Law, 338 Prop'rs. of Upper Locks vs. Abbott, 14 N. H.,
157.) But it has been said that if the person for whose
benefit the promise is made was himself liable at all, the
promise of the defendant must be in writing. (Matson vs.
Wharam, 2 T. R., 80.) And the text writers point out that if
this rule be understood as confined to cases where a third
party and the defendant are liable in the same way, and to
do the same thing, one as principal and the other as surety,
it may be accepted as the uniform doctrine of all the cases
both in England and in the United States. (Browne on the
Statute of Frauds, par. 197, and cases there cited.) In such
cases, the defendant is said to come in aid to procure the
credit to be given to the principal debtor, and the question,
therefore, ultimately is "upon whose credit the goods were
sold or the money advanced, or whatever other thing done
which the defendant by his promise procured to be done"
and where the defendant stands in the relation to the third
party of surety to principal "if any credit at all be given to
the third party, the defendant's promise is required to be in
writing as collateral." (Browne on the Statute of Frauds, p.
227, and notes 2 and 4.) But it must
355
VOL. 15, MARCH 1, 1910. 355

Reiss vs. Memije.
be clearly recognized that these principles are applicable

only where the parties are liable in the same way to do the
same thing, one as principal and the other as surety, for if

the credit is given to both jointly, since neither can be said
to be surety for the other to the creditor, their engagement
need not be in writing.
As has been said before, it is frequently a matter of
difficulty to determine to whom the credit has actually
been given, whether to the defendant alone, in which case
the debt is his own and his promise is good without writing
or in part to the third party, in which case the defendant's
promise being collateral to and in aid of the third party's
liability, requires a writing to support it, or to both jointly,
in which case as has been said their engagement need not
be in writing. This must be determined f rom the language
and expressions used by the parties promising, and from an
examination of the circumstances showing the
understanding of the parties. The unexplained fact that
charges were made against a third party on the plaintiffs'
books, or that the bill was presented to the original debtor
in the first instance, unqualified by special circumstances,
tends to prove that the credit was given in whole or in part
to him, and that the defendant's promise is a collateral one.
(Larson vs. Wyman, 14 Wend, (N. Y.), 246 Pennell vs.
Pentz, 4 E. D. Smith (N. Y.), 639.) But it is evidently quite
impossible to specify any one fact or set of facts on which
the question as to whom the plaintiff gave credit is to be
determined. In the language of Buchanan, C. J., in Elder
vs. Warfield (7 Harris & J. (Md.), 397), "the extent of the
undertaking, the expression used, the situation of the
parties, and all the circumstances of the case should be
taken into consideration."
Application of these principles has been made in many
cases where owners of buildings going up under contract
enter into agreements upon the faith of which
subcontractors or others have continued to supply labor or
material
356

Reiss vs. Memije,
after the principal contractor has become either actually or

probably unable to pay. In these cases, the question is
whether the services for which the action is brought
against the owner of the building were performed solely
upon the credit of his promise, to be himself responsible
and to pay for the materials and labor furnished, or
whether the subcontractors and laborers continued to
furnish labor and materials to the principal contractor

relying upon his obligation guaranteed by the promise of
the owner. (Gill vs. Herrick, 111 Mass., 501 Walker vs.
Hill, 119 Mass., 249 Cliff ord vs. Luhring, 69 111., 401
Rawson vs, Springsteen, 2 Thomp, & C. (N. Y.), 416
Belknap vs. Bender, 6 Thomp. & C, (N. Y.), 611 Jefferson
County vs. Slagle, 66 Pa. St., 202, See Eshleman vs.
Harnish, 76 Pa, St., 97 Haverly vs. Mercur, 78 Pa. St., 257
Weyand vs. Critchfield, 3 Grant (Pa.), 113 Lakeman vs.
Mountstephen, L. R. 7 H. L., 17.)
Taking into consideration all the circumstances of the
case at bar, we are satisfied that the credit for the lumber
delivered by the plaintiffs to defendant's contractor was
extended solely and exclusively to the defendant under the
verbal agreement had with him, and therefore, that the
provisions of the statute did not require that it should be
made in writing. Defendant admitted on the stand that his
contractor had no commercial credit or standing in the
community, and it appears that plaintiffs, after
investigation, absolutely refused to extend him any credit
whatever upon any conditions and that the defendant was
well aware of that fact. From the testimony of the
contractor himself, it seems clear that when the agreement
for the delivery of lumber was made, the credit was
extended not to the contractor but to the defendant. It
appears that both plaintiffs and defendant exercised
especial precautions to see that all the lumber was
delivered on defendant's lot, and that before each bill of
lumber was delivered, defendant carefully examined the
invoice, which by agreement was
357
VOL. 15, MARCH 1, 1910. 357

Reiss vs. Memije.
submitted to him, and that no lumber was delivered

without his approval. The precise language in which the
verbal agreement was made does not appear from the
evidence, and while it is true that one of the plaintiffs in
his deposition, made in the United States, refers to the
agreement as one whereby defendant "guaranteed"
payment for the lumber, we are satisfied from all the
evidence that the word was not used by this witness in its
technical sense, and that he did not mean thereby to say
that defendant guaranteed payment by the contractor, but
rather that after satisfying plaintiffs as to his own financial
responsibility, he obligated himself to pay for the lumber

delivered to his contractor for use in his house. The only
evidence in the whole record which tends to put our
conclusion in this regard in doubt, is the testimony of
plaintiffs' acting manager during plaintiffs' absence in the
United States who stated that he sent a statement of
account and a bill for the lumber to the contractor but this
fact, which under ordinary circumstances would be strong
evidence that the credit was originally extended to the
contractor and merely guaranteed by the defendant, was
satisfactorily and sufficiently explained by proof that the
plaintiff s were compelled to leave for the United States
quite unexpectedly, with no opportunity to go over the
accounts with their acting manager, who was left in charge,
so that the latter having no knowledge whatever as to
plaintiffs' agreement with defendant, and learning that
lumber had been delivered to the contractor, supposed that
it had been sold to him, and only discovered his mistake on
later investigation and correspondence with his principals,
after the contractor had notified him as to the true nature
of the transaction.
The judgment appealed from should be affirmed with
the costs of this instance against the appellant. So ordered.
Arellano, C. J., Torres, Mapa, Johnson, and Moreland,

JJ., concur.
Judgment affirmed.
358

United States vs. Insierto.
[No. 16666. April 10, 1922]
ROMULO MACHETTI, plaintiff and appellee, vs.

HOSPICIO DE SAN JOSE, defendant and appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE
ISLANDS, defendant and appellant.
1. CONTRACT OF GUARANTY.Machetti, by contract in

writing, agreed to erect a building f or the Hospicio de San
Jose. The def endant Surety Company made the f ollowing
endorsement in the English language upon the contract:
"For value. received we hereby guarantee compliance with
the terms and conditions as outlined in the above
contract." Held: That the terms of the en
298
Machetti vs. Hospicio de San Jose and Fidelity & Surety Co.
dorsement must be given the signification which

ordinarily attaches to them in the language in which the
endorsement was written and that the obligation of the
Surety Company was one of guaranty and not of
suretyship or fianza solidaria.
2. DISTINCTION BETWEEN GUARANTOR AND SURETY.

A guarantor is the insurer of the solvency of the debtor
a surety is an insurer of the debt. A guarantor binds
himself to pay if the principal is unable to pay a surety
undertakes to pay if the principal does not pay.
3. LIABILITY OF GUARANTOR INSOLVENCY OF

PRINCIPAL.A guarantor cannot be compelled to pay
until it is shown that the principal is unable to pay and
such inability is not sufficiently shown by the mere fact
that he has been declared insolvent under the present
Insolvency Law in which the extent of the insolvent's
inability to pay is not determined until the final
liquidation of his estate.
http://central.com.ph/sfsreader/session/0000015cda1337790ebf2e0d003600fb002c009e/t/?o=False 1/5

Manila. Concepcion, J.
Ross & Lawrence and Wolfson, Wolfson &
Schwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one

Romulo Machetti, by a written agreement, undertook to
construct a building on Calle Rosario in the city of Manila
for the Hospicio de San Jose, the contract price being of
P64,000. One of the conditions of the agreement was that
the contractor should obtain the "guarantee" of the Fidelity
and Surety Company of the Philippine Islands to the
amount of P12,800 and the following endorsement in the
English language appears upon the contract
"MANILA, July 15, 1916.

"For value received we hereby guarantee compliance with the
terms and conditions as outlined in the above contract.
"FIDELITY & SURETY COMPANY OF THE PHILIPPINE
ISLANDS.
(Sgd.) "OTTO VORSTER,
"VicePresident"
299
VOL. 43, APRIL 10, 1922 299

Machetti vs. Hospicio de San Jose and Fidelity & Surety
Co.
Machetti constructed the building under the supervision of

architects representing the Hospicio de San Jose and, as
the work progressed, payments were made to him f rom
time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the
sum of P4,978.08, was paid. Subsequently it was found that
the work had not been carried out in accordance with the
specifications which formed part of the contract and that
the workmanship was not of the standard required, and the
Hospicio de San Jose therefore refused to pay the balance
of the contract price. Machetti thereupon brought this
action, the complaint being filed May 28, 1917. On January
28, 1918, the Hospicio de San Jose answered the complaint
and presented a counterclaim for damages for the partial
noncompliance with the terms of the agreement

abovementioned, in the total sum of P71,350. After issue
was thus joined, Machetti, on petition of his creditors, was,
on February 27, 1918, declared insolvent and on March
4,1918, an order was entered suspending the proceeding in
the present case in accordance with section 60 of the
Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a
motion asking that the Fidelity and Surety Company be
made crossdefendant to the exclusion of Machetti and that
the proceedings be continued as to said company, but still
remain suspended as to Machetti. This motion was granted
and on February 7, 1920, the Hospicio filed a complaint
against the Fidelity and Surety Company asking for a
judgment for P12,800 against the company upon its
guaranty. After trial, the Court of First Instance rendered
judgment against the Fidelity and Surety Company for
P12,800 in accordance with the complaint. The case is now
before this court upon appeal by the Fidelity and Surety
Company from said judgment.
As will be seen, the original action in which Machetti
was the plaintiff and the Hospicio de San Jose defendant,
has been converted into an action in which the Hospicio de
San Jose is plaintiff and the Fidelity and Surety Company,
300

Machetti vs. Hospicio de San Jose and Fidelity & Surety
Co.
the original plaintiff's guarantor, is the defendant,

Machetti having been practically eliminated from the case.
We think the court below erred in proceeding with the
case against the guarantor while the proceedings were
suspended as to the principal. The guaranty in the present
case was for a future debt of unknown amount and even
regarding the guaranty as an ordinary fianza under the
Civil Code, the surety cannot be held responsible until the
debt is liquidated. (Civil Code, art. 1825.)
But in this instance the guarantor's case is even
stronger than that of an ordinary surety. The contract of
guaranty is written in the English language and the terms
employed must of course be given the signification which
ordinarily attaches to them in that language. In English
the term "guarantor" implies an undertaking of guaranty,
as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or
"guaranty" circumstances may be shown which convert the

contract into one of suretyship but such circumstances do
not exist in the present case on the contrary it appears
affirmatively that the contract is the guarantor's separate
undertaking in which the principal does not join, that it
rests on a separate consideration moving f rom the
principal and that although it is written in continuation of
the contract for the construction of the building, it is a
collateral undertaking separate and distinct from the
latter. All of these circumstances are distinguishing
features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal
does not pay, the guarantor only binds himself to pay if the
principal cannot pay. The one is the insurer of the debt, the
other an insurer of the solvency of the debtor. (Saint vs.
Wheeler & Wilson Mfg. Co., 95 Ala., 362 Campbell vs.
Sherman, 151 Pa. St., 70 Castellvi de Higgins and Higgins
vs. Sellner, 41 Phil., 142 U. S. vs. Varadero de la Quinta,
40 Phil., 48.) This latter liability is what the Fidelity and
Surety Company assumed in the present case. The
undertaking is perhaps not exactly that of a fianza
301
VOL. 43, APRIL 15, 1922 301

Manotoc vs. Smith
under the Civil Code, but it is a perfectly valid contract and

must be given the legal effect it ordinarily carries. The
Fidelity and Surety Company having bound itself to pay
only in the event its principal, Machetti, cannot pay it
follows that it cannot be compelled to pay until it is shown
that Machetti is unable to pay. Such inability may be
proven by the return of a writ of execution unsatisfied or by
other means, but is not sufficiently established by the mere
f act that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent of the
insolvent's inability to pay is not determined until the final
liquidation of his estate.
The judgment appealed from is therefore reversed
without costs and without prejudice to such right of action
as the crosscomplainant, the Hospicio de San Jose, may
have after exhausting its remedy against the plaintiff
Machetti. So ordered.
Araullo, C. J., Malcolm, Villamor, Johns, and

Romualdez, JJ., concur.
Judgment reversed.
_________
VOL. 61, NOVEMBER 15, 1974 67

Piczon vs. Piczon
*
No. L29139. November 15, 1974.
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.

ALCANTARA, plaintiffsappellants, vs. ESTEBAN
PICZON and SOSINGLOBOS & CO., INC., defendants
appellees.
Civil law Contracts Interpretation of Contracts The plain

terms of a contract should be adhered to by the parties.
Appellants first assignment of error is well taken. Instead of
requiring appellees to pay interest at 12% only from August 6,
1964, the trial court should have adhered to the terms of the
agreement which plainly provides that Esteban Piczon had
obligated SosingLobos and Co., Inc. and himself to return or pay
(to Piczon and Co., Inc.) the same amount (P12,500.00) with
Twelve Per Cent (12%) interest per annum commencing from the
date of the execution hereof, Annex A, which) was on September
28, 1956. Under Article 2209 of the Civil Code (i)f the obligation
consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six
per cent per annum. In the case at bar, the interest agreed
upon by the parties in Annex A was to commence from the
execution of said document.
Same Obligations An obligation to pay interest is due
without need of demand where the contract stipulates from what
time interest will be counted.Appellees contention that the
reference in Article 2209 to delay incurred by the debtor which
can serve as the basis for liability for interest is to that defined in
Article 1169 of the Civil Code
________________
* SECOND DIVISION.
http://central.com.ph/sfsreader/session/0000015cda149a0bf1735ac0003600fb002c009e/t/?o=False 1/8
68
Piczon vs. Piczon
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held

that the article cited by appellees (which was Article 1100 of the
Old Civil Code read in relation to Art. 1101) is applicable only
when the obligation is to do something other than the payment of
money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104
Phil. 920, the Court squarely ruled that if the contract stipulates
from what time interest will be counted, said stipulated time
controls, and, therefore interest is payable from such time, and
not from the date of the filing of the complaint. Were that not the
law, there would be no basis for the provision of Article 2212 of
the Civil Code providing that (I)nterest due shall earn legal
interest from the time it is judicially demanded, although the
obligation may be silent upon this point.
Same Same Guaranty Surety A party may not be considered
a surety where the contract itself stipulates that he is acting only
as a guarantor.As regards the other two assignments of error,
appellants pose cannot be sustained. Under the terms of the
contract, Annex A, Esteban Piczon expressly bound himself only
as guarantor, and there are no circumstances in the record from
which it can be deduced that his liability could be that of a surety.
A guaranty must be express, (Article 2055, Civil Code) and it
would be violative of the law to consider a party to be bound as a
surety when the very word used in the agreement is guarantor.
Pleadings The payment of legal interest upon interest due is
barred by failure to pray for it in the pleading.Appellants
prayer for payment of legal interest upon interest due from the
filing of the complaint can no longer be entertained, the same not
having been made an issue in the pleadings in the court below.
We do not believe that such a substantial matter can be deemed
included in a general prayer for any other relief just and
equitable in the premises, especially when, as in this case, the
pretrial order does not mention it in the enumeration of the
issues to be resolved by the court.

Samar, Pamaran, J.:

Vicente C. Santos for plaintiffsappellants.
Jacinto R. Bohol for defendantappellee SosingLobos

& Co., Inc.
Vicente M. Macabidang for defendantappellee
Esteban Piczon.
69
VOL. 61, NOVEMBER 15, 1974 69

Piczon vs. Piczon
BARREDO, J.:
Appeal from the decision of the Court of First Instance of

Samar in its Civil Case No. 5156, entitled Consuelo P.
Piczon, et al. vs. Esteban Piczon, et al., sentencing
defendantsappellees, Sosing Lobos and Co., Inc., as
principal, and Esteban Piczon, as guarantor, to pay
plaintiffsappellants the sum of P12,500.00 with 12%
interest from August 6, 1964 until said principal amount of
P12,500.00 shall have been duly paid, and the costs.
After issues were joined and at the end of the pretrial
held on August 22, 1967, the trial court issued the
following order:
When this case was called for pretrial, plaintiffs and defendants
through their lawyers, appeared and entered into the following
agreement:
1. That defendants admit the due execution of Annexes A

and B of the complaint
2. That consequently defendant SosingLobos and Co., Inc.
binds itself to the plaintiffs for P12,500.00, the same to be
paid on or before October 31, 1967 together with the
interest that this court may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00

commence to run from August 6, 1964 when plaintiffs
made the first demand or from August 29,1956 when the
obligation becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a
surety?
That the parties are hereby required to file their respective

memorandum if they so desire on or before September 15, 1967 to
discuss the legal issues and therewith the case will be considered
submitted for decision.
WHEREFORE, the instant case is hereby considered

submitted based on the aforesaid facts agreed upon and upon
submission of the parties of their respective memorandum on or
before September 15,
1
1967.
SO ORDERED. (Record on Appeal pp. 2830.)
________________
1 Annex B is a document entitled Mutual Quit Claims. Cessions and

Amicable Settlement under which the right of action of Piczon and Co.,
Inc. under Annex A was transferred to the heirs of Alejandro Piczon who
are the appellants.
70

Piczon vs. Piczon
Annex A, the actionable document of appellants reads

thus:
AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and

resident of and with postal address in the municipality of
Catbalogan, Province of Samar, Philippines, in my capacity as the
President of the corporation known as the SOSINGLOBOS and
CO., INC., as controlling stockholder, and at the same time as
guarantor for the same, do by these presents contract a loan of
Twelve Thousand Five Hundred Pesos (P12,500.00), Philippine
Currency, the receipt of which is hereby acknowledged, from the
Piczon and Co., Inc another corporation, the main offices of the
two corporations being in Catbalogan, Samar, for which I
undertake, bind and agree to use the loan as surety cash deposit
for registration with the Securities and Exchange Commission of
the incorporation papers relative to the SosingLobos and Co.,
Inc., and to return or pay the same amount with Twelve Per Cent
(12%) interest per annum, commencing from the date of execution
hereof, to the Piczon and Co., Inc., as soon as the said
incorporation papers are duly registered and the Certificate of
Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in
Catbalogan, Samar, Philippines, this 28th day of September,
1956.
(Sgd.) ESTEBAN PICZON
(Record on Appeal, pp. 67.)

The trial court having rendered judgment in the tenor

aforequoted, appellants assign the following alleged errors:
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT

OF 12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM
AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28,
1956, WHEN ANNEX A WAS DULY EXECUTED.
II
THE TRIAL COURT ERRED IN CONSIDERING

DEFENDANT ESTEBAN PICZON AS GUARANTOR ONLY
AND NOT AS SURETY.
III
THE TRIAL COURT ERRED IN NOT ADJUDICATING

DAMAGES IN FAVOR OF THE PLAINTIFFSAPPELLANTS.
(Appellants Brief, pp. a to b.)
Appellants first assignment of error is well taken. Instead

of requiring appellees to pay interest at 12% only from
August 6,
71
VOL. 61, NOVEMBER 15, 1974 71

Piczon vs. Piczon
1964, the trial court should have adhered to the terms of

thefffs agreement which plainly provides that Esteban
Piczon had fobligated SosingLobos and Co., Inc. and
himself to return or pay (to Piczon and Co., Inc.) the same
amount (P12.500.00) with Twfelve Per Cent (12%) interest
per annum commencing from the dfsate of the execution
hereof, Annex A, which was on Septemfber 28, 1956.
Under Article 2209 of the Civil Code (i)f the obligfation
consists in the payment of a sum of money, and the debtor
fincurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the
interest agfreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum. In the case
at bar, the interest agreed upon by the parties in Annex A
was to commence from the execution of said document.
Appellees contention that the reference in Article 2209
to delay incurred by the debtor which can serve as the basis
for liability for interest is to that defined in Article 1169 of
the Civil Code reading tfhus:
Those obliged to deliver or to do something incur in delay from

the time the obligee judicially or extrajudicially demands from
them the fulfillment of their ofbligation. However, the demand byf
the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declares or

(2) When from the natusre and the circumstances of the
obligation it appears that tshe designation of the time
when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of
the contract or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
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.
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it
was held that the article cited by appellees (which was
Article 1100 of the Old Civil Code read in relation to Art.
1101) is applicable only when the obligation is to do
something other than the payment of money. And in
Firestone Tire & Rubber Co ( P I ) vs. Delgado, 104 Phil.
920, the Court squarely ruled that if the contract stipulates
from what time interest will be counted, said stipulated
time controls, and, therefore interest is
72

Piczon vs. Piczon
payable from such time, and not from the date of the filing
of the complaint (at p. 925). Were that not the law, there
would be no basis for the provision of Article 2212 of the
Civil Code providing that (I)nterest due shall earn legal
interest from the time it is judicially demanded, although
the obligation may be silent upon this point. Incidentally,
appellants would have been entitled to the benefit of this
article, had they not failed to plead the same in their
complaint. Their prayer for it in their brief is much too late.
Appellees had no opportunity to meet the issue squarely at
the pretrial.
As regards the other two assignments of error,
appellants pose cannot be sustained. Under the terms of
the contract, Annex A, Esteban Piczon expressly bound
himself only as guarantor, and there are no circumstances

in the record from which it can be deduced that his liability
could be that of a surety. A guaranty must be express,
(Article 2055, Civil Code) and it would be violative of the
law to consider a party to be bound as a surety when the
very word used in the agreement is guarantor.
Moreover, as well pointed out in appellees brief, under
the terms of the pretrial order, appellants accepted the
express assumption of liability by SosingLobos & Co., Inc.
for the payment of the obligation in question, thereby
modifying their original posture that inasmuch as that
corporation did not exist yet at the time of the agreement,
Piczon necessarily must have bound himself as insurer.
As already explained earlier, appellants prayer for
payment of legal interest upon interest due from the filing
of the complaint can no longer be entertained, the same not
having been made an issue in the pleadings in the court
below. We do not believe that such a substantial matter can
be deemed included in a general prayer for any other relief
just and equitable in the premises, especially when, as in
this case, the pretrial order does not mention it in the
enumeration of the issues to be resolved by the court.
PREMISES CONSIDERED, the judgment of the trial
court is modified so as to make appellees liable for the
stipulated interest of 12% per annum from September 28,
1956, instead of August 6, 1964. In all other respects, said
judgment is affirmed. Costs against appellees.
73
VOL. 61, NOVEMBER 15, 1974 73

People vs. Caoile
Fernando (Chairman), Antonio, Fernandez and

Aquino, JJ., concur.
Notes.Guaranty distinguished from suretyship.

Fiador is a person who guarantees payment of the debt
of another, guaranty under Art. 1137 of the Spanish Civil
Code, being the obligation undertaken by a person who
binds himself to pay or perform for a third person in case
the latter fails to do so, unless he expressly binds himself
in solidum. (Agcaoili v. Agcaoili, L3331, September 28,
1951).
Where a third person signing a promissory note given by
husband and wife as principal debtors especially stated
that he was fiador that the spouses would pay the above
mentioned debt, he was only a guarantor, not a surety. Id.
LEGAL RESEARCH SERVICE
See SCRA Quick IndexDigest, volume one, page 959 on

Guaranty.
See also SCRA Quick IndexDigest, volume two, page
1976 on Suretyship.
o0o
VOL. 475, NOVEMBER 15, 2005 149

International Finance Corporation vs. Imperial Textile
Mills, Inc.
*
G.R. No. 160324. November 15, 2005.
INTERNATIONAL FINANCE CORPORATION,

**
petitioner,
vs. IMPERIAL TEXTILE MILLS, INC., respondent.
Obligations and Contracts Suretyship Guarantee Where if

the agreement referred to a corporation as a guarantor but at the
same time specifically stated that the corporation was jointly and
severally liable, further stating that it was a primary obligor, not
a mere surety, at bottom, and to all intents and purposes, it means
it was a surety.While referring to ITM as a guarantor, the
Agreement specifically stated that the corporation was jointly
and severally liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary
obligor, not a mere surety. Those stipulations meant only one
thing: that at bottom, and to all
_______________
* THIRD DIVISION.
** The Petition included Philippine Polyamide Industrial Corporation (PPIC)

as a respondent. Petitioner subsequently manifested that it had no knowledge of
PPICs present address and that it received no pleading from any lawyer
purporting to act for the corporation, which moreover failed to appeal the trial
courts Decision to the CA (Compliance and Manifestation Rollo, pp. 147148).
Consequently, this Court considered the case against PPIC as closed (Resolution
dated February 28, 2005).
150
International Finance Corporation vs. Imperial Textile Mills, Inc.
http://central.com.ph/sfsreader/session/0000015cda165faddf86abbf003600fb002c009e/t/?o=False 1/16
legal intents and purposes, it was a surety. Indubitably therefore,

ITM bound itself to be solidarily liable with PPIC for the latters
obligations under the Loan Agreement with IFC. ITM thereby
brought itself to the level of PPIC and could not be deemed merely
secondarily liable.
Same Same Same Words and Phrases Jointly and
Severally When qualified by the term jointly and severally, the
use of the word guarantor to refer to a surety does not violate
the law.The Court does not find any ambiguity in the provisions
of the Guarantee Agreement. When qualified by the term jointly
and severally, the use of the word guarantor to refer to a
surety does not violate the law. As Article 2047 provides, a
suretyship is created when a guarantor binds itself solidarily with
the principal obligor. Likewise, the phrase in the Agreementas
primary obligor and not merely as suretystresses that ITM is
being placed on the same level as PPIC. Those words emphasize
the nature of their liability, which the law characterizes as a
suretyship.
Same Same Same Same The use of the word guarantee
does not ipso facto make the contract one of guaranty.The use of
the word guarantee does not ipso facto make the contract one of
guaranty. This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be
bound by a primary or an independent obligation. The very terms
of a contract govern the obligations of the parties or the extent of
the obligors liability. Thus, this Court has ruled in favor of
suretyship, even though contracts were denominated as a
Guarantors Undertaking or a Continuing Guaranty.
Contracts have the force of law between the parties, who are free
to stipulate any matter not contrary to law, morals, good customs,
public order or public policy. None of these circumstances are
present, much less alleged by respondent. Hence, this Court
cannot give a different meaning to the plain language of the
Guarantee Agreement.
Same Same Same Same The literal meaning of the
stipulations control when the terms of the contract are clear and
there is no doubt as to intention of the parties.The finding of
solidary liability is in line with the premise provided in the
Whereas clause of the Guarantee Agreement. The execution of
the Agreement was a condition precedent for the approval of
PPICs loan from IFC. Consistent
151
VOL. 475, NOVEMBER 15, 2005 151
International Finance Corporation vs. Imperial

http://central.com.ph/sfsreader/session/0000015cda165faddf86abbf003600fb002c009e/t/?o=False Textile Mills, Inc. 2/16
with the position of IFC as creditor was its requirement of a

higher degree of liability from ITM in case PPIC committed a
breach. ITM agreed with the stipulation in Section 2.01 and is
now estopped from feigning ignorance of its solidary liability. The
literal meaning of the stipulations control when the terms of the
contract are clear and there is no doubt as to the intention of the
parties.
Same Same Although a surety contract is secondary to the
principal obligation, the liability of the surety is direct, primary
and absolute, or equivalent to that of the regular party to the
undertakinga surety becomes liable to the debt and the duty of
the principal obligor even without possessing a direct or personal
interest in the obligations constituted by the latter.We note that
the CA denied solidary liability, on the theory that the parties
would not have executed a Guarantee Agreement if they had
intended to name ITM as a primary obligor. The appellate court
opined that ITMs undertaking was collateral to and distinct from
the Loan Agreement. On this point, the Court stresses that a
suretyship is merely an accessory or a collateral to a principal
obligation. Although a surety contract is secondary to the
principal obligation, the liability of the surety is direct, primary
and absolute or equivalent to that of a regular party to the
undertaking. A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal
interest in the obligations constituted by the latter.


Sycip, Salazar, Hernandez & Gatmaitan for
petitioner.
Cayanga, Zuiga and Angel Law Offices for
respondent.
PANGANIBAN, J.:
The terms of a contract govern the rights and obligations of

the contracting parties. When the obligor undertakes to be
jointly and severally liable, it means that the obligation is
solidary. If solidary liability was instituted to guarantee a
principal obligation, the law deems the contract to be one of
suretyship.
152

Mills, Inc.
The creditor in the present Petition was able to show

convincingly that, although denominated as a Guarantee
Agreement, the Contract was actually a surety.
Notwithstanding the use of the words guarantee and
guarantor, the subject Contract was indeed a surety,
because its terms were clear and left no doubt as to the
intention of the parties.
The Case
1
Before us is a Petition for Review under Rule 45 of the2
Rules of Court, assailing the February
3
28, 2002 Decision
and September 30, 2003 Resolution of the Court of Appeals
(CA) in CAG.R. CV No. 58471. The challenged Decision
disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The

decision of the trial court is MODIFIED to read as follows:
1. Philippine Polyamide Industrial Corporation is

ORDERED to pay [Petitioner] International Finance
Corporation, the following amounts:
(a) US$2,833,967.00 with accrued interests as provided in the

Loan Agreement
(b) Interest of 12% per annum on accrued interest, which
shall be counted from the date of filing of the instant
action up to the actual payment
(c) P73,340.00 as attorneys fees
(d) Costs of suit.
2. The guarantor Imperial Textile Mills, Inc. together with

Grandtex is HELD secondarily liable to pay the amount
herein adjudged
4
to [Petitioner] International Finance
Corporation.
_______________
1 Rollo, pp. 317.

2 Id., pp. 2741. Special Fifteenth Division. Penned by Justice Oswaldo
D. Agcaoili (Division chairperson), with the concurrence of Justices Jose L.
Sabio, Jr. and Josefina GuevaraSalonga (members).
3 Id., p. 43.
4 Id., pp. 4041.
153
VOL. 475, NOVEMBER 15, 2005 153

Mills, Inc.
The assailed Resolution denied both parties respective

Motions for Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
On December 17, 1974, [Petitioner] International Finance

Corporation (IFC) and [Respondent] Philippine Polyamide
Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC extended to PPIC a loan of US$7,000,000.00, payable
in sixteen (16) semiannual installments of US$437,500.00 each,
beginning June 1, 1977 to December 1, 1984, with interest at the
rate of 10% per annum on the principal amount of the loan
advanced and outstanding from time to time. The interest shall be
paid in US dollars semiannually on June 1 and December 1 in
each year and interest for any period less than a year shall accrue
and be prorated on the basis of a 360day year of twelve 30day
months.
On December 17, 1974, a Guarantee Agreement was executed
with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) and IFC as parties
thereto. ITM and Grandtex agreed to guarantee PPICs
obligations under the loan agreement.
PPIC paid the installments due on June 1, 1977, December 1,
1977 and June 1, 1978. The payments due on December 1, 1978,
June 1, 1979 and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC
served a written notice of default to PPIC demanding the latter to
pay the outstanding principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and its interests.
By virtue of PPICs failure to pay, IFC, together with DBP,
applied for the extrajudicial foreclosure of mortgages on the real
estate, buildings, machinery, equipment plant and all
improvements owned by PPIC, located at Calamba, Laguna, with
the regional sheriff of Calamba, Laguna. On July 30, 1985, the
deputy sheriff of Calamba, Laguna issued a notice of extrajudicial
sale. IFC and DBP were the only bidders during the auction sale.
IFCs bid was for P99,269,100.00 which was equivalent to
US$5,250,000.00 (at the prevailing exchange rate of P18.9084 =

US$1.00). The outstanding
154

loan, however, amounted to US$8,083,967.00 thus leaving a

balance of US$2,833,967.00. PPIC failed to pay the remaining
balance.
Consequently, IFC demanded ITM and Grandtex, as
guarantors of PPIC, to pay the outstanding balance. However,
despite the demand made by IFC, the outstanding balance
remained unpaid.
Thereafter, on May 20, 1988, IFC filed a complaint with the
RTC of Manila against PPIC and ITM for the payment of the
outstanding balance plus interests and attorneys fees.
The trial court held PPIC liable for the payment of the
outstanding loan plus interests. It also ordered PPIC to pay IFC
its claimed attorneys fees. However, the trial court relieved ITM
of its obligation as guarantor. Hence, the trial court dismissed
IFCs complaint against ITM.
x x x x x x x x x
Thus, apropos the decision 5dismissing the complaint against
ITM, IFC appealed [to the CA].
Ruling of the Court of Appeals
The CA reversed the Decision of the trial court, insofar as

the latter exonerated ITM from any obligation to IFC.
According to the appellate court, ITM bound itself under
the Guarantee
6
Agreement to pay PPICs obligation upon
default. ITM was not discharged from its obligation as
guarantor
7
when PPIC mortgaged the latters properties to
IFC. The CA, however, held that ITMs liability as a
guarantor would arise only if and when PPIC could not
pay. Since PPICs inability to comply with its obligation
was not sufficiently established, ITM8 could not
immediately be made to assume the liability.
_______________
5 Id., pp. 2831.

6 Assailed Decision, p. 9 Rollo, p. 35.
7 Id., pp. 11 & 37.
8 Id., pp. 1414 & 4041.
155
VOL. 475, NOVEMBER 15, 2005 155

Mills, Inc.
The September9 30, 2003 Resolution 10

of the CA denied
reconsideration. Hence, this Petition.
The Issues
Petitioner states the issues in this wise:

11
I. Whether or not ITM and Grandtex are sureties
and therefore, jointly and severally liable with
PPIC, for the payment of the loan.
II. Whether or not the Petition raises a question of
law.
III. Whether or not the Petition12
raises a theory not
raised in the lower court.
The main issue is whether ITM is a surety, and thus

solidarily liable with PPIC for the payment of the loan.
The Courts Ruling
The Petition is meritorious.
_______________
9 Special Former Fifteenth Division. The Resolution was penned by

Justice Jose L. Sabio Jr. (acting chairperson) with the concurrence of
Justices Josefina GuevaraSalonga and Rosalinda AsuncionVicente (in
lieu of Justice Oswaldo D. Agcaoili).
10 The case was deemed submitted for decision on November 2, 2004,
upon this Courts receipt of petitioners Memorandum signed by Attys.
Alfredo Benjamin S. Caguioa and Cesar E. Santamaria, Jr. Respondents
Memorandum, signed by Atty. Ma. Cecilia P. Subido, was received by this
Court on September 27, 2004.
Respondent also filed a Petition for Review to challenge the CA
Decision, which held it secondarily liable to IFC. The case was docketed as
G.R. No. 160299 and raffled to the First Division of this Court. In a
Resolution dated February 2, 2004, the Petition was denied for failure to
show sufficiently that the CA had committed a reversible error.
11 The Court will no longer address the liability of Grandtex, which is
not a party to this Petition.
12 Petitioners Memorandum, p. 9 Rollo, p. 133.
156

Mills, Inc.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following

Contracts: (1) the Loan Agreement
13
dated December 17,
1974, between IFC and PPIC and (2) the Guarantee
Agreement dated December 17, 1974, between 14ITM and
Grandtex, on the one hand, and IFC on the other.
IFC claims that, under the Guarantee Agreement, ITM
bound itself as a surety to
15
PPICs obligations proceeding
from the Loan Agreement. For its part, ITM asserts that,
by the terms
16
of the Guarantee Agreement, it was merely a
guarantor and not a surety. Moreover, any ambiguity in
the Agreement17should be construed against IFCthe party
that drafted it.
Language of the Contract
The premise of the Guarantee Agreement is found in its

preambular clause, which reads:
Whereas,
(A) By an Agreement of even date herewith between IFC and

PHILIPPINE POLYAMIDE INDUSTRIAL
CORPORATION (herein called the Company), which
agreement is herein called the Loan Agreement, IFC
agrees to extend to the Company a loan (herein called the
Loan) of seven million dollars ($7,000,000) on the terms
therein set forth, including a provision that all or part of
the Loan may be disbursed in a currency other than
dollars, but only on condition that the Guarantors agree to
guarantee the obligations of the Company in respect of the
Loan as hereinafter provided.
_______________
13 Rollo, pp. 4472.

14 Id., pp. 7377.
15 Petitioners Memorandum, p. 9 Rollo, p. 133.

16 Respondents Memorandum, p. 5 Rollo, p. 112.
17 Id., pp. 8 & 115.
157
VOL. 475, NOVEMBER 15, 2005 157

(B) The Guarantors, in order to induce IFC to enter into the

Loan Agreement, and in consideration of IFC entering into
said Agreement, have agreed 18
so to guarantee such
obligations of the Company.
The obligations of the guarantors are meticulously

expressed in the following provision:
Section 2.01. The Guarantors jointly and severally, irrevocably,

absolutely and unconditionally guarantee, as primary obligors
and not as sureties merely, the due and punctual payment of the
principal of, and interest and commitment charge on, the Loan,
and the principal of, and interest on, the Notes, whether at stated
maturity or upon prematuring, 19
all as set forth in the Loan
Agreement and in the Notes.
The Agreement uses guarantee and guarantors, 20

prompting ITM to base its argument on those words. This
Court is not convinced that the use of the two words limits
the Contract to a mere guaranty. The specific stipulations
in the Contract show otherwise.
Solidary Liability
Agreed to by ITM
While referring to ITM as a guarantor, the Agreement
specifically stated that the corporation was jointly and
severally liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a
primary obligor, not a mere surety. Those stipulations
meant only one thing: that at bottom, and to all legal
intents and purposes, it was a surety.
_______________
18 Id., pp. 2 & 74.

19 Ibid. Emphasis ours.
158

Mills, Inc.
21
Indubitably therefore, ITM bound itself to be solidarily
liable with PPIC for the latters obligations under the Loan
Agreement with IFC. ITM thereby brought itself to the
level of PPIC and could not be deemed merely secondarily
liable.
Initially, ITM was a stranger to the Loan Agreement
between PPIC and IFC. ITMs liability commenced only
when it guaranteed PPICs obligation. It became a surety
when it bound itself solidarily with the principal obligor.
Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds

himself to the creditor to fulfill the obligation of the principal in
case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor,
the provisions of Section 4, Chapter 3, Title I of this Book shall22 be
observed. In such case the contract shall be called suretyship.
The aforementioned provisions refer to Articles 1207 to

1222 of the Civil Code on Joint and Solidary Obligations.
Relevant to this case is Article 1216, which states:
The creditor may proceed against any one of the solidary debtors
or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt
has not been fully collected.
Pursuant to this provision, petitioner (as creditor) was

justified in taking action directly against respondent.
_______________
21 The term jointly and severally connotes a solidary obligation.

Sharruf v. Tayabas Land Co., 37 Phil. 655, 657, February 15, 1918.
In a solidary obligation, the creditor may proceed against any one of the
debtors for the fulfillment of the obligation. Art. 1216 of the Civil Code.
22 Civil Code.
159
VOL. 475, NOVEMBER 15, 2005 159

Mills, Inc.
No Ambiguity in the
Undertaking
The Court does not find any ambiguity in the provisions of
the Guarantee Agreement. When qualified by the term
jointly and severally, the use of the word 23
guarantor to
refer to a surety does not violate the law. As Article 2047
provides, a suretyship is created when a guarantor binds
itself solidarily with the principal obligor. Likewise, the
phrase in the Agreementas primary obligor and not
merely as suretystresses that ITM is being placed on the
same level as PPIC. Those words emphasize the nature of
their liability, which the law characterizes as a suretyship.
The use of the word guarantee does 24
not ipso facto
make the contract one of guaranty. This Court has
recognized that the word is frequently employed in
business transactions to describe the intention 25to be bound
by a primary or an independent obligation. The very
terms of a contract govern the obligations of the parties or
the extent of the obligors liability. Thus, this Court has
ruled in favor of suretyship, even though contracts 26
were
denominated as a Guarantors
27
Undertaking or a
Continuing Guaranty.28
Contracts have the force of law
between the parties, who are free to stipulate any matter
not contrary 29to law, morals, good customs, public order or
public policy. None of these
_______________
23 Art. 1375 of the Civil Code provides that [w]ords which may have
different significations shall be understood in that which is most in
keeping with the nature and object of the contract.
24 E. Zobel, Inc. v. Court of Appeals, 352 Phil. 608, 618 290 SCRA 1, 10,
May 6, 1998.
25 Ibid.
26 Pacific Banking Corporation v. Intermediate Appellate Court, 203
SCRA 496, November 13, 1991.
27 E. Zobel, Inc. v. Court of Appeals supra, p. 615 p. 7.
28 Art. 1159 of the Civil Code.
29 Art. 1409, Id.
160

Mills, Inc.
circumstances are present, much less alleged by

respondent. Hence, this Court cannot give a different
meaning to the plain language of the Guarantee
Agreement.
Indeed, the finding of solidary liability is in line with the
premise provided in the Whereas clause of the Guarantee
Agreement. The execution of the Agreement was a
condition precedent for the approval of PPICs loan from
IFC. Consistent with the position of IFC as creditor was its
requirement of a higher degree of liability from ITM in case
PPIC committed a breach. ITM agreed with the stipulation
in Section 2.01 and is now estopped from feigning
ignorance of its solidary liability. The literal meaning of the
stipulations control when the terms of the contract are
clear and30
there is no doubt as to the intention of the
parties.
We note that the CA denied solidary liability, on the
theory that the parties would not have executed a
Guarantee Agreement 31
if they had intended to name ITM as
a primary obligor. The appellate court opined that ITMs
undertaking was collateral to and distinct from the Loan
Agreement. On this point, the Court stresses that a
suretyship is merely32 an accessory or a collateral to a
principal obligation. Although a surety contract is
secondary to the principal obligation, the liability of the
surety is direct, primary and absolute or 33
equivalent to that
of a regular party to the undertaking. A surety becomes
liable to the debt and duty of the principal
_______________
30 Art. 1370, Id.

32 Philippine Bank of Communications v. Lim, G.R. No. 158138, April
12, 2005, 455 SCRA 714 Garcia v. Court of Appeals, 191 SCRA 493, 495,
November 20, 1990.
33 Philippine Bank of Communications v. Lim, supra Molino v. Security
Diners International Corporation, 415 Phil. 587, 597 363 SCRA 358, 369,
August 16, 2001 Agra v. Philippine National Bank, 368 Phil. 829, 846
309 SCRA 509, 524, June 29, 1999.
161
VOL. 475, NOVEMBER 15, 2005 161

Mills, Inc.
obligor even without possessing a direct or personal 34

interest in the obligations constituted by the latter.
ITMs Liability as Surety

With the present finding that ITM is a surety, it is clear
that the
35
CA erred in declaring the former secondarily
liable. A surety is considered in law to be on the same
footing as the principal debtor
36
in relation to whatever is
adjudged against the latter. Evidently, the dispositive
portion of the assailed Decision should be modified to
require ITM to pay the amount adjudged in favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural

infirmities allegedly justifying the denial of the present
Petition. Before the trial court and the CA, IFC had
allegedly instituted different arguments that effectively
changed the corporations theory on appeal,
37
in violation of
this Courts previous pronouncements. ITM further claims
that the main issue in the present case
38
is a question of fact
that is not cognizable by this Court.
These contentions deserve little consideration.
_______________
34 Molino v. Security Diners International Corporation, supra Agra v.

Philippine National Bank, supra Garcia v. Court of Appeals, supra.
36 Molino v. Security Diners International Corporation, supra, p. 597 p.
369 Philippine National Bank v. Pineda, 197 SCRA 1, 11, May 13, 1991.
See also Government of the Republic of the Philippines v. Tizon, 127 Phil.
607, 614 20 SCRA 1182, 1188, August 30, 1967.
38 Id., pp. 4 & 11.
162

Mills, Inc.
Alleged Change of
Theory on Appeal
Petitioners arguments before the trial court (that ITM was
a primary obligor) and before the CA (that ITM was a
surety) were related and intertwined in the action to

enforce the solidary liability of ITM under the Guarantee
Agreement. We emphasize that the terms primary obligor
and surety were premised on the same stipulations in
Section 2.01 of the Agreement. Besides, both terms had the
same legal consequences. There was therefore effectively no
change of theory on appeal. At any rate, ITM failed to show
to this Court a disparity between IFCs allegations in the
trial court and those in the CA. Bare allegations without
proof deserve no credence.
Review of Factual
Findings Necessary
As to the issue that only questions
39
of law may be raised in
a Petition40 for Review, the Court has recognized
exceptions,
_______________
39 1 of Rule 45 of the Rules of Court.

40 Fuentes v. Court of Appeals, 268 SCRA 703, 708709, February 26,
1997 Metro Concast Steel Corporation v. Manila Electric Company, 361
SCRA 35, July 11, 2001 Pamplona Plantation Company, Inc. v. Tinghil,
450 SCRA 421, February 3, 2005.
The exceptions include the following conditions: (1) when the factual
findings of the Court of Appeals and the trial court are contradictory (2)
when the conclusion is a finding grounded entirely on speculation,
surmises, or conjectures (3) when the inference made by the Court of
Appeals from its findings of fact is manifestly mistaken, absurd, or
impossible (4) when there is grave abuse of discretion in the appreciation
of facts (5) when the appellate court goes beyond the issues of the case
when making its findings, and the findings are contrary to the admissions
of both the appellant and the appellee (6) when the judgment of the Court
of Appeals is premised on a misapprehension of facts (7) when the Court
of Appeals fails to notice certain relevant facts which, if properly
considered, will justify a
163
VOL. 475, NOVEMBER 15, 2005 163

Mills, Inc.
one of which applies to the present case. The assailed

41
Decision was based on a misapprehension of facts, which
particularly related to certain stipulations in the
Guarantee Agreementstipulations that had not been
disputed by the parties. This circumstance compelled the
Court to review the Contract firsthand and to make its own

findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and
the assailed Decision and Resolution MODIFIED in the
sense that Imperial Textile Mills, Inc. is declared a surety
to Philippine Polyamide Industrial Corporation. ITM is
ORDERED to pay International Finance Corporation the
same amounts adjudged against PPIC in the assailed
Decision. No costs.
SO ORDERED.
Corona, CarpioMorales and Garcia, JJ., concur.

SandovalGutierrez, J., On Official Leave.
Petition granted, assailed decision and resolution

modified.
Notes.By the contract of suretyship, it is not for the

obligee to see to it that the principal pays the debt or
fulfills the contract, but for the surety to see to it that the
principal pay or perform. (Paramount Insurance
Corporation vs. Court of Appeals, 310 SCRA 377 [1999])
_______________
different conclusion (8) when the findings of fact are themselves

conflicting (9) when the findings of fact are conclusions made without
citing the specific evidence on which they are based and (10) when the
findings of fact of the Court of Appeals are premised on the absence of
evidence, but the findings are contradicted by the evidence on record.
41 Swagman Hotels and Travel, Inc. v. Court of Appeals, G.R. No.
161135, April 8, 2005, 455 SCRA 175 Magellan Capital Management
Corporation v. Zosa, 355 SCRA 157, 168, March 26, 2001 De la Cruz v.
Sosing, 94 Phil. 26, 28, November 27, 1953.
164

Banal III vs. Panganiban
Where the final judgment, which superseded the action

brought for the enforcement of a contract of suretyship,
declared the obligation to be merely joint, it is of no
consequence that, under said contract, the obligation
contracted by the sureties was joint and several in
character. (PH Credit Corporation vs. Court of Appeals, 370
SCRA 155 [2001])
o0o
[No. 34642. September 24, 1931]
FABIOLA SEVERINO, accompanied by her husband

RICARDO VERGARA, plaintiffs and appellees, vs.
GUILLERMO SEVERINO ET AL., defendants. ENRIQUE
ECHAUS, appellant.
CONTRACT CONSIDERATION SURETY OR

GUARANTOR.It is not necessary that a surety or guarantor
should participate in the benefit which constitutes the
consideration as between the principal parties to the contract.

Iloilo. Barrios, J.
186

Severino and Vergara vs. Severino
R. Nepomuceno f or appellant.
Jacinto E. Evidente for appellees.
STREET, J.:
This action was instituted in the Court of First Instance of

the Province of Iloilo by Fabiola Severino, with whom is
joined her husband Ricardo Vergara, for the purpose of
recovering the sum of P20,000 from Guillermo Severino
and Enrique Echaus, the latter in the character of
guarantor for the former. Upon hearing the cause the trial
court gave judgment in favor of the plaintiffs to recover the
sum of P20,000 with lawful interest from November 15,
1929, the date of the filing of the complaint, with costs. But
it was declared that execution of this judgment should
issue first against the property of Guillermo Severino, and
if no property should be found belonging to said defendant
sufficient to satisfy the judgment in whole or in part,
execution for the remainder should be issued against the
property of Enrique Echaus as guarantor. From this
http://central.com.ph/sfsreader/session/0000015cda178e0e5adb5100003600fb002c009e/t/?o=False 1/4
judgment the def endant Echaus appealed, but his

principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural
daughter of Melecio Severino, deceased, former resident of
Occidental Negros. Upon the death of Melecio Severino a
number of years ago, he left considerable property and
litigation ensued between his widow, Felicitas Villanueva,
and Fabiola Severino, on the one part, and other heirs of
the deceased on the other part. In order to make an end of
this litigation a compromise was effected by which
Guillermo Severino, a son of Melecio Severino, took over
the property pertaining to the estate of his father at the
same time agreeing to pay P100,000 to Felicitas Villanueva
and Fabiola Severino. This sum of money was made
payable, first, P40,000 in cash upon the execution of the
document of compromise, and the balance in three several
payments of P20,000 at the end of one year, two years, and
three years respectively. To this contract the appellant
Enrique
187
VOL. 56, SEPTEMBER 24, 1931 187

Severino and Vergara vs. Severino
Echaus affixed his name as guarantor. The first payment of

P40,000 was made on July 11, 1924, the date when the
contract of compromise was executed and of this amount
the plaintiff Fabiola Severino received the sum of P10,000.
Of the remaining P60,000, all as yet unpaid, Fabiola
Severino is entitled to the sum of P20,000.
It appears that at the time the compromise agreement
abovementioned was executed Fabiola Severino had not
yet been judicially recognized as the natural daughter of
Melecio Severino, and it was stipulated that the last
P20,000 corresponding to Fabiola and the last P5,000
corresponding to Felicitas Villanueva should be retained on
deposit until the definite status of Fabiola Severino as
natural daughter of Melecio Severino should be
established. The judicial decree to this effect was entered
in the Court of First Instance of Occidental Negros on June
16, 1925, and as the money which was contemplated to be
held in suspense has never in fact been paid to the parties
entitled thereto, it results that the point respecting the
deposit referred to has ceased to be of moment.
The proof shows that the money claimed in this action
has never been paid and is still owing to the plaintiff and
the only defense worth noting in this decision is the
assertion on the part of Enrique Echaus that he received

nothing for affixing his signature as guarantor to the
contract which is the subject of suit and that in effect the
contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is
bound by the same consideration that makes the contract
effective between the principal parties thereto. (Pyle vs.
Johnson, 9 Phil., 249.) The compromise and dismissal of a
lawsuit is recognized in law as a valuable consideration
and the dismissal of the action which Felicitas Villanueva
and Fabiola Severino had instituted against Guillermo
Severino was an adequate consideration to support the
promise on the part of Guillermo Severino to pay the sums
of
188

Cario vs. Jamoralne
money stipulated in the contract which is the subject of this

action. The promise of the appellant Echaus as guarantor
is therefore binding. It is never necessary that a guarantor
or surety should receive any part of the benefit, if such
there be, accruing to his principal. But the true
consideration of this contract was the detriment suffered.
by the plaintiffs in the former action in dismissing that
proceeding, and it is immaterial that no benefit may have
accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct,
and the same will be affirmed, with costs against the
appellant. So ordered.
Avancea, C. J., Johnson, Malcolm, Villamor, Ostrand,

Romualdez, VillaReal, and Imperial, JJ., concur.
Judgment affirmed.
______________
[No. 43486. September 30, 1936]
THE MUNICIPALITY OF GASAN, plaintiff and appellee,

vs. MIGUEL MARASIGAN, ANGEL R. SEVILLA and
GONZALO L. LUNA, defendants and appellants.
1. FISHING PRIVILEGES LICENSE FEES DUE.In view

of the facts stated in the decision of the court, Held: That
between the defendantappellant M. M. and the plaintiff
municipality, there existed a tacit contract based upon
Exhibit A which was cancelled, wherein the sureties
appellants A. S. and G. L. did not intervene. It was under
said contract that the appellant M. M. enjoyed the
privilege of gathering whitefish spawn in the jurisdictional
waters of Gasan, at least from the month of April to the
month of July, 1931, inclusive. Consequently, he owes and
is bound to pay to the plaintiff, for said privilege, license
fees corresponding to one and onethird quarter at the rate
of P4,200 a year, or P1,400 (P1,050 for one quarter and
P350 for onethird of a quarter), but with. the right to be
credited with the sum of P420 deposited by him on
December 9, 1930, and the ?840 paid by him on June 29,
1931, or the total amount of P1,260. In other words, the
appellant M. M. is bound to pay the sum of P140 to the
plaintiff.
2. ID. EFFECT OF ANNULMENT OF A FISHING

PRIVILEGE CONTRACT WITH RESPECT TO THE
SURETIES.The fishing privilege contract entered into
by the plaintiff and the appellant M. M. on December 11,
1930, not only was not consummated but was cancelled.
511
VOL. 63, SEPTEMBER 30, 1936 511
Municipality of Gasan vs. Marasigan
This being so, neither the appellant M. M. nor his sureties

or the other appellants were bound to comply with the
terms of their respective contracts of fishing privilege and
http://central.com.ph/sfsreader/session/0000015cda18c8d3f1fdae7e003600fb002c009e/t/?o=False 1/12
suretyship. This is so, particularly with respect to the

suretiesappellants, because suretyship cannot exist
without a valid obligation (art. 1824 of the Civil Code), the
obligation arising from a cancelled contract not being a
valid obligation."
3. ID. ID.The obligation whose compliance by the

appellant M. M. was guaranteed by the sureties
appellants A. S. and G. L., was exclusively that appearing
in Exhibit A, which should begin on January 1, 1931, not
on the 14th of said month and year, and end on December
31st next. They intervened in no other subsequent
contract which the plaintiff and M. M. might have entered
into on or after January 14, 1931. Guaranty is not
presumed it must be express and cannot be extended
beyond its specified limits (art. 1827 of the Civil Code).

Marinduque. Gutierrez David, J.
Luis Atienza Bijis for appellants.
Provincial Fiscal Noel of Marinduque for appellee.
DIAZ, J.:
This is an action brought by the municipality of Gasan of

the Province of Marinduque, against Miguel Marasigan,
Angel R. Sevilla and Gonzalo L. Luna, to recover from them
the sum of P3,780, alleging that it forms a part of the
license fees which Miguel Marasigan failed to pay for the
privilege granted him of gathering whitefish spawn
(semillas de bangs) in the jurisdictional waters of the
plaintiff municipality during the period from January 1,
1931, to December 31 of said year.
The Court of First Instance of Marinduque, which tried
the case, rendered a decision adverse to the defendants,
sentencing them to pay jointly to the plaintiff said sum of
P3,780 with legal interest thereon from August 19, 1932,
until fully paid, plus the costs of the suit. From said
judgment, the defendants appealed to this court, attribut
512

ing to the lower court the five alleged errors relied upon in
their brief, as follows:
"I. The court a quo erred in holding and maintaining

that, notwithstanding the fact that resolution No.
161 of the municipal council of Gasan which gave
rise to the contract and bond, Exhibits A and B,
respectively, of the complaint, has been declared
null and void by the provincial board and by the
Executive Bureau, the contract and bond in
question are valid and, consequently, enforceable on
the ground that said resolution No. 161 is within or
had been adopted within the powers of the council.
"II. The court' a quo erred in holding that even granting
that the contract Exhibit A is not valid de jure, it is
a de facto contract as to the defendants, particularly
the defendantgrantee Miguel Marasigan.
"III. The court a quo erred in not absolving the
defendants Angel R. Sevilla and Gonzalo L. Luna,
sureties of the defendant Miguel Marasigan,
notwithstanding the fact that resolution No. 161, by
virtue of which said defendants subscribed the bond
Exhibit B of the complaint, had been declared null
and void by the provincial board and by the
Executive Bureau.
"IV. The court a quo erred in holding that the herein
defendant Miguel Marasigan had taken advantage
of the privilege to catch or gather whitefish spawn
in the jurisdictional waters of the municipality of
Gasan, during the period from January 1, to
December 31, 1931, notwithstanding the fact that
counsel for the plaintiff municipality failed to
present evidence, either documentary or oral, to
justify said fact.
"V. The court a quo erred in not absolving each and
every one of the herein defendants from the
complaint, and in not ordering the plaintiff
municipality to return to the defendant Miguel
Marasigan the sums of four hundred twenty pesos
(P420) and eight hundred forty pesos (P840)
deposited with said plaintiff, with interest thereon
513
VOL. 63, SEPTEMBER 30, 1936 513

from the respective dates of their deposit, until

their return."
The case was tried by the lower court with no other

evidence than the admissions made by the parties in the
stipulation of facts mentioned in the body of the decision,
the pertinent parts of which will be discussed later. Said
stipulation and the attached papers forming a part thereof
enables this court to narrate the material facts of the case,
as follows:
The plaintiffappellee municipality, on December 9,
1930, put up at auction the privilege of gathering whitefish
spawn in its jurisdictional waters for the period of one year
from January 1, 1931. Two bidders, Graciano Napa and
Miguel Marasigan, appeared at the auction. Both attached
to their respective bids the certificate of not being behind in
the payment of any tax, issued by the municipal treasurer
of Gasan, Marinduque, as required by the provisions of
resolution No. 42, series of 1930, of the council of said
municipality. Graciano Napa proposed to accept the
privilege by paying P5,000 therefor, and Miguel Marasigan
proposed to do likewise, but by paying only P4,200.
The council of the plaintiffappellee municipality, in its
resolution No. 161 (Exhibit 1) of December 11, 1930,
rejected Graciano Napa's bid and accepted that of the
appellant Miguel Marasigan, granting and selling to the
latter the privilege put up at auction for the sum of P4,200,
payable quarterly in advance at the rate of P1,050 a
quarter (Exhibit A). To secure his compliance with the
terms of the contract which was immediately formalized by
him and the plaintiff, and pursuant to the provisions of
section 8 of resolution No. 128, series of 1925, of the council
of said plaintiff, Miguel Marasigan filed the bond, Exhibit
B, subscribed on December 15, 1930, by the defendants
appellants Angel R. Sevilla and Gonzalo L. Luna, who
bound themselves in said document to pay to the plaintiff
the sum of P8,400, if Miguel Marasigan failed to deposit
onefourth of P4,200 quarterly in advance in the municipal
treasury of Gasan,
514

in violation of the terms of the contract executed and

entered into by him and the.plaintiff on December 11, 1930
(Exhibit A), for the compliance with which they became
sureties.
Before the plaintiff municipality and Miguel Marasigan
entered into their contract, and also before the latter's
sureties executed the abovestated bond, Graciano Napa,

whose bid was rejected for the reason that he had not
attached thereto the certificate that he is not behind in the
payment of any tax which he should have obtained from
the municipal treasurer of Lemery, his native town,
forwarded a protest (Exhibit 4) to the provincial board,
which protest was later indorsed by said provincial board
to the Chief of the Executive Bureau, alleging that the
plaintiff municipality violated the provisions of section
2323 of the Administrative Code in rejecting his bid.
The provincial board, passing upon Graciano Napa's
protest and acting under the authority which, in its
opinion, was granted to it by section 2233 of the
Administrative Code, held that resolution No. 161, series of
1930, by virtue of which the municipal council of Gasan
rejected Graciano Napa's bid and accepted that of Miguel
Marasigan, notwithstanding the fact that the latter offered
to pay less, was invalid, and suggested that the privilege
should be awarded to Graciano Napa who, in its opinion,
appeared to be the highest bidder in accordance with the
provisions of sections 2323 and 2319 of the Administrative
Code (Exhibit 9). The Executive Bureau, concurring with
the provincial board's points of view, declared, in turn, that
the concession made to Marasigan was illegal in view of the
fact that Graciano Napa was the highest bidder (Exhibit
13).
The plaintiff municipality, through its municipal
council, exerted efforts to obtain the reconsideration of the
decisions of the provincial board of Marinduque and of the
Executive Bureau but, as these two entities maintained
their decisions (Exhibits 14, 15, 16, 17 and 18), it decided,
in its resolution No. 11, series of 1931 (Exhibit 19), to
award the
515
VOL. 63, SEPTEMBER 30, 1936 515

privilege of gathering whitefish spawn within its waters to

Graciano Napa, giving him a period of six days, which was
later extended to seven days, from January 8, 1931
(Exhibit 19A), to deposit the sum of P500, equivalent to 10
per cent of his bid of P5,000, with the municipal treasurer
of Gasan, so as to comply with the provisions of section 8 of
the conditions of the public auction at which he was a
bidder, warning him that if he failed to do so, the contract
entered into by the plaintiff, through its president, and the
appellant Miguel Marasigan (Exhibit A), would

automatically take effect. Graciano Napa not only failed to
make the deposit required by the plaintiff in its two above
stated resolutions Nos. 11 and 12, series of 1931 (Exhibits
19 and 19A), but he formally declared, through his duly
authorized representative, that he yielded the privilege
granted him to Miguel Marasigan or to any other person
selected by the municipal authorities (Exhibit 20).
One day later, or on January 15, 1931, the president of
the plaintiffappellee municipality sent the letter Exhibit
21 to Miguel Marasigan, which reads:
"SIR:
"By virtue of Res. No. 11, c. s., as amended by Res. No. 12, same
series, and the communication of Mr. J. Zaguirre dated January
14, 1931, copy of which is hereto attached, you are hereby advised
that the contract entered into between you and the municipality
of Gasan for the lease of the bangus fishery privilege f or the year
1931 becomes effective on January 14, 1931, to run until
December 31, 1931.
"You are hereby requested to appear before the session of the
Municipal Council to be held at the office of the undersigned
tomorrow, January 16, 1931, bringing with yourself the contract
and bond executed in your favor for ratification.
"You are further informed that you are given 10 days from the
date hereof, within which time you are to pay the amount of
P1,050, as per tax corresponding to the first quarter, 1931."
516

Prior to this, but after the adoption by the municipal

council of Gasan of its resolution No. 163 (Exhibit 7) on
December 16, 1930, and two days before the provincial
board declared said council's resolutions Nos. 161 and 163
invalid, the president of the plaintiffappellee municipality
notified the appellant Miguel Marasigan that the contract
whereby he was granted the privilege of gathering
whitefish spawn during the year 1931, upon his offer to pay
P4,200 a year therefor, was suspended and that he should
consider it ineffective in the meantime in view of the fact
that the question whether he (Miguel Marasigan) or
Graciano Napa was the highest bidder still remained
undecided by the provincial board of Marinduque and by
the Executive Bureau. The English translation of the letter
sent by the municipal president to Miguel Marasigan,

which was written in Tagalog (Exhibit 8), reads:
"SIR:
"In view of the fact that the whitefish (bangus) case has not yet
been decided or determined by the provincial board and is still
pending action to date, and in view of the instructions given me
by the representative of the Executive Bureau, Mr. Jose Zaguirre,
I beg to inform you, with due respect, that you should refrain from
carrying out and giving efficacy to the contract signed by me in
the name of the municipality, relative to the privilege of gathering
whitefish in your favor, from this date until further notice,
because this case is still pending action."
Knowing the abovestated facts, let us now turn to the

consideration of the alleged errors attributed to the lower
court by the appellants.
The first and third errors should be considered jointly on
account of the close relation existing between them. The
determination of one depends upon that of the other.
This court believes that there is no necessity of even
discussing the first error because the plaintiff itself
accepted the conclusions and decision of the provincial
board
517
VOL. 63, SEPTEMBER 30, 1936 517

and of the Executive Bureau, so much so that in its

resolution No. 11, series of 1931, it thereafter considered
Graciano Napa as the highest bidder, going to the extent of
requiring him, as it in fact required him, to make the
deposit of P500 prescribed by the conditions of the auction
sale in which he had intervened, and granting him a period
of seven days to comply with said requirement (Exhibits 19
and 19A). Furthermore, when the plaintiff received
Graciano Napa's notice informing it that he ceded the
privilege just granted him to appellant Miguel Marasigan
or to any other person that it might choose, said plaintiff,
through its municipal president, required Miguel
Marasigan to appear before its municipal council to present
his formerly prepared contract as well as his bond in order
that both documents might be ratified (Exhibit 21). It
should be added to the foregoing that on December 18,
1930, the plaintiff, also through its municipal president,
notified appellant Marasigan that his contract should, in
the meantime, be considered ineffectual and that he should

do nothing to put it in execution because the case was still
undecided by the provincial board and by the Executive
Bureau (Exhibit 8). It is clear that it may be logically
inferred from these facts that the contract regarding
fishing privilege entered into between the plaintiff and
appellant Marasigan on December 11, 1930 (Exhibit A), not
only was not consummated but was cancelled.
Consequently, it now appears useless and futile to discuss
whether or not resolution No. 161 (Exhibit 1) is valid and
legal. In either case, it is a fact that said contract ceased to
have life or force to bind each of the contracting parties. It
ceased to be valid from the time it was cancelled and this
being so, neither the appellant Marasigan nor his sureties
or the other appellants were bound to comply with the
terms of their respective contracts of fishing privilege and
suretyship. This is so, particularly with respect to the
suretiesappellants, because suretyship cannot exist
without a valid obligation (art. 1824 of the Civil Code). The
obligation
518

whose compliance by the appellant Marasigan was

guaranteed by the suretiesappellants, was exclusively that
appearing in Exhibit A, which should begin on January 1,
1931, not on the 14th of said month and year, and end on
December 31st next. They intervened in no other
subsequent contract which the plaintiff and Miguel
Marasigan might have entered into on or after January 14,
1931. Guaranty is not presumed it must be express and
cannot be extended beyond its specified limits (art. 1827 of
the Civil Code). Therefore, after eliminating the obligation
for which said suretiesappellants desired to answer with
their bond, the bond necessarily ceased and it ceases to
have effects. Consequently, said errors I and III are true
and well founded.
As to the second error, it must be known that among the
stipulations contained in the stipulation of facts submitted
to the court 'are the following:
"21. That on July 20, 1931, Miguel Marasigan paid the sum of
P16.20 to the municipal treasurer of Gasan, as internal revenue
tax on sales of whitefish (bangus) spawn amounting to P1,080
during the months of April, May and June, 1931 and that on
August 22, 1931, said Miguel Marasigan presented his sales book
to the municipal treasurer of Gasan, Mr. Gregorio D. Chavez, it
appearing therein that said Miguel Marasigan, in the month of
July, 1931, sold whitefish spawn amounting to P85 in the month
of August, 1931, none, and in the month of September, 1931,
none.
"22. That Miguel Marasigan is the concessionaire of the
privilege to gather whitefish spawn in the jurisdictional waters of
the municipality of Boac, Marinduque, during the period from
January 1, 1931, to December 31 of said year, and that during
said period of time he had paid the sales tax on the whitefish
spawn in question only in the municipality of 'Gasan, without
having made any payment in the municipality of Boac.
519
VOL. 63, SEPTEMBER 30, 1936 519

"23. That defendant Miguel Marasigan, as bidder at the auction of

December 9, 1930, deposited in the municipal treasury of Gasan
the sum of P420, equivalent to 10 per cent of his bid at said
auction, and that said sum has not yet been returned to him to
date.
"24. That on June 29, 1931, said Miguel Marasigan delivered
another sum of P840 to the municipal treasurer of Gasan, making
the total amount delivered by him to said municipal treasurer
P1,260, the corresponding receipt having been issued to Miguel
Marasigan to that effect."
The facts resulting from the stipulations in question

warrant and justify the inference that the appellant Miguel
Marasigan practically enjoyed the privilege of gathering
whitefish spawn in the jurisdictional waters of the
municipality of Gasan, under the terms of the contract
executed by him on December 11, 1930, but which was
cancelled later by virtue of Graciano Napa's protest, at
least from the month of April to the month of July, 1931,
inclusive. If this were not true, he would not have paid, as
he spontaneously paid to the municipal treasurer of Gasan,
the following sums: P840 on June 29, 1931, and P16.20 on
July 20 of said year, nor presented, as he in fact presented
to said official for inspection, his sales book wherein it
appears that his sales of whitefish spawn during the month
of July of said year amounted to P85. The stipulation of
facts, however, is silent as to whether or not he enjoyed the
privilege in question during the rest of the year. On the
contrary, it states that he sold no whitefish spawn in

August or September.
The excuse now offered by appellant Marasigan in his
brief that the abovestated amounts were on account of
license fees or taxes on the privilege of gathering whitefish
spawn in the jurisdictional waters of Boac, obtained by him
from said municipality, is not supported by the evidence. If
the payments made by him were as he claims them to be,
he would have so stated in the stipulation of facts. Not
520

having done so and, furthermore, the practice generally

observed being to pay an obligation in the municipality
where the payment is due, the only conclusion possible is
that said appellant made all such payments on account of
the .tacit contract entered into by him and the plaintiff
after he had received the letter of January 15, 1931
(Exhibit 21), sent to him by said plaintiff through its
municipal president. This conclusion is all the more logical
because appellant Marasigan insisted in his answer, and
still continues to insist in his brief, that the plaintiff is
obliged to refund to him the amount of P1,260 which he
claims to have paid to it, and which is no other than the
amount of the two sums of P420 and P840 stated in the last
two paragraphs of the abovestated stipulation of facts. If it
were really true, as said appellant contends, that said sum
of P840 was paid by him on account of his contract for
privilege of gathering whitefish spawn, executed in his
favor by the municipality of Boac, he would not have
insisted in his answer, nor would he now insist in his brief,
that said sum be refunded to him, because in the absence of
evidence to the contrary, it must be presumed that it was
transmitted by the municipal treasurer of Gasan to that of
Boac, inasmuch as, accepting his contention, he was
obliged to pay something to the latter municipality by
virtue of his alleged contract with it.
For the foregoing reasons, the conclusion of this court
with respect to the second error attributed to the lower
court by appellant Marasigan is that said error is without
merit. The truth is that between him and the plaintiff,
there was a tacit contract for the privilege of gathering
whitefish spawn in the jurisdictional waters of the
municipality of Gasan, based upon Exhibit A, but without
the intervention of the suretiesappellants, for the above
stated period, or from April to July, 1931, inclusive, which

is equivalent to one and onethird quarter. Said contract
was one which, by its nature, need not be in writing (sec.
335 of Act No. 190) but it is binding because it has all the
es
521
VOL. 63, SEPTEMBER 30, 1936 521

sential requisites of a valid contract (art. 1278 of the Civil

Code).
The fourth error is practically disposed of by the same
reasons stated in passing upon the second error.
As to the fifth error, it must be stated that appellant
Marasigan really deposited in the municipal treasury of
Gasan, as stated in paragraph 23 of the stipulation of facts,
the sum of P420 on account of his cancelled original
contract (Exhibit A), and that said deposit has not as yet
been returned to him. Therefore, he is entitled to be
credited with said sum.
Summarizing all that has been stated heretofore, this
court holds that appellant Miguel Marasigan owes and is
bound to pay to the plaintiff municipality the proceeds of
one and onethird quarter, for the privilege of gathering
whitefish spawn enjoyed by him in 1931, at the rate of
P4,200 a year, or P1,400 (P1,050 for one quarter and P350
for onethird of a quarter) but he is, in turn, entitled to be
credited with the sum of P420 deposited by him on
December 9, 1930, and P840 paid by him on June 29, 1931,
or the total amount of P1,260. In other words, appellant
Marasigan is bound to pay the sum of P140 to the plaintiff.
In view of the foregoing considerations, this court
absolves the defendantsappellants Angel R. Sevilla and
Gonzalo L. Luna from the complaint and orders the
defendantappellant Miguel Marasigan to pay the sum of
P140 to the plaintiff municipality.
It is considered unnecessary to expressly mention
appellant Miguel Marasigan's counterclaim because, as
may be seen, he is credited in this judgment with the sum
of P1,260 which is all that he claims therein, without
special pronouncement as to costs. So ordered.
Avancea, C. J., VillaReal, Abad Santos, Imperial,

and Laurel, JJ., concur.
Judgment modified.
522

Salomon and Lachica vs. Dantes
VOL. 120, FEBRUARY 28, 1983 827

Plaridel Surety & Insurance Co. vs. Artex Development
Company, Inc.
*
No. L30554. February 28, 1983.
PLARIDEL SURETY & INSURANCE COMPANY,

petitioner, vs. ARTEX DEVELOPMENT COMPANY, INC.,
and HON. JESUS P. MORFE, Presiding Judge, Branch
XIII, Court of First Instance of Manila, respondents.
Mercantile Law Insurance Bonds Suretyship No liability of

surety company for any violation under the original surety bonds
which were already void Suretyship cannot exist without a valid
obligation.The petitioner could not possibly be liable for any
violation under the original surety bonds which were already void
and of no force and effect. Suretyship cannot exist without a valid
obligation.
Same Same Same Same Absence of risk incurred by surety
company negates liability of respondent for renewal premiums
upon approval of the latters tax exemption application Renewals
of original surety bonds void where cause or object of renewals of
bonds did not exist at time of the alleged transaction and
purported renewal of original bonds was without consideration
Case at bar.As to the alleged obligation to remit the premiums
for the period March 1967 to March 1969, the purported renewals
were without any consideration at all. Petitioner incurred no risk
from the time respondents tax exemption application was
approved. Any renewals were void from the beginning because the
cause or object of said renewals did not exist at the time of the
purported transaction (Arts, 1409, 1352, and 1353, Civil Code).
The lower court correctly ruled that upon approval of defendants
(respondents) application for tax exemption on
_____________
* FIRST DIVISION.
828
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Plaridel Surety & Insurance Co. vs. Artex Development Company,

Inc.
December 19, 1966, any purported renewal of the original bond

after that was, therefore, without consideration and will not
warrant the collection of premiums and the payment of cost of
documentary stamps.
PETITION for review on certiorari of the orders of the

Court of First Instance of Manila, Br. XIII. Morfe, J.

Bonifacio L. Hilario and Arturo Topacio, Jr., for
petitioner.
Norberto Quisumbing for respondents.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the orders of

the respondent judge dismissing the complaint in Civil
Case No. 73904 and denying a motion for reconsideration of
the dismissal order.
The petitioner filed with the Court of First Instance of
Manila a complaint for a sum of money against respondent
Artex Development Co. Inc., wherein it prayed that
judgment be rendered in its favor as follows:
a) Ordering the respondent (defendant) Artex

Development Co. Inc. to pay plaintiff the sum of
P20,570.24, plus interest thereon at the rate of 12%
per annum computed monthly and automatically
accumulated to the outstanding capital and shall
bear the same interests as said capital until fully
paid
b) Ordering the defendant to pay plaintiff, the sum
equivalent to 15% per centum of the amount due as
and for attorneys fees and
c) For costs of suit.
The action was brought by the petitioner to recover from

the respondent company P20,570.24 worth of renewal
premiums and costs of documentary stamps on various
surety bonds posted by petitioner Plaridel Surety and
Insurance Co., in behalf of respondent Artex Development
Co. Inc., as principal
829
VOL. 120, FEBRUARY 28, 1983 829

Company, Inc.
in favor of the Republic of the Philippines through the

Bureau of Customs and the Board of Industries.
These surety bonds were posted pursuant to Republic
Act No. 4086 and its implementing Rules and Regulations
No. 164 particularly paragraph 9, which provides:
Par. 9. Withdrawal Under Bond.Persons or firms who or which

have pending applications for tax exemption privileges under the
Act and whose imported raw materials, chemicals, dyestuffs and
spare parts are actually within the Bureau of Customs
jurisdiction, may withdraw such raw materials chemicals,
dyestuffs and spare parts from the customs house upon the
posting of a bond equivalent to the customs duties and taxes due
thereon in accordance with the rules and regulations of the
Department of Finance and the Bureau of Customs.
Consequently, the respondent withdrew from the Bureau of

Customs custody shipments of imported raw materials,
chemicals, dyestuffs, and spare parts which were then
subject lo customs duties, special import taxes, sales and/or
compensating taxes because the respondents applications
for tax exemption of these items were not then approved by
the Board of Industries.
In consideration of the obligation assumed by the
petitioner, the private respondent agreed to pay the
premiums and cost of documentary stamps due thereon as
per stipulations contained in the separate agreement of
counterguaranty:
(a) PREMIUMTo pay to the Surety Company at its principal

offices in the sum of * * * in advance as premiums of same for
each period of (12) mos. beginning March 1965 or fraction thereof,
to be computed from this date until said bonds and its renewals,
extensions or substitutions be cancelled in full by the person or
entity guaranteed thereby, or by a court of competent
jurisdiction.
It is an admitted fact that the premiums due and costs of

documentary stamps for the first year duration of the
undertaking under these surety bonds, which was from
March 1965 to March 1966, were paid in accordance with
the agreements of counterguaranty.
830

Company, Inc.
On December 19, 1966, respondent Artex Development Co.

Inc., was granted tax exemption by the Board of Industries
(BOI Certificate No. 22). Thereafter, the respondent
stopped paying premiums and costs of documentary stamps
to the petitioner.
On September 11, 1968, the private respondent filed its
motion to dismiss petitioners complaint on the ground that
it states no cause of action and/or that the claim or demand
setforth therein has been extinguished. The petitioner filed
its opposition to the motion to dismiss followed by the
respondents filing its reply to the opposition.
Acting on the motion to dismiss, the respondent judge
issued one of the assailed orders which reads as follows:
After careful consideration of defendants motion to dismiss,

dated 9 September, 1968, plaintiffs opposition thereto, dated
September 12, 1968, and movants closing written arguments
(Reply to Opposition, dated 20 September 1968), this Court finds
said motion to dismiss to be well taken.
WHEREFORE, said motion to dismiss, dated 9 September,
1968, is hereby granted, and plaintiffs action or complaint is
hereby dismissed, without pronouncement as to costs.
The respondent judge later issued the other assailed order

denying petitioners motion for reconsideration.
The private respondent contents that the grant of tax
exemption by the Board of Industries on December 19,
1966 rendered null and void and extinguished the surety
bonds and agreement of counter guaranty. It argues that
guaranty and suretyship are accessory to and dependent
upon the principal obligation guaranteed or secured by
them and cannot exist without a valid obligation.
Therefore, as a necessary consequence, the obligation of
defendant to pay premiums and cost of documentary
stamps allegedly due on the extinguished agreements of
counterguaranty has likewise been rendered of no force and
effect.
Petitioner, on the other hand, maintains that, granting
arguendo that the grant of tax exemption in favor of
respon
831
VOL. 120, FEBRUARY 28, 1983 831

Company, Inc.
dent corporation had the effect of releasing the surety

bonds involved, still the petitioner had the valid and
subsisting right to claim unpaid renewal premiums and
costs of documentary stamps that had accrued in its favor
prior to the grant of tax exemptions. Petitioner maintains
that it had renewed the surety bonds in March 1966, more
or less eight months before the application for tax
exemption was granted by the Board of Industries.
With respect to accrued premiums and costs of
documentary stamps on renewals of the surety bonds made
after the grant of tax exemptions to the respondent
corporation, the petitioner maintains that the surety bonds
which were renewed subsequent thereto should continue in
full force and effect until the Chairman of the Board of
Industries shall order their cancellation.
Petitioner submits that the mere grant of tax
exemptions would not discharge the surety bonds because
it is possible that the grantee may have violated some of
the terms and conditions imposed by the Board of
Industries in connection with authority granted to it to
withdraw the items from customs custody under bond.
We agree with the private respondents. We note that
Condition No. 2 of the original surety bonds reads:
2. That in case the application (of respondent Artex Development

Co. Inc. for tax exemption) is approved by the Board of Industries,
then this bond shall be null and void and of no force and effect.
The petitioner could not possibly be liable for any violation

under the original surety bonds which were already void
and of no force and effect. Suretyship cannot exist without
a valid obligation. (Municipality of Gasan v. Marasigan, et
al., 63 Phil. 510). As stated in Visayan Surety and
Insurance Corporation v. Laperal (69 Phil. 688):
Segun el articulo 1822 del Codigo Civil la fianza es un contrato

accesorio y la responsabilidad que contrae el fiador es subsidiaria.
Por ella el fiador se obliga a pagar o a cumplir por un tercero,
832

Plaridel Surety & Insurance Co. vs. Artex Development Company,
Inc.
solamente en el caso de no hacerlo este. Explicando la naturaleza

y efectos de la fianza, Manresa en sus comentarios al Codigo Civil,
Tomo XII, paginas 137, 138 y 140, dice:
Dos son las acepciones que en el tecnicismo juridico tiene la palabra

fianza: uno, lato, amplio y extenso, que comprende, dentro de sus
terminos, todos los Contratos de garantia y otro, restringido y estricto,
que es lo que constituye la fianza propiamente dicha. En ambos sentidos,
denota el aseguramiento por medios subsidiarios de una obligacion
principal, que es la caracteristica de su esencia, pues sin dicha obligacion
principal no se concibe la existencia de la fianza, y por eso es siempre un
contrato accesorio, dependiente de otro, para cuya seguridad se
constituye.
En este concepto puede definirse la fianza, diciendo que es un

contrato mediante el cual uno de los contratantes da su garantia
personal para asegurar el cumplimiento de una obligacion
contraida por otra distinta persona, comprometiendose a
cumplirla por ella, si esta no lo hiciere en el tiempo y en la forma
en que se obligo a llevarla a efecto.
Recordando las indicaciones consignadas en la introduccion
al presente titulo, facil es precisar la naturaleza y aun la
extension de la fianza en el concepto en que ha de ser objecto de
nuestro estudio. En cuanto a la primera, tres son los caracteres
que la distinguen y diferencian, determinando la razon de su
especialidad, drivada del objeto mismo de dicho contrato. Esos
caracteres, son: 1., la cualidad accesoria y subsidiara de la
obligacion contraida 2., la condicion unilateral de la misma, y 3.
la circumstancia de haber ser el fiador persona distinta del
principal obligado.
Es accesoria la obligacion contraida, porque careceria de
objeto sin otro principal cuyo cumplimiento asegure y garantice,
hasta el punto de que sin esta no se concibe su existencia. Ha de
vivir, pues, unida a la convencion a que debe su nacimiento y no
puede asumir los caracteres de una obligacion principal,
independiente y con vida propia. x x x
Insofar as the complaint seeks recovery of the payment for

one year renewed premiums and costs of documentary
stamps from March 1966 to March 1367, petitioner cannot
recover for the simple reason that private respondent had
already paid
833
VOL. 120, FEBRUARY 28, 1983 833

Company, Inc.
them in advance. Petitioner never disputed the payment

made by private respondent. Consequently, whatever
obligation of private respondent to remit premiums and
costs of documentary stamps from March 1966 to March
1967 had already been extinguished.
As to the alleged obligation to remit the premiums for
the period March 1967 to March 1969, the purported
renewals were without any consideration at all. Petitioner
incurred no risk from the time respondents tax exemption
application was approved. Any renewals were void from the
beginning because the cause or object of said renewals did
not exist at the time of the purported transaction (Arts,
1409, 1352, and 1353, Civil Code).
The lower court correctly ruled that upon approval of
defendants (respondents) application for tax exemption on
December 19, 1966, any purported renewal of the original
bond after that was, therefore, without consideration and
will not warrant the collection of premiums and the
payment of cost of documentary stamps.
We also see no need for a formal release of the surety
bonds by the Board of Industries or the Bureau of Customs.
By express stipulation of the parties themselves, the surety
bonds became null and void upon the grant of tax
exemption.
The complaint was correctly dismissed by the
respondent judge.
WHEREFORE, the petition for review on certiorari is
dismissed for lack of merit. The questioned orders of the
respondent judge are affirmed. Costs against the
petitioner.
SO ORDERED.
Teehankee (Chairman), MelencioHerrera, Plana,

Vasquez and Relova, JJ., concur.
Petition dismissed.
o0o
834
G.R. No. 185945. December 5, 2012.*
FIDELIZA J. AGLIBOT, petitioner, vs. INGERSOL L.

SANTIA, respondent.
Civil Law Contracts Guaranty The liability of the guarantor

is only subsidiary, and all the properties of the principal debtor
must first be exhausted before the guarantor may be held
answerable for the debt. Thus, the creditor may hold the guarantor
liable only after judgment has been obtained against the principal
debtor and the latter is unable to pay.It is settled that the
liability of the guarantor is only subsidiary, and all the properties
of the principal debtor, the PLCC in this case, must first be
exhausted before the guarantor may be held answerable for the
debt. Thus, the creditor may hold the guarantor liable only after
judgment has been obtained against the principal debtor and the
latter is unable to pay, for obviously the exhaustion of the
principals propertythe benefit of which the guarantor claims
cannot even begin to take place before judgment has been
obtained. This rule is contained in Article 2062 of the Civil Code,
which provides that the action brought by the creditor must be
filed against the principal debtor alone, except in some instances
mentioned in Article 2059 when the action may be brought
against both the guarantor and the principal debtor.
_______________
*FIRST DIVISION.
284
Aglibot vs. Santia
Same Same Same A guaranty agreement is a promise to

answer for the debt or default of another, the law clearly requires
that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified, although it
does not have to appear in a public document.Concerning a
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guaranty agreement, which is a promise to answer for the debt or

default of another, the law clearly requires that it, or some note or
memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified, although under Article 1358 of the
Civil Code, a contract of guaranty does not have to appear in a
public document. Contracts are generally obligatory in whatever
form they may have been entered into, provided all the essential
requisites for their validity are present, and the Statute of Frauds
simply provides the method by which the contracts enumerated in
Article 1403(2) may be proved, but it does not declare them
invalid just because they are not reduced to writing. Thus, the
form required under the Statute is for convenience or evidentiary
purposes only.
Same Same Same Article 2055 of the Civil Code provides
that a guaranty is not presumed, but must be express, and cannot
extend to more than what is stipulated therein.Article 2055 of
the Civil Code also provides that a guaranty is not presumed, but
must be express, and cannot extend to more than what is
stipulated therein. This is the obvious rationale why a contract of
guarantee is unenforceable unless made in writing or evidenced
by some writing. For as pointed out by Santia, Aglibot has not
shown any proof, such as a contract, a secretarys certificate or a
board resolution, nor even a note or memorandum thereof,
whereby it was agreed that she would issue her personal checks
in behalf of the company to guarantee the payment of its debt to
Santia. Certainly, there is nothing shown in the Promissory Note
signed by Aglibot herself remotely containing an agreement
between her and PLCC resembling her guaranteeing its debt to
Santia. And neither is there a showing that PLCC thereafter
ratified her act of guaranteeing its indebtedness by issuing her
own checks to Santia.
Mercantile Law Negotiable Instruments Law Checks,
Defined Bills of Exchange, Defined Words and Phrases.
Section 185 of the Negotiable Instruments Law defines a check as
a bill of exchange drawn on a bank payable on demand, while
Section 126 of the said law defines a bill of exchange as an
unconditional order in
285
VOL. 687, DECEMBER 5, 2012 285
Aglibot vs. Santia
writing addressed by one person to another, signed by the person

giving it, requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum certain in

money to order or to bearer.
Same Same Accommodation Party Suretyship The relation
between an accommodation party and the party accommodated is,
in effect, one of principal and suretythe accommodation party
being the surety. It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed an original
promisor and debtor from the beginning. The liability is
immediate and direct.The relation between an accommodation
party and the party accommodated is, in effect, one of principal
and suretythe accommodation party being the surety. It is a
settled rule that a surety is bound equally and absolutely with the
principal and is deemed an original promisor and debtor from the
beginning. The liability is immediate and direct. It is not a valid
defense that the accommodation party did not receive any
valuable consideration when he executed the instrument nor is it
correct to say that the holder for value is not a holder in due
course merely because at the time he acquired the instrument, he
knew that the indorser was only an accommodation party.
Same Same Same Unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary but
also unconditional to a holder for value, such that even if the
accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the
latter is still liable for the whole obligation and such extension
does not release him because as far as a holder for value is
concerned, he is a solidary codebtor.It was held in Aruego that
unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also
unconditional to a holder for value, such that even if the
accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the
latter is still liable for the whole obligation and such extension
does not release him because as far as a holder for value is
concerned, he is a solidary codebtor. The mere fact, then, that
Aglibot issued her own checks to Santia made her personally
liable to the latter on her checks without the need for Santia to
first go after PLCC for the payment of its loan. It would have been
otherwise had it been shown that Aglibot was a
286
Aglibot vs. Santia
mere guarantor, except that since checks were issued ostensibly

in payment for the loan, the provisions of the Negotiable
Instruments Law must take primacy in application.

Court of Appeals.
Regino, Palma, Raagas, Esguerra & Associates Law
Office for petitioner.
Villamor A. Tolete for respondent.
REYES, J.:
Before the Court is a Petition for Review on Certiorari
under Rule 45 of the 1997 Rules of Civil Procedure seeking
to annul and set aside the Decision1 dated March 18, 2008
of the Court of Appeals (CA) in CAG.R. SP No. 100021,
which reversed the Decision2 dated April 3, 2007 of the
Regional Trial Court (RTC) of Dagupan City, Branch 40, in
Criminal Case Nos. 20060559D to 20060569D and
entered a new judgment. The fallo reads as follows:
WHEREFORE, the instant petition is GRANTED and the

assailed Joint Decision dated April 3, 2007 of the RTC of Dagupan
City, Branch 40, and its Order dated June 12, 2007 are
REVERSED AND SET ASIDE and a new one is entered
ordering private respondent Fideliza J. Aglibot to pay petitioner
the total amount of [P]3,000,000.00 with 12% interest per annum
from the filing of the Informations until the finality of this
Decision, the sum of which, inclusive of interest, shall be subject
thereafter to 12% annual interest until fully paid.
_______________
1Penned by Associate Justice Estela M. PerlasBernabe (now a member of this
Court), with Associate Justices Portia AlioHormachuelos and Lucas P. Bersamin
(now also a member of this Court), concurring: Rollo, pp. 8894.
2Id., at pp. 4044.
287
VOL. 687, DECEMBER 5, 2012 287

Aglibot vs. Santia
SO ORDERED.3
On December 23, 2008, the appellate court denied

herein petitioners motion for reconsideration.
Antecedent Facts
Private respondentcomplainant Engr. Ingersol L.

Santia (Santia) loaned the amount of P2,500,000.00 to
Pacific Lending & Capital Corporation (PLCC), through its
Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan
was evidenced by a Promissory Note dated July 1, 2003,
issued by Aglibot in behalf of PLCC, payable in one year
subject to interest at 24% per annum. Allegedly as a
guaranty or security for the payment of the note, Aglibot
also issued and delivered to Santia eleven (11) postdated
personal checks drawn from her own demand account
maintained at Metrobank, Camiling Branch. Aglibot is a
major stockholder of PLCC, with headquarters at 27
Casimiro Townhouse, Casimiro Avenue, Zapote, Las Pias,
Metro Manila, where most of the stockholders also reside.4
Upon presentment of the aforesaid checks for payment,
they were dishonored by the bank for having been drawn
against insufficient funds or closed account. Santia thus
demanded payment from PLCC and Aglibot of the face
value of the checks, but neither of them heeded his
demand. Consequently, eleven (11) Informations for
violation of Batas Pambansa Bilang 22 (B.P. 22),
corresponding to the number of dishonored checks, were
filed against Aglibot before the Municipal Trial Court in
Cities (MTCC), Dagupan City, Branch 3, docketed as
Criminal Case Nos. 47664 to 47674. Each Information,
except as to the amount, number and date of the checks,
and the reason for the dishonor, uniformly alleged, as
follows:
_______________
3Id., at p. 93.
4Id., at pp. 7580.
288

Aglibot vs. Santia
That sometime in the month of September, 2003 in the City of

Dagupan, Philippines and within the jurisdiction of this
Honorable Court, the abovenamed accused, FIDELIZA J.
AGLIBOT, did then and there, willfully, unlawfully and
criminally, draw, issue and deliver to one Engr. Ingersol L.
Santia, a METROBANK Check No. 0006766, Camiling Tarlac
Branch, postdated November 1, 2003, in the amount of
[P]50,000.00, Philippine Currency, payable to and in payment of
an obligation with the complainant, although the said accused
knew full[y] well that she did not have sufficient funds in or credit
with the said bank for the payment of such check in full upon its
presentment, such [t]hat when the said check was presented to
the drawee bank for payment within ninety (90) days from the
date thereof, the same was dishonored for reason DAIF, and
returned to the complainant, and despite notice of dishonor,
accused failed and/or refused to pay and/or make good the amount
of said check within five (5) days banking days [sic], to the
damage and prejudice of one Engr. Ingersol L. Santia in the
aforesaid amount of [P]50,000.00 and other consequential
damages.5
Aglibot, in her counteraffidavit, admitted that she did

obtain a loan from Santia, but claimed that she did so in
behalf of PLCC that before granting the loan, Santia
demanded and obtained from her a security for the
repayment thereof in the form of the aforesaid checks, but
with the understanding that upon remittance in cash of the
face amount of the checks, Santia would correspondingly
return to her each check so paid but despite having
already paid the said checks, Santia refused to return them
to her, although he gave her assurance that he would not
deposit them that in breach of his promise, Santia
deposited her checks, resulting in their dishonor that she
did not receive any notice of dishonor of the checks that for
want of notice, she could not be held criminally liable under
B.P. 22 over the said checks and that the reason Santia
filed the criminal cases against her was because she
refused to agree to his demand for higher interest.
_______________
5Id., at pp. 1011.
289
VOL. 687, DECEMBER 5, 2012 289

Aglibot vs. Santia
On August 18, 2006, the MTCC in its Joint Decision

decreed as follows:
WHEREFORE, in view of the foregoing, the accused,

FIDELIZA J. AGLIBOT, is hereby ACQUITTED of all counts of
the crime of violation of the bouncing checks law on reasonable
doubt. However, the said accused is ordered to pay the private
complainant the sum of [P]3,000,000.00 representing the total
face value of the eleven checks plus interest of 12% per annum
from the filing of the cases on November 2, 2004 until fully paid,
attorneys fees of [P]30,000.00 as well as the cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3,

2007 in Criminal Case Nos. 20060559D to 20060569D,
which further absolved Aglibot of any civil liability towards
Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the

court a quo regarding the civil aspect of these cases is reversed
and set aside and a new one is entered dismissing the said civil
aspect on the ground of failure to fulfill, a condition precedent of
exhausting all means to collect from the principal debtor.
SO ORDERED.7
Santias motion for reconsideration was denied in the

RTCs Order dated June 12, 2007.8 On petition for review
to the CA docketed as CAG.R. SP No. 100021, Santia
interposed the following assignment of errors, to wit:
In brushing aside the law and jurisprudence on the matter, the

Regional Trial Court seriously erred:
1. In reversing the joint decision of the trial court by dismissing the
civil aspect of these cases
_______________
6Id., at p. 26.
7Id., at p. 44.
8Id., at p. 90.
290

Aglibot vs. Santia
2. In concluding that it is the Pacific Lending and Capital

Corporation and not the private respondent which is principally
responsible for the amount of the checks being claimed by the
petitioner
3. In finding that the petitioner failed to exhaust all available legal
remedies against the principal debtor Pacific Lending and Capital
Corporation
4. In finding that the private respondent is a mere guarantor and
not an accommodation party, and thus, cannot be compelled to pay
the petitioner unless all legal remedies against the Pacific Lending
and Capital Corporation have been exhausted by the petitioner
5. In denying the motion for reconsideration filed by the
petitioner.9
In its now assailed decision, the appellate court rejected

the RTCs dismissal of the civil aspect of the aforesaid B.P.
22 cases based on the ground it cited, which is that the
failure to fulfill a condition precedent of exhausting all
means to collect from the principal debtor. The appellate
court held that since Aglibots acquittal by the MTCC in
Criminal Case Nos. 47664 to 47674 was upon a reasonable
doubt10 on whether the prosecution was able to
satisfactorily establish that she did receive a notice of
dishonor, a requisite to hold her criminally liable under
B.P. 22, her acquittal did not operate to bar Santias
recovery of civil indemnity.
It is axiomatic that the extinction of penal action does not

carry with it the eradication of civil liability, unless the extinction
proceeds from a declaration in the final judgment that the fact
from which the civil liability might arise did not exist. Acquittal
will not bar a civil action in the following cases: (1) where the
acquittal is based on reasonable doubt as only preponderance of
evidence is required in civil cases (2) where the court declared the
accuseds liability is not criminal but only civil in nature[] and (3)
where the
_______________
9Id., at p. 91.
10Id.
291
VOL. 687, DECEMBER 5, 2012 291

Aglibot vs. Santia
civil liability does not arise from or is not based upon the criminal
act of which the accused was acquitted.11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay

Santia P3,000,000.00 with interest at 12% per annum, from
the filing of the Informations until the finality of its
decision. Thereafter, the sum due, to be compounded with
the accrued interest, will in turn be subject to annual
interest of 12% from the finality of its judgment until full
payment. It thus modified the MTCC judgment, which
simply imposed a straight interest of 12% per annum from
the filing of the cases on November 2, 2004 until the
P3,000,000.00 due is fully paid, plus attorneys fees of
P30,000.00 and the costs of the suit.
Issue
Now before the Court, Aglibot maintains that it was

error for the appellate court to adjudge her personally
liable for issuing her own eleven (11) postdated checks to
Santia, since she did so in behalf of her employer, PLCC,
the true borrower and beneficiary of the loan. Still
maintaining that she was a mere guarantor of the said debt
of PLCC when she agreed to issue her own checks, Aglibot
insists that Santia failed to exhaust all means to collect the
debt from PLCC, the principal debtor, and therefore he
cannot now be permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.

Aglibot cannot invoke the benefit
of excussion
The RTC in its decision held that, It is obvious, from
the face of the Promissory Note x x x that the accused
appellant
_______________
11Id.
292

Aglibot vs. Santia
signed the same on behalf of PLCC as Manager thereof and

nowhere does it appear therein that she signed as an
accommodation party.12 The RTC further ruled that what
Aglibot agreed to do by issuing her personal checks was
merely to guarantee the indebtedness of PLCC. So now
petitioner Aglibot reasserts that as a guarantor she must
be accorded the benefit of excussionprior exhaustion of
the property of the debtoras provided under Article 2058
of the Civil Code, to wit:
Art. 2058. The guarantor cannot be compelled to pay the

creditor unless the latter has exhausted all the property of the
debtor, and has resorted to all the legal remedies against the
debtor.
It is settled that the liability of the guarantor is only

subsidiary, and all the properties of the principal debtor,
the PLCC in this case, must first be exhausted before the
guarantor may be held answerable for the debt.13 Thus, the
creditor may hold the guarantor liable only after judgment
has been obtained against the principal debtor and the

latter is unable to pay, for obviously the exhaustion of the
principals propertythe benefit of which the guarantor
claimscannot even begin to take place before judgment
has been obtained.14 This rule is contained in Article
206215 of the Civil Code, which
_______________
12Id., at p. 43.
13Baylon v. Court of Appeals, 371 Phil. 435, 443 312 SCRA 502, 510
(1999), citing World Wide Insurance and Surety Co., Inc. v. Jose, 96 Phil.
45 (1954) Visayan Surety and Insurance Corp. v. De Laperal, 69 Phil. 688
(1940).
14Id., at pp. 443444, citing Viuda de Syquia v. Jacinto, 60 Phil. 861,
868 (1934).
15Art. 2062. In every action by the creditor, which must be against
the principal debtor alone, except in the cases mentioned in Article 2059,
the former shall ask the court to notify the guarantor of the action. The
guarantor may appear so that he may, if he so desire, set up such defenses
as are granted him by law. The benefit of excussion mentioned in Article
2058 shall always be unimpaired, even
293
VOL. 687, DECEMBER 5, 2012 293

Aglibot vs. Santia
provides that the action brought by the creditor must be

filed against the principal debtor alone, except in some
instances mentioned in Article 205916 when the action may
be brought against both the guarantor and the principal
debtor.
The Court must, however, reject Aglibots claim as a
mere guarantor of the indebtedness of PLCC to Santia for
want of proof, in view of Article 1403(2) of the Civil Code,
embodying the Statute of Frauds, which provides:
Art. 1403. The following contracts are unenforceable, unless they are
ratified:
xxxx
(2) Those that do not comply with the Statute of Frauds as set forth
in this number. In the following cases an agreement hereafter made shall
be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing, and subscribed by the party
charged, or by his agent evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a

year from the making thereof
b) A special promise to answer for the debt, default, or miscarriage of
another
c) An agreement made in consideration of marriage, other than a
mutual promise to marry
_______________
if judgment should be rendered against the principal debtor and the
guarantor in case of appearance by the latter.
16Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it
(2) If he has bound himself solidarily with the debtor
(3) In case of insolvency of the debtor
(4) When he has absconded, or cannot be sued within the Philippines
unless he has left manager or representative
(5) If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the obligation.
294

Aglibot vs. Santia
d) An agreement for the sale of goods, chattels or things in action, at

a price not less than five hundred pesos, unless the buyer accept
and receive part of such goods and chattels, or the evidences, or
some of them, or such things in action, or pay at the time some
part of the purchase money but when a sale is made by auction
and entry is made by the auctioneer in his sales book, at the time
of the sale, of the amount and kind of property sold, terms of sale,
price, names of purchasers and person on whose account the sale
is made, it is a sufficient memorandum
e) An agreement for the leasing of a longer period than one year, or
for the sale of real property or of an interest therein
f) A representation to the credit of a third person. (Italics ours)
Under the above provision, concerning a guaranty

agreement, which is a promise to answer for the debt or
default of another,17 the law clearly requires that it, or
some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified,18
although under Article 135819
_______________
17Article 2047 of the Civil Code defines it as follows:
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.

18 Prudential Bank v. Intermediate Appellate Court, G.R. No. 74886,
December 8, 1992, 216 SCRA 257, 275276.
19Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation,
transmission, modification or extinguishment of real rights over
immovable property sales of real property or of an interest therein are
governed by Articles 1403, No. 2 and 1405
(2) The cession, repudiation or renunciation of hereditary rights or of
those of the conjugal partnership of gains
(3) The power to administer property, or any other power which has
for its object an act appearing or which should appear in a public
document, or should prejudice a third person and
295
VOL. 687, DECEMBER 5, 2012 295

Aglibot vs. Santia
of the Civil Code, a contract of guaranty does not have to

appear in a public document.20 Contracts are generally
obligatory in whatever form they may have been entered
into, provided all the essential requisites for their validity
are present, and the Statute of Frauds simply provides the
method by which the contracts enumerated in Article
1403(2) may be proved, but it does not declare them invalid
just because they are not reduced to writing. Thus, the
form required under the Statute is for convenience or
evidentiary purposes only.21
On the other hand, Article 2055 of the Civil Code also
provides that a guaranty is not presumed, but must be
express, and cannot extend to more than what is stipulated
therein. This is the obvious rationale why a contract of
guarantee is unenforceable unless made in writing or
evidenced by some writing. For as pointed out by Santia,
Aglibot has not shown any proof, such as a contract, a
secretarys certificate or a board resolution, nor even a note
or memorandum thereof, whereby it was agreed that she
would issue her personal checks in behalf of the company to
guarantee the payment of its debt to Santia. Certainly,
there is nothing shown in the Promissory Note signed by
Aglibot herself remotely containing an agreement between
her and PLCC resembling her guaranteeing its debt to
Santia. And neither is there a showing that PLCC
thereafter ratified her act of guaranteeing its
indebtedness by issuing her own checks to Santia.
Thus did the CA reject the RTCs ruling that Aglibot was
a mere guarantor of the indebtedness of PLCC, and as such
_______________
(4) The cession of actions or rights proceeding from an act appearing
in a public document. All other contracts where the amount involved
exceeds five hundred pesos must appear in writing, even a private one.
But sales of goods, chattels or things in action are governed by Articles
1403, No. 2 and 1405.
20Supra note 18.
21Ordua v. Fuentebella, G.R. No. 176841, June 29, 2010, 622 SCRA
146, 158 Municipality of Hagonoy, Bulacan v. Dumdum, Jr., G.R. No.
168289, March 22, 2010, 616 SCRA 315.
296

Aglibot vs. Santia
could not be compelled to pay [Santia], unless the latter

has exhausted all the property of PLCC, and has resorted
to all the legal remedies against PLCC xxx.22
Aglibot is an accommodation party
and therefore liable to Santia
Section 185 of the Negotiable Instruments Law defines a
check as a bill of exchange drawn on a bank payable on
demand, while Section 126 of the said law defines a bill of
exchange as an unconditional order in writing addressed
by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on
demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.
The appellate court ruled that by issuing her own post
dated checks, Aglibot thereby bound herself personally and
solidarily to pay Santia, and dismissed her claim that she
issued her said checks in her official capacity as PLCCs
manager merely to guarantee the investment of Santia. It
noted that she could have issued PLCCs checks, but
instead she chose to issue her own checks, drawn against
her personal account with Metrobank. It concluded that
Aglibot intended to personally assume the repayment of
the loan, pointing out that in her CounterAffidavit, she
even admitted that she was personally indebted to Santia,
and only raised payment as her defense, a clear admission
of her liability for the said loan.
The appellate court refused to give credence to Aglibots
claim that she had an understanding with Santia that the
checks would not be presented to the bank for payment, but
were to be returned to her once she had made cash
payments for their face values on maturity. It noted that
Aglibot failed to present any proof that she had indeed paid
cash on the above checks as she claimed. This is precisely

why Santia
_______________
22Rollo, p. 92.
297
VOL. 687, DECEMBER 5, 2012 297

Aglibot vs. Santia
decided to deposit the checks in order to obtain payment of

his loan.
The facts below present a clear situation where Aglibot,
as the manager of PLCC, agreed to accommodate its loan to
Santia by issuing her own postdated checks in payment
thereof. She is what the Negotiable Instruments Law calls
an accommodation party.23 Concerning the liability of an
accommodation party, Section 29 of the said law provides:
Sec. 29. Liability of an accommodation party.An

accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
As elaborated in The Phil. Bank of Commerce v.

Aruego:24
An accommodation party is one who has signed the instrument

as maker, drawer, indorser, without receiving value therefor and
for the purpose of lending his name to some other person. Such
person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the
instrument knew him to be only an accommodation party. In
lending his name to the accommodated party, the accommodation
party is in effect a surety for the latter. He lends his name to
enable the accommodated party to obtain credit or to raise money.
He receives no part of the consideration for the instrument but
assumes liability to the other parties thereto because he wants to
accommodate another. xxx.25 (Citation omitted)
The relation between an accommodation party and the

party accommodated is, in effect, one of principal and
surety
_______________
23 See Stelco Marketing Corporation v. Court of Appeals, G.R. No.
96160, June 17, 1992, 210 SCRA 51, 57 citing Agbayani, Commercial
Laws of the Philippines, 1975 ed., Vol. I.
24102 SCRA 530 (1981).
25Id., at pp. 539540.
298

Aglibot vs. Santia
the accommodation party being the surety. It is a settled

rule that a surety is bound equally and absolutely with the
principal and is deemed an original promisor and debtor
from the beginning. The liability is immediate and direct.26
It is not a valid defense that the accommodation party did
not receive any valuable consideration when he executed
the instrument nor is it correct to say that the holder for
value is not a holder in due course merely because at the
time he acquired the instrument, he knew that the indorser
was only an accommodation party.27
Moreover, it was held in Aruego that unlike in a contract
of suretyship, the liability of the accommodation party
remains not only primary but also unconditional to a
holder for value, such that even if the accommodated party
receives an extension of the period for payment without the
consent of the accommodation party, the latter is still liable
for the whole obligation and such extension does not
release him because as far as a holder for value is
concerned, he is a solidary codebtor.
The mere fact, then, that Aglibot issued her own checks
to Santia made her personally liable to the latter on her
checks without the need for Santia to first go after PLCC
for the payment of its loan.28 It would have been otherwise
had it been shown that Aglibot was a mere guarantor,
except that since checks were issued ostensibly in payment
for the loan, the provisions of the Negotiable Instruments
Law must take primacy in application.
WHEREFORE, premises considered, the Petition for
Review on Certiorari is DENIED and the Decision dated
March
_______________
26 Garcia v. Llamas, 462 Phil. 779, 794 417 SCRA 292, 305 (2003),
citing Spouses Gardose v. Tarroza, 352 Phil. 797 290 SCRA 186 (1998),
Palmares v. Court of Appeals, 351 Phil. 664 288 SCRA 422 (1998).
27Ang Tiong v. Ting, 130 Phil. 741, 744 22 SCRA 713, 716 (1968).
28Sps. Gardose v. Tarroza, 352 Phil. 797 290 SCRA 186 (1998).
299
VOL. 687, DECEMBER 5, 2012 299

Aglibot vs. Santia
18, 2008 of the Court of Appeals in CAG.R. SP No. 100021

is hereby AFFIRMED.
SO ORDERED.
LeonardoDe Castro (Acting Chairperson), Del

Castillo,** Villarama, Jr. and Perez,*** JJ., concur.
Petition denied, judgment affirmed.
Notes.The extent of a suretys liability is determined

by the language of the suretyship contract or bond itself. It
cannot be extended by implication, beyond the terms of the
contract. (First LepantoTaisho Insurance Corporation vs.
Chevron Philippines, Inc., 663 SCRA 309 [2012])
The law is clear that a surety contract should be read
and interpreted together with the contract entered into
between the creditor and the principal. A surety contract is
merely a collateral one, its basis is the principal contract or
undertaking which it secures. (Id.)
o0o
_______________
** Additional member per Raffle dated November 7, 2012 vice
Associate Justice Lucas P. Bersamin.
*** Acting member per Special Order No. 1385 dated December 4,
2012 vice Chief Justice Maria Lourdes P. A. Sereno.
[Nos. 18774 and 18876. March 27, 1923]
EL VENCEDOR, plaintiff and appellee, vs. JUAN S.

CANLAS, JOSE S. GALANG, MELCHOR DULAY,
ALFONSO ROSARIO, DOMINGO PAYAUAN, and
DOMINGO MATABANG, defendants and appellants,
1. SURETYSHIP CONSTRUCTION OF CONTRACT.A

contract of suretyship is strictly construed and cannot be
extended beyond its specified limits.
2. ID. ID. NOT RETROSPECTIVE.A contract of

suretyship is not retrospective and no liability attaches to
the surety for defaults occurring before the contract is
entered into unless an intent to be so liable is indicated.
3. ID. ID. ID.The defendant C was the agent of the

plaintiff for the sale of merchandise on commission and
failed to account for some P5,000 received by him for such
merchandise. Subsequently the other defendants, without
being informed of the fact that C at that time was
indebted to the plaintiff, bound themselves as sureties to
respond for the fulfillment by C
700
El Vencedor vs., Canlas
of his duties as the plaintiff's agent, and for his rendering

true accounts of all things belonging to the plaintiff and
which might at any time come into his possession or under
his control and for his making exact payment of all sums
of money coming into his possession by virtue of the
agency. Held: That the suretyship was not retrospective
and that the liability of the sureties was limited to debts
contracted subsequently to the date of the contract of
suretyship.
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Manila. Imperial, J.
Jose S. Galang in his own behalf.
L. Siguion Reyna, for the other appellants.
Romualdez Brothers for appellee.
OSTRAND, J.:
It appears from the evidence that during the period from

October, 1919, to November, 1920, the defendant, Juan S.
Canlas, was the agent of the plaintiff for the sale of
merchandise in the Province of Pangasinan on a
commission basis. On June 30, 1920, an accounting was
had between the plaintiff and Canlas from which it
resulted that the latter had failed to pay the plaintiff for
merchandise of the value of P5,039.67. Canlas maintained
that his failure to pay was due to the fact that he had sold
some of the goods on credit and had been unable to collect
the accounts from the customers, but the plaintiff company
insisted that he had no authority to sell on credit and
therefore was indebted to them for the amount of the
outstanding accounts. The plaintiff thereupon refusing to
continue to furnish Canlas merchandise for sale unless he
gave a bond, Canlas induced his codefendants to become
his sureties and on September 10, 1920, the following bond
was executed:
"Know all men by these presents, That we, Melchor Dulay,

Ildefonso Rosario, Domingo Payauan and Domingo Matabang, of
age, married and residents of San Carlos, Pangasinan, hereby
bind ourselves, our heirs, executors and administrators, jointly
and severally on this bond in the
701
VOL. 44, MARCH 27, 1923 701

El Vencedor vs. Canlas
sum of Two Thousand Five Hundred Pesos (P2,500), Philippine

currency, in favor of El Vencedor, a corporation whose corporate
existence and right to sue are hereby admitted, which sum we,
our heirs, executors and administrators, hereby agree to pay to El
Vencedor, its successors and assigns in due form.
"The condition of this obligation is the following: Whereas the
firm, El Vencedor, has appointed Juan S. Canlas, of Dagupan, its
agent in the Philippine Islands in its business of selling goods
belonging to the said establishment, now therefore, if the said
Juan S. Canlas shall f faithfully ully f ulfill his duties as such

agent and render a true account, and make exact payment of all
such funds, goods, documents and any other things belonging to
the said establishment, El Vencedor, as may on any occasion come
into his possession or under his control, then the foregoing
obligation shall become null and void otherwise it shall have full
force and effect.
"It is hereby specially stipulated that the undersigned
expressly waive all the benefits provided for by law, and agree
that in the event of the failure of the said Juan S. Canlas
faithfully to fulfill his duties as agent, or to render an exact
account of all such funds, goods, documents and any other things
pertaining to the firm, El Vencedor, as may on any occasion have
come into his possession or under his control, the said firm, El
Vencedor, may immediately proceed against them or each of them
indiscriminately without the necessity of first exhausting all the
remedies provided by law or part thereof against said agent.
"It is also hereby stipulated that the undersigned bind
themselves jointly and severally not to withdraw this bond
without giving three months' previous notice to El Vencedor at its
office in Manila, of their intention to withdraw and cancel the
same, it being distinctly understood that unless such notice is
given, this bond shall have full force and effect.
702

"In testimony whereof, we sign these presents in San Carlos,

Pangasinan, this 10th day of September, 1920.
(Sgd.) "MELCHOR DULAY

"F167915542920, San Carlos, Pangasinan
(Marked.) "DOMINGO PAYAUAN
(Sgd.) "ILDEFONSO ROSARIO
(Sgd.) "DOMINGO MATABANG
"F16724101220, San Carlos, Pangasinan"
(Signed by two witnesses and acknowledged before a notary

public.)
On the 15th of the same month the defendant Galang

executed the following document in favor of the plaintiff:
"Know all men by these presents

"Whereas Mr. Juan S. Canlas was appointed travelling agent
of El Vencedor, a commercial house of this city of Manila, to offer
for sale the goods and merchandise of the said house
"Whereas the said Juan S. Canlas, in his capacity as travelling
agent, will have to take with himself some samples of the goods
and merchandise of the aforesaid house
"Whereas the said house requires of said Juan S. Canlas the
giving of a bond in the amount of P1,500 to guarantee the return
to said house of any such goods and merchandise which the said
agent may have in his possession
"Now, therefore, I, Jose S. Galang, attorney and notary
practicing in this City of Manila, and owner of the Galang
Pharmacy of this same city, the value of which is estimated at
P3,000, hereby bind myself as surety and guarantor of the said
Juan S. Canlas to become liable in case of his inability to pay any
such damages as the house may suffer by reason of his failure to
return such goods and merchandise, as the said principal, Juan S.
Canlas, may be legally obliged to return.
703
VOL. 44, MARCH 27, 1923 703

"In witness whereof, I sign these presents in this City of

Manila this 15th day of September, 1920.
(Sgd.) "JOSE S. GALANG
"Attorney and Notary Public
"1331 Misericordia, Manila"
It does not appear from the evidence, that at the time of
executing the undertakings above quoted the sureties had
knowledge of the fact that Canlas was at that time
indebted to the company in any sum whatever. Subsequent
to the execution of the bonds the plaintiff furnished Canlas
merchandise to the value of P194.99 for which he has failed
to account.
The present action was instituted February 25, 1921,
and the sureties on both bonds were made defendants.
After trial, the court below rendered judgment against
Juan S. Canlas for the sum of P5,039.67, with interest at
10 per cent per annum from the 26th day of February,
1921, and with the costs, holding the defendants Melchor
Dulay, Alfonso Rosario, Domingo Payauan and Domingo
Matabang liable as sureties, jointly and severally, for the
sum of P2,500 and the defendant Galang, likewise as
surety, for the sum of P1,500, the full amount of his bond.
From this judgment all of the defendant sureties appeal,
two bills of exceptions being presented, one by the

appellant Galang and one by the other appellants and
numbered R. G, 18876 and R. G. 18774, respectively, in
this court.
The principal question involved in the two appeals is
whether the bonds can be considered retrospective so as to
respond for the debts contracted by Juan S. Canlas
previously to the execution of the bonds. The court below
held that they are retrospective this court takes the
opposite view.
The rule is well known that a bond or contract of
suretyship is strictly construed and cannot be extended
beyond its specified limits. (Civil Code, art. 1821.) It is not
retrospective and no liability attaches for defaults
occurring before it is entered into unless an intent to be so
liable is
704

indicated. (32 Cyc., 74, 75 and authorities there cited 21 R.

C. L., 979.)
We find nothing in the bonds in question which indicates
that they were intended to be retrospective. There is
nothing in the documents to show that Canlas had entered
upon the performance of his agency previously to their
execution or that he was indebted to his principal at that
time and the sureties, as far as the documents show, had a
right to rely on the presumption that their suretyship was
prospective and to assume that the samples, merchandise,
and accounts, for which they bound themselves to respond,
related to future transactions.
It appears from the record that practically all the
samples delivered to Canlas have been returned to the
plaintiff and a minority of the court, including the writer,
think that Galang's contract of suretyship relates only to
samples and does not embrace merchandise delivered to
Canlas for sale. The majority of the court are, however, of
the opinion that the bond covers both samples and ordinary
merchandise.
As stated above, the value of the merchandise f urnished
Canlas subsequent to ,the execution of the bonds, and not
accounted for by him, is P194.99, and we hold that this is
the only amount for which the appellants are liable as
sureties on the bonds in question.
The judgment appealed from is therefore modified and it

is ordered that the defendantsappellants Jose Galang,
Melchor Dulay, Alfonso Rosario, Domingo Payauan, and
Domingo Matabang, jointly and severally, pay to the
plaintiff the sum of P194.99, with interest at the rate of 10
per cent per annum from February 25, 1921, and with the
costs, reserving to said defendants their rights of
contribution and their recourse to the principal Canlas. So
ordered.
Araullo, C. J., Street, Malcolm, Avancea, Villamor,

and Johns, JJ., concur.
Romualdez, J., did not take part.
Judgment modified.
705
VOL. 44, MARCH 27, 1923 705

Fua Cun vs. Summers and China, Banking Corporation
[No. 25811. December 31, 1926]
BANK OF THE PHILIPPINE ISLANDS, plaintiff and

appellant, vs. ULRICH FOERSTER, as administrator of
the intestate of the deceased Francisco Echevarria,
defendant and appellee.
1. CONTRACT OF SURETYSHIP NOT ORDINARILY

RETROSPECTIVE INTERPRETATION.Bonds or
other contracts of suretyship are ordi
844
Bank of the Philippine Islands vs. Foerster
narily not to be construed as retrospective, but that rule

must yield to the intention of the contracting parties as
revealed by the evidence, and does not interfere with the
application of the ordinary tests and canons followed in
the interpretation of other contracts.
2. ID. ID. ID.E. F. as directortreasurer of a corporation

established a current credit account on behalf of the
corporation with the plaintiff bank for P100,000. After
having drawn checks against the credit account for a
considerable amount, a formal agreement in writing was
entered into between the corporation and the plaintiff
bank and a bond was given by E. F. for the repayment of
the amounts drawn against the credit account. Held: That
the circumstances of the case clearly indicated that the
bond given by E. F. was intended to cover all of the
indebtedness incurred by the corporation upon its current
account with the plaintiff bank and that the bond was
retrospective with reference to the amount drawn prior to
its execution.

Iloilo. Salas, J.
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Montinola, & Montinola for appellant.

Jose Lopez Vito for appellee.
OSTRAND, J.:
On January 30, 1920, the board of directors of the

corporation Arrocera de Pototan authorized its treasurer,
the now deceased Francisco Echevarria, to obtain for the
corporation a credit on current account for the sum of
P100,000 from the Bank of the Philippine Islands. The
credit was granted and though no formal document to that
effect was executed until March 27, 1920, it appears from
the testimony of the witness Eugenio Rocha, then cashier
of the Iloilo branch of the bank that the defendant
corporation began to draw against the credit as early as
February 9, 1920. The document of March 27, 1920, reads
as follows:
845
VOL. 49, DECEMBER 31, 1926 845

"BANK OF THE PHILIPPINE ISLANDS

"AGREEMENT FOR CREDIT IN CURRENT ACCOUNT
"This Agreement, made this 27th day of March of 1920,

between Mr. Francisco Echevarria, as DirectorTreasurer
of the Arrocera de Pototan of Iloilo, Philippine Islands, of
the first part and the Bank of the Philippine Islands, of
Iloilo, Philippine Islands, of the second part.
"WlTNESSETH
"That whereas the party of the second part agrees to grant

and hereby does grant to the party of the first part a loan
by way of a credit in current account of not to exceed the
sum of one hundred thousand pesos (P100,000) which said
sum, or so much as may be desired by said first party, is to
be advanced to the said first party upon his/its checks
drawn upon the said second party.
"Now, therefore, said first party for self hereby agrees to
pay, to said second party, interest upon all sums so taken,
computed upon average daily balances and payable upon
the last day of each quarter of the calendar year, at the
rate of eight percent per annum.
"Said first party further agrees to furnish security for
said loan by pledge or mortgage of real estate or chattels or
assignments of securities, as may be desired by said second
party, to an amount sufficient at all times amply to secure

said second party for the principal and interest of said loan,
and in case said first party fails to furnish the amount of
security or additional security deemed necessary and
demanded by ,said second party, said second party may
declare the whole principal and interest immediately due
and payable, anything in these presents to the contrary
notwithstanding.
846

"It is hereby further agreed that the principal and interest

of said loan shall in any event be and become due and
payable on sixty days from demand.
"For the ARROCERA DE POTOTAN

(Sgd.) "FRANCISCO ECHEVARRIA
"DirectorTreasurer
"THE BANK OF THE PHILIPPINE ISLANDS
"By (Sgd.) "Illegible
"Witnesses:
(Sgd.) "Illegible
"MIGUEL GARGOLLO"
Simultaneously with the execution of the document quoted,

Echevarria gave the following bond:
"BANK OF THE PHILIPPINE ISLANDS

"BOND
"Know all men by these.presents, that we Mr.. Francisco

Echevarria, DirectorTreasurer of the Arrocera de Pototan
in the name of the latter as well as in his own name as
surety are hereby held and bound unto the Bank of the
Philippine Islands, of Iloilo, Philippine Islands, in the sum
of one hundred thousand pesos (P100,000), Philippine
currency, for the payment of which, well and truly to be
made, we hereby jointly and severally, bind ourselves, our
heirs, executors, administrators and assigns, firmly by
these presents.
"The conditions of this obligation are such, that
"Whereas, the said Bank of the Philippine Islands has
advanced to the said Arrocera de Pototan by way of a credit
on current account the sum of one hundred thousand pesos

(P100,000).
"Now, therefore, if the said Arrocera de Pototan shall
duly pay, or cause to be paid, to the said Bank of the
Philippine Islands, on demand, at sixty days from demand,
the said sum of one hundred thousand pesos (P100,000),
and shall duly pay, or cause to be paid, quarterly, on the
last days of March, June, September, and December of each
847
VOL. 49, DECEMBER 31, 1926 847

year, until the principal and interest are paid in full,

interest on said sum and on all sums from time to time
remaining unpaid at the rate of eight per cent (8%) per
annum, then this obligation shall be void, otherwise it shall
remain in full force and effect.
"In witness whereof, we have hereunto set our hands at
Iloilo, Philippine Islands, this 27th day of March of 1920.
"For the ARROCERA DE POTOTAN
(Sgd.) "FRANCISCO ECHEVARRIA

"DirectorTreasurer
"FRANCISCO ECHEVARRIA
"Surety
"Witnesses:
(Sgd.) "Illegible
"Illegible"
The Arrocera de Pototan continued to draw against its

credit with the plaintiff Bank until December 8, 1921,
when its overdraft amounted to P77,944.40, of which
amount the plaintiff then demanded payment within sixty
days. The Arrocera was able to pay only P1,000 and on the
30th of November, 1923, the amount due with interest up
to September 30, 1923, reached the sum of P84,922.98. The
plaintiff thereupon brought an action against the
Corporation as a result of which it was able on January 26,
1925, to collect the sum of P43,100, leaving a balance of
P45,751.37 due and unpaid. In the meantime and while the
action against the Arrocera de Pototan was pending, the
plaintiff by virtue of the bonds above quoted presented a
claim to the committee of claims against the estate of the
then deceased Francisco Echevarria for the full amount of
the debt of the Arrocera de Pototan to the bank. The

committee allowed the claim and the administrator of the
estate appealed to the Court of First Instance, which on
January 30, 1926, rendered a decision in which it was held
that the bond given on March 27, 1920, had no retroactive
effect and did not cover the amounts received from the
Bank prior to the date of the instrument that the amount
received subsequent to
848

that date was only P25,429.15 that the money collected by

the aforesaid action against the Arrocera de Pototan should
first be applied to the payment of the debt incurred
subsequent to March 27, 1920, and that by so applying the
money collected the amount due upon the bond was more
than covered. The court therefore dismissed the case and
thereupon the present appeal was taken by the plaintiff.
In our opinion, the appealed judgment is erroneous. It is
very true that bonds or other contracts of suretyship are
ordinarily not to be construed as retrospective, but that
rule must yield to the intention of the contracting parties
as revealed by the evidence, and does not interf ere with
the use of the ordinary tests and canons of interpretation
which apply in regard to other contracts. (21 R. C. L., 977.)
In the present case the circumstances so clearly indicate
that the bond given by Echevarria was intended to cover all
of the indebtedness of the Arrocera upon its current
account with the plaintiff Bank that we cannot possibly
adopt the view of the court below in regard to the effect of
the bond.
Echevarria was directortreasurer of the Arrocera
corporation and was familiar with its financial affairs. The
corporation had only one current credit account, a fact
which was known to Echevarria, and there can be no doubt
whatever that the bond was intended by all parties to cover
the entire account. The Arrocera's credit on current account
was limited to P100,000not to that amount plus previous
overdraftsand Echevarria bound himself to respond f or
the f full amount of that credit, well knowing that at the
time the bond was executed a large portion of the credit
secured by the bond had already been exhausted. In such
circumstances, the defendant can hardly be heard to say
that the bond was executed merely to cover future
advances and was not intended to cover the entire credit.
The situation would have been different if Echevarria at

the time of the execution of the bond had been ignorant of
the fact that a part of the credit had already been utilized
in that case
849
VOL. 49, DECEMBER 31, 1926 849

Ramirez and De Marcaida vs. Redfern
we should have been justified in regarding the bond as

merely prospective.
For the reasons stated, and it appearing that all of the
assets of the Arrocera de Pototan are exhausted, the
appealed judgment is reversed and it is ordered that the
plaintiff have and recover judgment against the defendant
for the sum of P45,751.37, with interest at the rate of 8 per
cent per annum from January 26, 1925, but without costs.
So ordered.
Avancea, C. J., Street, Villamor, Johns, Romualdez,

and VillaReal, JJ., concur.
Judgment reversed.
______________
[No. 29588. December 29, 1928]
STANDARD OIL CO. OF NEW YORK, plaintiff and

appellant, vs. CHO SIONG ET AL., defendants and
appellees.
[No. 29753. December 29, 1928]
ONG GUAN CAN, plaintiff and appellant, vs. STANDARD

OIL CO. OF NEW YORK, defendant and appellee.
PRINCIPAL AND SURETY SURETY'S LIABILITY ON

BOND.Under the terms of the bond signed by the surety, he
did not answer for
613
VOL. 52, DECEMBER 29, 1928 613
Standard Oil CO. of New York vs. Cho Siong
the principal obligor save for the latter's acts by virtue of the
contract of agency. He cannot be held liable for the debt of a
former agent, which the principal obligor assumed by virtue of
another contract, of which said surety was not even aware. A
contract of suretyship is to be strictly interpreted and is not to be
extended beyond its terms.

Iloilo. Santamaria, J.
Powell & Hill for appellant in case No. 29588, and for
appellee in case No. 29753.
Padilla, Treas & Magalona for appellees in case No.
29588 and for appellant in case No. 29753.
AVANCEA, C. J.:
These two cases, 29588 and 29753 were jointly prosecuted

in the court below and only one judgment was rendered in
http://central.com.ph/sfsreader/session/0000015cda23897d1e23bebc003600fb002c009e/t/?o=False 1/4
both.
In case 29588, the plaintiff, Standard Oil Co. of New
York, sued the defendants, Cho Siong and Ong Guan Can,
for the amount of P2,197.42, with interest, plus P750 as
attorney's fees. The trial court ordered the defendants Cho
Siong and Ong Guan Can to pay the plaintiff the amount of
P64.46, with legal interest from the date when the
complaint was filed until full payment, plus P200 by way of
attorney's fees and defendant Cho Siong to pay the
plaintiff the sum of P2,132.96, with legal interest thereon
from the date when the complaint was filed until fully paid,
plus P500 as attorney's fees.
On January 27, 1926, the plaintiff and defendant Cho
Siong entered into a contract whereby Cho Siong obligated
himself to sell as agent, plaintiff's petroleum products. He
guaranteed the fulfilment of his obligation by giving a
personal bond in the sum of P3,000, subscribed by Ong
Guan Can, and with the sum of P1,000 in cash which he
delivered to the plaintiff, with the right to apply it to the
payment of any amount in which he might become
indebted. Cho Siong also bound himself to pay
614

Standard Oil Co. of New York vs. Cho Siong
such attorney's fees, costs, and other expenses, as might be

occasioned the plaintiff should it be under the necessity of
filing suit for the recovery of any amount to Which it might
be entitled pursuant to this contract in a sum equal to 10
per cent of the amount owed.
By virtue of this contract, Cho Siong received from the
plaintiff petroleum to the value of P14,136.79, and made
good to said plaintiff the total amount of P14,072.33, thus
leaving a balance of P64.46 in favor of the plaintiff and
against the defendant Cho Siong.
But it appears that on the same day (January 27, 1926),
when the plaintiff and defendant Cho Siong entered into
the contract of agency and when the other defendant, Ong
Guan Can subscribed the P3,000 bond, the defendant Cho
Siong signed an instrument in favor of the plaintiff in
which he assumed responsibility for all the accounts that
might be owing to the plaintiff by the former agent, Tong
Kuan, and for all the goods the latter might have in his
possession at the time when the agency was transferred to
Cho Siong. According to the plaintiff's evidence, the
amount then owed by Tong Kuan was P3,132.96. Adding
P64.46 to this amount, we have the total debt of P3,197.42.

Deducting from this the P1,000 in cash which Cho Siong
deposited with the plaintiff to be applied upon his
liabilities, it leaves a debit balance of P2,197.42 which is
the amount claimed in the complaint.
According to the above, excluding the debt of the former
agent Tong Kuan, the only balance against the defendant
Cho Siong on his own contract of agency with the plaintiff
is the sum of P64.46. Since the plaintiff has the P1,000
belonging to the defendant Cho Siong, which may be
applied to the payment of the sums owed by the latter, it
follows that, as to Cho Siong's agency, he has incurred no
liability, for out of the P1,000 deposited with the plaintiff
he still has P935.54 in his favor. Consequently, Ong Guan
Can, as a surety for those debts which Cho Siong might
incur upon the contract of agency, does not answer
615
VOL. 52, DECEMBER 29, 1928 615

Standard Oil Co. of New York vs. Cho Siong
for anything, the principal not having incurred any

liability. It is plain under the terms of the bond signed by
Ong Guan Can that he did not answer for Cho Siong, save
for the latter's acts by virtue of the contract of agency. He
cannot be held liable for the debt of agent Tong Kuan
which Cho Siong assumed by virtue of another contract of
which said Ong Guan Can was not even aware. A contract
of suretyship is to be strictly interpreted and is not to be
extended beyond its terms.
The amount of P750 for attorney's fees and court costs,
which Cho Siong bound himself to pay to the plaintiff, was
agreed upon in the contract of agency, and as Cho Siong did
not incur any liability with respect to this contract he
cannot be ordered to pay this sum.
In the instrument by which Cho Siong assumed the debt
of the former agent, Tong Kuan, no stipulation was made
as to attorney's fees and as it is on this contract that Cho
Siong failed to perform his obligation it is also clear that he
is not liable for any amount as attorney's fees.
In view of the foregoing, the appealed judgment is
modified as to case No. 29588 and the defendant Cho Siong
is ordered to pay the plaintiff the amount of P2,197.42 only,
the other defendant Ong Guan Can being relieved from all
liability.
In case No. 29753 Ong Guan Can claims the sum of
P15,000 from the Standard Oil Co., of New York. In the
former case, No. 29588, the Standard Oil Co., of New York
secured a preliminary attachment against Ong Guan Can,
which was levied on some of his lands. This attachment
consisted simply in the annotation thereof in the transfer
certificate of title entered on November 17, 1927, which
attachment was dissolved and the annotation cancelled on
the 19th of the same month. The attachment, therefore,
only lasted two days. The amount of P15,000 which Ong
Guan Can claims of the Standard Oil Co., of New York is
the amount of damages he alleges were, caused him by this
attachment.
616

Gemora vs. F. M. Yap Tico & Co.
The trial court finding that no damage proven to have been

suffered by Ong Guan Can on account of said attachment,
absolved the Standard Oil Co., of New York from this claim
in case No. 29753.
Without considering the other question raised in this
case, and accepting the trial court's conclusions that no
damage was occasioned Ong Guan Can by said attachment
which only lasted two days, the judgment appealed from is
affirmed, with costs against the appellant. So ordered.
Johnson, Street, Malcolm, Villamor, Ostrand, Romual

dez, and VillaReal, JJ., concur.
Judgment modified.
__________
[No. 23871. December 7, 1925]
THE MUNICIPALITY OF LEMERY, plaintiff and

appellee, vs. ANDRES MENDOZA and SIMEON BLAS,
defendants and appellants.
1. FISHERY PRIVILEGE OF FISHERY IN MUNICIPAL

WATERS CERTAINTY AS TO SUBJECTMATTER OF
LEASE.A contract by which the municipal authorities
purport to grant to a designated person the privilege of
fishery in "all salt waters" within the limits of the
municipality is sufficiently certain as to subjectmatter of
the grant and it does not offend against section 2321 of
the Administrative Code, which authorizes the council to
grant privileges of fishery "within any definite portion, or
area, of the municipal waters." It was not intended by this
provision to prohibit the council from letting all waters
suitable for fishing in its limits in a single lease.
2. ID. ID. APPROVAL OF LEASE BY PROVINCIAL

BOARD CLERICAL ERROR IN DATE OF
TERMINATION OF LEASE.A resolution of a provincial
board approving a municipal lease of the privilege of
fishery for two years is not rendered ineffectual for the
second year of the lease by the circumstance that a clerical
error is made in the resolution with respect to the date of
the termination of the lease.
3. ID. ID. INTERVENTION OF DEPARTMENT HEAD.A

provision of law to the effect that leases of fishing
privileges in municipal waters s for a longer period than
one year shall be let under such conditions as shall be
prescribed by the department head does not make it
necessary for all such leases to be submitted to this official
in order that he may dictate the terms to be embodied
therein. The provision referred to was merely intended to
authorize him to make general regulations for the
governance of the municipal authorities in making such
leases.
416
http://central.com.ph/sfsreader/session/0000015cda24bb792dcaf4ee003600fb002c009e/t/?o=False 1/9
Municipality of Lemery vs. Mendoza and Blas
4. ID. ID. LIABILITY OF SURETY ON BOND GIVEN

FOR PRIVILEGE OF FISHERY.Where a bond given to
secure compliance on the part of the lessee clearly shows
that the privilege is let f or & stated sum for the term of
two years, the total liability of the surety is limited to this
amount and the contract will not be interpreted as
making the surety liable for the stated amount per annum
for each of the two years of the lease.

Batangas. Filamor, J.
Rafael Palma for appellants.
Provincial Fiscal de la Costa for appellee.
STREET, J.:
This action was instituted in the Court of First Instance of

Batangas by the municipality of Lemery for the purpose of
recovering jointly and severally of the defendants, Andres
Mendoza, as principal, and of Simeon Blas and Mariano
Napa, as sureties, the sum of P22,999.99, plus a further
penal sum of P4,599.99, with costs. Upon hearing the cause
the trial judge gave judgment for the plaintiff in the
amounts stated, with costs, and the defendants Mendoza
and Blas appealed.
It appears that on September 1,1920, the municipal
council of Lemery, Batangas, adopted a resolution, No. 53,
authorizing the letting of the privilege of fishing for bangs
in the sea waters within the limits of the municipality for
the period of two years, extending from January 1, 1921, to
December 31, 1922, inclusive. As the resolution
contemplated the letting of this privilege for a longer period
than one year it was necessary to obtain the previous
approval of the provincial board, in conformity with section
2319 in relation with section 2323 of the Administrative
Code and on October 1, 1920, said provincial board
adopted its resolution, No. 740, of the following tenor: "On
motion by member Muoz,
417
VOL. 48, DECEMBER 7, 1925 417

"The provincial board unanimously approved the resolution No.

53, current series, of the municipal council of Lemery, authorizing
the sale on public auction of bangs fishery privilege, said
privilege to take effect f rom January 1, to December 31, 1921,
inclusive."
The circumstance that the resolution of the provincial

board, in describing the contents of the lease, as embodied
in resolution No. 53 of the municipal council of Lemery,
used the date "1921," as the terminal, instead of "1922,"
seems to have passed unnoticed and the municipal
authorities of Lemery, considering resolution No. 53 as
approved, proceeded to make public announcement,
inviting the submission of bids for the lease of the fishery
for the period of two years. When the bids were opened
nine offers were found forthcoming. Of these eight were in
amounts around P8,000 per year, while the other, the one
submitted by Andres Mendoza, was in the amount of
P22,999.99 per year. As this bid was by far the most
advantageous to the municipality, it was of course
accepted.
A formal contract was therefore executed by Zacarias
Marasigan, as municipal president, and Andres Mendoza,
by which the privilege of fishing for bangs in all the salt
waters of the municipality was let to the said Mendoza for
the period of two years beginning with January 1, 1921,
and ending with December 31, 1922, for the sum of
P22,999.99 for each year. This contract (Exhibit D) is dated
November 11, 1920.
It appears that in a provincial circular No. 153, series of
1917, of the Executive Bureau, it is declared that in letting
the privilege of fishery the municipal council shall require
the successful bidder to supply a bond in a sum double the
amount of his liability under his contract, to be executed by
two of more persons possessing real property assessed at
not less than the amount stated in the bond. Accordingly on
December 7, 1920, Mendoza undertook in writing to supply
to the municipal president "a bond of
418

P46,000 in favor of the municipality of Lemery" in

conformity with the requirement of the abovementioned
circular and on December 4, 1920, a document was
executed by Simeon Blas and Mariano Napa, as bondsmen

(Exhibit E). This document is of the following tenor:
"Whereas, Andres Mendoza, resident of the municipality of

Lemery, Province of Batangas, Philippine Islands, has leased the
privilege of fishing for bangs in the seas comprised in the
jurisdictional limits of the municipality of Lemery, Batangas, by
virtue of an auction held November 10, 1920, for the value of
P23,000, Philippine currency, for the term of two years from the
first day of January, 1921, to the 31st of December, 1922
"Whereas, one of the conditions of the bid approved by the
municipal council is (for the bidder) to give bond for double the
amount for which said privilege was let, to answer for compliance
with the terms of the bid
"Whereas, said privilege has been awarded for the sum of
P23,000, Philippine currency, "Now, therefore, we, Simeon Blas,
resident of the municipality of Malabon, Rizal, and Mariano
Napa, resident of the municipality of Lemery, Batangas, and
property owners, do hereby obligate ourselves jointly and
severally for the payment, to the municipality of Lemery,
Batangas, of the sum of P46,000, Philippine currency, in case
Andres Mendoza, as grantee of the aforesaid privilege, shall fail to
comply with the conditions of the bid, of which we are informed
and we agree moreover not to recede from this undertaking before
the expiration of the period of the lease.
"We also state under oath that we are solvent to the said
amount of P46,000, Philippine currency, over and above our debts
and other obligations.
"In testimony whereof we hereunto set our hands in Malabon,
Province of Rizal, this 4th day of December, 1920."
As might have been expected from the disparity between

Mendoza's bid and those of his competitors, the privilege
419
VOL. 48, DECEMBER 7, 1925 419

which was the subject of the lease was unprofitable to the

lessee, and before the first year of the lease had expired he
and his sureties were anxious to be rid of the contract.
Mendoza apparently thought that he saw a way out in the
circumstance that in the resolution No. 740 of the
provincial board, approving resolution No. 53 of the
municipal council of Lemery, the lease was described as
ending December 31, 1921. Mendoza therefore
communicated to the municipal council his desire to
abandon the lease, on the ground that authority for making

the lease for two years had been lacking. Simeon Blas, one
of the sureties, also addressed a letter to the council
informing it that he would no longer be bound by his
contract of suretyship. The municipal council rejected these
proposals and announced its intention to insist on the
fulfilment of the contract for the full period of two years.
But attention having been called to the fact that the period
of one year was apparently prescribed in provincial
resolution No. 740, the municipal president addressed a
letter on the subject to the provincial board and an
examination of the record was made with the result that
the provincial board came to the conclusion that the date
1921, had been written by clerical error in resolution No.
740 instead of the date 1922. A resolution was therefore
adopted by the provincial board declaring that the date
December 31, 1921, had been inserted in resolution No. 740
by clerical error, and in order to rectify this error the
secretary was instructed to make a correction of resolution,
No. 740 by changing the date 1921 to 1922.
It should be stated that the terms of the lease were fully
complied with by Mendoza for the year 1921, and the sum
of P23,000 was paid by him in satisfaction of the lease for
that year. The privilege, however, covered by the lease was
abandoned by the lessee for the year 1922, and it is for the
stipulated rental of P22,999.99, with penalty and costs,
that the present action was instituted.
In behalf of the defendantappellants certain contentions
are made which are common to the defense of both the
prin
420

cipal and the sureties, but the sureties have one ground of
defense with which the principal is not connected. We shall
therefore first discuss the defenses common to all the
appellants.
It is first suggested that the contract is not binding for
the reason that the subject of the lease comprises all salt
waters within the limits of the municipality and attention
is directed to the first paragraph of section 2321 of the
Administrative Code where authority is given to the
municipal council to grant the exclusive privilege of fishery
"within any definite portion, or area, of the municipal
waters." The contention of the appellants on this point is
manifestly not well founded. Where the subject of the lease

is described as comprising all of the salt waters pertaining
to the municipality, this defines the extent of the lease with
precision, and that is all that is necessary to make the
lease valid so far as description is concerned. It was not
intended by section 2321 to prohibit the municipal council
from letting all waters suitable for fishing in its limits in a
single lease.
In the second place it is insisted that the lease is invalid
as to all excess over the period of one year for the reason
that the provincial board approved the lease for one year
only. We are unable to agree with this contention, We are
of the opinion that by its resolution No. 740 the provincial
board approved resolution No. 53 of the municipal council
of Lemery, which provided for a twoyear lease. It is true
that in stating the tenor of the lease it is described "as
taking effect from January 1, to December 31, 1921,
inclusive." The use of the date 1921 in this connection was
evidently an error, which has misled nobody, and cannot
affect the validity of the lease for two years. In this
connection it is well to remember that the provincial board
does not legislate directly for the municipalities nor does it
have the power of amending their resolutions. Its function
is to approve or disapprove and there could not have been
any intention on the part of the provincial board
421
VOL. 48, DECEMBER 7, 1925 421

to amend the resolution of the council by substituting the

date 1921 for 1922. Besides, the approval of the provincial
board is not necessary for a lease for one year, and if the
intention of the .provincial board had been to cancel the
resolution of the municipal council to let the fishery for
only one year, the proper procedure would have been to
disapprove resolution No. 53, as involving a lease for a
longer period than was advisable. We do not overlook the
point that the law requires the previous approval of the
provincial board when the lease is to be made for more
than one year, and if the error in resolution No. 740 had
been vital, the curative resolution adopted later would
probably had been without effect. But we consider the
situation to be that the provincial board in substance
approved resolution No. 53, and the error as to the date did
not in our opinion affect the validity of the lease.
Lastly, it is contended that the lease was invalid as

lacking the approval of the department head. In this
connection reliance is placed upon section 2319 of the
Administrative Code where it is said that leases for a
period of greater duration than one year shall be let upon
the previous approval of the provincial board, under such
conditions as shall be prescribed by the department head.
It is supposed that the last expression, "under such
conditions as shall be prescribed by the department head,"
requires the submission to him of each particular lease in
order that he may make the conditions which shall be
embodied in it. This is a mistake. The words quoted were
merely intended to authorize the department head to make
general regulations for the governance of the municipal
authorities in making the lease.
We now come to consider the defense interposed for the
sureties arising from the form in which the contract of
suretyship is expressed, and particular attention is
directed to the words of the first paragraph where it is
stated that the principal, Andres Mendoza, had leased the
privilege of fishery in question "for the value of P23,000 for
the term
422

of two years, to count from the first day of January, 1921,

to the thirtyfirst of December, 1922." These words are
relied upon as showing that the principal liability, the
subject of the contract of suretyship, was limited to
P23,000. This contention is, in our opinion, well founded. It
is true that in the obligating clause farther down the
sureties declared themselves bound in the sum of P46,000
but this was because the bond was required to be made in
double the amount of the principal liability. The language
is quite clear to the effect that the rent to be paid for the
privilege of fishery was P23,000 for the full term of two
years.
But it is insisted for the plaintiff that the contract is to
be read as if the rental had been expressed to be at the rate
of P23,000 per annum f or a period of two years. We are of
the opinion that the words "per annum" cannot be inserted
by judicial construction and no attempt has been made to
obtain a judicial reformation of the contract.
As we have previously stated Mendoza has paid to the
municipality the full sum of P23,000. In our opinion this
discharged the sureties from all further liability. The

circumstance that the sum of P23,000 which Mendoza paid
may have been applied by the municipality to Mendoza's
indebtedness for the first year of the lease is without sig
nificance as against the sureties, since the sureties were
not parties to the contract of lease (Exhibit D) and are
liable only upon the contract of suretyship (Exhibit E),
which calls for the payment of only P23,000 by the
principal. It is a just rule of jurisprudence, recognized in
article 1827 of the Civil Code, that the obligation of a
surety must be express and cannot be extended by
implication beyond its specified limits.
We do not overlook the fact that the obligating clause in
Exhibit E binds the sureties in the amount of P46,000, but,
as in all bonds, that obligation was intended as an
assurance of the performance of the principal obligation
and when the principal obligation was discharged, the
larger obliga
423
VOL. 48, DECEMBER 7, 1925 423

Municipality of Lemery vs. Mendoza, and Blas
tion expressed in the contract of suretyship ceased to have

any vitality.
From what has been said it results that while no error
was committed by the trial judge in giving judgment
against the principal, the sureties should have been
absolved.
The judgment appealed from will therefore be affirmed
as against Andres Mendoza and reversed as against
Simeon Blas, who will be absolved from the complaint,
without costs. So ordered.
Johnson, Ostrand, Johns, and VillaReal, JJ.,

concur.
AVANCEA, C. J., with whom concur MALCOLM,

VILLAMOR and ROMUALDEZ, JJ., dissenting:
I do not agree. In my opinion the judgment appealed
from must also be affirmed as to the surety Simeon Blas.
As stated in the opinion of the majority, the contract
between the plaintiff and the def endant Andres Mendoza
was for two years at the rate of P22,999.99 per year. The
surety Simeon Blas, in securing the fulfilment of the
conditions of the contract by Andres Mendoza, knew that
this contract was for two years, as clearly stated in the
bond which he signed, and besides he also knew that the

obligation of the principal obligor, Andres Mendoza, was to
pay P22,999.99 per year, for in the bond itself this surety
states being aware of the conditions of the contract.
Consequently the obligation of the surety Andres Mendoza,
according to the terms of the bond, is to answer for the
performance of the contract on the part of the principal
obligor Andres Mendoza during the whole twoyear period
fixed by the contract. It is true that through error, perhaps,
it was stated in the bond that he was liable only to the
amount of P46,000, the amount of the obligation of
Mendoza for one year, because it was required that the
bond be for double the value of the obligation of the
principal obligor. Blas might, perhaps, take advantage of
this
424

Susi vs. Razon and Director of Lands
error to limit his liability to the amount of the obligation of

the principal debtor for one year, if the case were concerned
with this obligation for two years. He cannot, however, take
advantage of this mistake in the instant case which
involves only nonpayment for one year which, after all, is
one of the two years during which he secured the fulfilment
of the contract by the principal debtor Andres Mendoza.
Judgment modified.
_____________
[No. 11073. February 21, 1918.]
WISE & Co. (Ltd.), plaintiff and appellant, vs. JAMES

KELLY and MARIANO LIM, defendants and appellees.
CONTRACTS OBLIGATIONS CONDITIONS SURETY.

A purchased merchandise from B on credit and agreed that
he would apply the proceeds of its sale to the discharge of his
indebtedness. C as surety for A undertook that A would pay
over to B the entire
697
VOL. 37, FEBRUARY 21, 1918. 697
Wise & Co. vs. Kelly and Lim.
proceeds of the sale of the merchandise. Held: That C is not liable

for the difference between the amount realized from the sale of
the merchandise and the purchase price of the same.

Lawrence, Ross & Block for appellant.
Cosme Ferrer for appellees.
FISHER, J.:
This action was brought in the Court of First Instance of

Manila against the appellee, Mariano Lim, and one James
Kelly, the former as surety and the latter as principal, to
recover the amount of a promissory note.
The note upon which the action was brought is in the
following terms:
"Be it known that we guarantee unto the firm of Wise &
Co. (Ltd.) the payment of the sum of thirteen thousand
seven hundred and fortynine pesos and nine centavos
(P13,749.09) which James Kelly, a merchant, owes to the
said firm of Wise & Co. (Ltd.), for goods and merchandise
http://central.com.ph/sfsreader/session/0000015cda25f04137288c77003600fb002c009e/t/?o=False 1/4
received and purchased by Mr. Kelly, to be sold in his

establishment, upon the condition that Mr. Kelly will pay
over to the firm of Wise & Co. (Ltd.) at the end of each
month all sums which he may receive from the sale of said
goods and merchandise, and that in the contrary event we,
the sureties, undertake to pay to the firm of Wise & Co.
(Ltd.) such sums as Mr. James Kelly may fail to turn in as
above stated.
"In witness whereof we have signed this instrument,
Manila, P. I., December 12, 1912.
(Sgd.) "JAMES KELLY.
(Sgd.) "MARIANO LIM."
In his answer to the complaint the appellee, Mariano
Lim, interposed, among others, the defense that the
obligation was conditional as to him, and that the fact
constituting the condition had not occurred.
698

Wise & Co. vs. Kelly and Lim.
The trial judge in his decision said, concerning the

construction which in his opinion should be placed upon
note in suit:
"It will be seen that the said document obliges Lim to
respond for the payment to the firm of Wise & Co. (Ltd.) of
the sum of P13,749.09 which the principal obligor Kelly
owes to it for goods and merchandise received and
purchased prior thereto, to be sold in his establishment, to
the extent that Kelly fails to comply with the condition of
paying in at the end of each month all sums which he may
collect f from the sale of such goods and merchandise, it
appearing that he has only undertaken to pay such sums as
have been received from the sale of merchandise by the
principal obligor which have not been paid in by the latter."
Upon the evidence submitted the court below held that
plaintiff had not proven that the principal obligor Kelly had
failed to turn over any money whatever received from the
sale of the merchandise for which the note was given, and
establishes the conclusion that Lim had therefore incurred
no liability, and that plaintiff has no cause of action against
him.
In accordance with this conclusion, judgment was
rendered against the principal debtor Kelly for the full
amount of the note in suit, with interest, and the action
was dismissed as to Lim. From this judgment plaintiff
appealed and has assigned as error the conclusion of the
trial court with regard to the conditional nature of the

obligation assumed by Lim.
Upon an examination of the document in question it
becomes evident that Lim, as surety, did not undertake
absolutely to pay the sum of P13,749.09, in which the
principal debtor admits himself to be indebted to the
creditor firm. His agreement was limited to respond for the
performance by Kelly of one of the accessory pacts of the
contract evidenced by that document, namely, the
undertaking to deliver to the plaintiff firm the total
proceeds of the sales of the merchandise for the invoice
value of which the promissory note was given.
699
VOL. 37, FEBRUARY 23, 1918. 699

Remata vs. Javier.
It not having been stipulated that the merchandise was to

be sold at a price not less than cost, it follows that even
were Kelly to pay in the total amount derived from its sale,
part of his obligation to the sellers might remain
undischarged. He, unquestionably, is liable for the
payment of the note whatever may be the price at which
the merchandise might be sold but this obligation is not
extended to Lim. It having been determined by the court, in
its findings, which we regard as fully supported by the
evidence of record, that plaintiff has not proved that it has
not in fact received all the money derived from the "sale of
the merchandise mentioned in the note, it follows that
there is no evidence of the existence of the condition to
which the obligation assumed by Lim was subordinated. In
obligations subject to a suspensive condition the
acquisitions of the right on the part of the creditor depends
upon the occurrence of the event constituting the condition.
(Civil Code, art. 1114.)
For the reason stated, we affirm the judgment appealed
with the costs of this instance to the appellant. So ordered.
Arellano, C. J., Torres, Johnson, Carson, Araullo,

Street, Malcolm and Avancea, JJ., concur.
Judgment affirmed.
_______________
[No. L8086. October 31, 1957]
PACIFIC TOBACCO CORPORATION, plaintiff and

appellee, vs. RICARDO D. LORENZANA and VISAYAN
SURETY & INSURANCE CORPORATION, defendants.
VISAYAN SURETY & INSURANCE CORPORATION,
cross claimant and third party plaintiff and appellant, vs.
RlCARDO D. LORENZANA, cross defendant, CALIXTO D.
LORENZANA, JOSE M. LORENZANA and BENIGNO C.
GUTIERREZ, third party defendants.
1. SURETYSHIP AND GUARANTY STRICTISSIMI JURIS

RULE REFERS TO ACCOMMODATION SURETY NOT
TO COMPENSATED SURETY.The rule of strictissimi
juris, commonly refers to an accomodation surety and
should not be extended to favor a compensated surety. The
rationale of this doctrine is reasonable an accommodation
surety acts without motive of pecuniary gain and hence,
should be protected against unjust pecuniary
impoverishment by imposing on the principal duties akin
to those of a fiduciary. This cannot be said of a
compensated corporate surety which is a business
association organized for the purpose of assuming
classified risks in large numbers, for profit and on an
impersonal basis, through the medium of standardized
written contractual forms drawn by its own
representatives with the primary aim of protecting its own
interest (see Stearn's The Law of Suretyship, 4th ed 402
403).
2. ID. ALTERATION OF CONTRACT TO RELEASE

SURETY SHOULD BE MATERIAL.A material
alteration of a contract is such a change in the terms of
the agreement as either imposes some new obligation on
the party promising or takes away some new obligation
already imposed. A change in the form of the contract
which does not effect one or the other of these results is
immaterial and will not discharge the surety (Stearn's The
Law of Suretyship, 4th ed. p. 98). To be material an
alteration must change the legal effect of the original
contract (New Armsterdam Casualty Co. vs. W. T. Taylor
Const. Co. 12 [2d] 972).
http://central.com.ph/sfsreader/session/0000015cda2770ed9ba8e15c003600fb002c009e/t/?o=False 1/11
3. ID. RELEASE OF SURETY CONTRACT MENTIONS

PLACES OF DISTRIBUTION OF PRODUCTS
ADDITION OF TERRITORIES NOT ALTERATION.
Where the contract states that the places of distribution of
products of the company are in Manila and Rizal and
nowhere in
235
VOL. 102, OCTOBER 31, 1957 235
Pacific Tobacco Corp., et al. vs. Lorenzana, et al.
the same agreement appears a restriction against

distributor's acceptance of additional territories if he so
desired, Held: That the addition or diminution of the
territories covered by the distributor's previous
assignment will not alter or affect the duty to make
payment on time. Apart from the fact that the alteration
in the case at bar is not material as to relieve the surety
from its liability under the bond, there is not even an iota
of proof that such deviation caused the surety any loss or
injury or that such delivery caused the distributor's failure
to pay his accounts.

Manila. Concepcin, J.

Sycip, Quisumbing, Salazar & Associates for appellee.
Enrico I. de la Cruz for appellant.
Edgar C. Melia for cross defendant and appellee.
FLIX, J.:
The Pacific Tobacco Corporation is a duly organized

domestic corporation with offices at Grace Park, Caloocan,
Rizal, engaged in the business of manufacturing and
distributing cigarettes, cigars and other tobacco products.
On January 16, 1952, Ricardo D. Lorenzana and said
corporation entered into an agreement, the pertinent
provisions of which read as follows:
"WITNESSETH: That
"WHEREAS, the Company manufactures cigarettes, cigars, and

other tobacco products which it desires to sell and distribute
throughout the Philippines
"WHEREAS, the DISTRIBUTOR (Lorenzana) is willing to sell

and distribute the said products of the COMPANY in the territory
of Manila and Rizal Province under the terms and conditions
hereinbelow set forth
Now, THEREFORE, for and in consideration of the premises
and stipulations herein contained, the parties hereto have agreed
and covenanted, as follows:
"1. The DISTRIBUTOR shall sell and distribute solely the

cigarettes, cigars and other tobacco products of the
COMPANY in the abovementioned territory
"2. The Company shall, from time to time, deliver to the
DISTRIBUTOR, for sale, cigarettes and other tobacco
products, provided that
236

the balance of the account of the DISTRIBUTOR with the

COMPANY shall not at any time exceed THREE THOUSAND
ONLY PESOS (P3,000.00)
''3. All accounts of the Distributor with the Company shall be
due and payable in the office of the latter within thirty (30) days
from and after the date of the sales invoice issued by the
COMPANY
*******
"8. The DISTRIBUTOR shall only sell the products of the

COMPANY and in case he sells the products of other
persons or firms, the COMPANY shall be at liberty to
terminate this contract
"9. The DISTRIBUTOR binds himself to sell for the
COMPANY not less than TWENTY THOUSAND ONLY
PESOS (P20,000.00) worth of cigarettes and other tobacco
products every month and should he f ail to meet this
quota, the COMPANY shall have the option to terminate
this contract upon twenty (20) days' notice
*******
"11. To guarantee the faithful performance on his part of the
terms and conditions of this contract, the DISTRIBUTOR shall
post a surety bond in favor of the COMPANY in the amount of
EIGHT THOUSAND ONLY PESOS (P8,000.00) signed by him
and a reputable surety company acceptable to the COMPANY,
THREE THOUSAND PESOS (P3,000.00) of which bond shall
answer for the faithful settlement of the account of the
DISTRIBUTOR with the COMPANY, and FIVE THOUSAND

PESOS (P5,000.00) for the return of the af orementioned truck to
the COMPANY in the same condition that the DISTRIBUTOR
received it, * * *". (Exhibit A).
In accordance thereto, Lorenzana put up V. S. & I. C. bond

No. EJA52/101 in the amount of P3,000 with the Visayan
Surety & Insurance Corporation, as surety, to guarantee
the faithful fulfillment of the principal's (Lorenzana's) part
in the contract with the Pacific Tobacco Corporation, which
was "to sell and distribute the latter's cigarettes, cigars and
other tobacco products subject to the terms and conditions
stipulated in the said contract" (Exhibit B).
The record shows that on various occasions in 1952, the
Philippine Tobacco Corporation delivered to Lorenzana for
distribution cigarettes, cigars and other tobacco products
amounting to P15,645.64, but out of this amount the latters
paid and was only credited with P13,559.33,
237
VOL. 102, OCTOBER 31, 1957 237

leaving a balance of P2,086.31. Upon demand by the

corporation, Lorenzana proposed to settle his pending
obligation by giving P100 a month, which amount was later
reduced to P25, to which arrangement the company
apparently agreed and Lorenzana actually made
installments amounting to P250 (Exhibit G6). As he failed
to make any further payment, the Philippine Tobacco
Corporation filed a complaint with the Court of First
Instance of Manila on October 30, 1953, against Ricardo D.
Lorenzana and the Visayan Surety & Insurance
Corporation for the recovery of the sum of P2,086.31, with
legal interest thereon from the date of the filing of the
complaint until fully paid attorney's fees in the amount of
P500.00 costs, and for such other remedy as may be
deemed just and equitable in the premises.
Defendant Visayan Surety & Insurance Corporation
answered this complaint, which it later modified with leave
of Court by filing an amended answer with crossclaim
against Ricardo D. Lorenzana and third party complaint
against Calixto D. Lorenzana, Jose Lorenzana and Benigno
C. Gutirrez, denying the material allegations of the
complaint and setting up the affirmative defense that the
bond could not be held liable for damages and attorney's
fees that plaintiff Philippine Tobacco Corporation was
barred from presenting this. action against the surety due

to laches, waiver of claim and estoppel. It was thus prayed
that the complaint be dismissed as against said defendant
in the event that the surety would be sentenced to pay the
plaintiff, that a simultaneous order be issued ordering the
crossdefendant and the thirdparty defendants to pay the
surety, jointly and severally, for whatever amount the
latter may be required to satisfy, with interest thereon at
12 per cent per annum from the date of payment until it
was fully reimbursed that the said crossdefendant and
thirdparty defendants be ordered to pay the surety, jointly
and severally, in accordance with the indemnity bond
executed by them
238

as counterguarantors, 20 per cent of the amount involved

as attorney's fees, and costs.
In his answer dated December 1, 1953, Ricardo D.
Lorenzana denied the allegation of the complaint that he
refused or failed to pay the plaintiff, the true fact being
that he had tendered to plaintiff certain sums in
accordance with their verbal agreement which allowed him
to settle his obligation in installments until the entire
amount was fully satisfied set up the defense that the
agreement, Annex "A", was partially modified when
plaintiff s agreed and allowed him to sell the tobacco
products not only in the City of Manila and Rizal province
but throughout the island of Luzon that in virtue of such
modification, he sold plaintiff's products in places as far as
the northern provinces that most of defendant's
transactions in these provinces were on credit basis that
on August 2, 1952, when defendant arrived from his trip
from the Ilocos regions, plaintiff terminated his services on
the ground that the corporation was losing without giving
him an advance notice of 30 days in accordance with the
agreement that as plaintiff took the delivery truck which
he was using in the distribution of plaintiff's products he
was prevented from going back to the provinces to collect
from his customers their accounts that he made several
payments in small amounts to settle his remaining
obligation which were accepted, but in November, 1953,
plaintiff refused to receive the same. Lorenzana claimed
that because of plaintiffs failure to notify him in advance
that his services were terminated, he incurred and was
incurring transportation expenses in order to collect the

accounts of his former customers. He, therefore, prayed
that the complaint be dismissed and plaintiff be ordered to
pay the amount that he incurred as transportation
expenses. The thirdparty defendants likewise filed their
answer practically admitting all the averments of the third
party complaint except the claim for 20 per cent of the
amount involved as attorney's
239
VOL. 102, OCTOBER 31, 1957 239

fees, on the ground that it was excessive and that they

should not be held liable for the payment of the pending
obligation of Lorenzana.
At the hearing defendant Lorenzana failed to appear
and to adduce evidence in support of his defenses in spite of
the fact that he was duly notified. After hearing and after
the other parties had filed their respective memoranda, 'the
Court rendered judgment dated May 12, 1954, finding that
although on one occasion plaintiff shipped cigarettes to
defendant Lorenzana addressed at San Fernando, La
Union (Exhibit C18), this fact alone would not release the
surety from liability, for there was nothing in the contract
Exhibit A that expressly prohibited defendant Lorenzana
from selling cigarettes outside Manila and Rizal. The lower
Court opined that what was guaranteed by the Visayan
Surety & Insurance Corporation was the f aithful delivery
by def endant Lorenzana of the price of the cigarettes to
plaintiff within the time fixed in the contract and as the
sending of some cigarettes to San Fernando, La Union,
caused the surety no injury, said deviation will not relieve
the surety from its liability under the bond. The court thus
ordered defendants Ricardo D. Lorenzana and the Visayan
Surety & Insurance Corporation to pay, jointly and
severally, to the plaintiff Pacific Tobacco Corporation the
sum of P2,086.31, with legal interest from the date of the
filing of the complaint, plus P500 as attorney's fees and
costs. On the strength of the indemnity bond (Exhibit "2")
executed by the thirdparty defendants Calixto D.
Lorenzana, Jos M. Lorenzana and Benigno C. Gutirrez as
counterguarantors, they, together with Ricardo D.
Lorenzana, were ordered to indemnify the Visayan Surety
& Insurance Corporation for the amount which the latter
would actually pay plaintiff in case defendant Ricardo D.
Lorenzana should fail to make the payment himself and

another sum of P500 as attorney's fees.
After the motion filed by the surety for the
reconsideration of said decision was denied, said defendant
brought
240

the matter to this Court on appeal ascribing to the lower

Court the commission of several errors. But stripping them
of unnecessaries and reducing the same to bare essentials,
the only question at issue in the case at bar is whether the
delivery by the company of its products to defendant
Lorenzana in a place other than that mentioned in the
agreement constitutes an alteration of said agreement that
would release the surety from its liability under the bond.
It appears on record that cigarettes valued at P1,870
were transported to Ricardo Lorenzana, c/o Mrs. Justo de
Len at San Fernando, Pampanga. Defendant surety tried
to capitalize on this single act but it f ailed to present
evidence that these goods were actually sold and
distributed in said place. It would have been possible for
the distributor to take a sojourn in that place and the
company, knowing where he could be reached, sent the
merchandise to him. Defendant Lorenzana also alleged in
his answer that plaintiff allowed him to sell the latter's
products even as far as the northern provinces but this
defendant was not able to substantiate such claim due to
his failure to appear and testify to this. effect at the trial,
despite the fact that he was duly represented by counsel.
But even granting arguendo that the merchandise thus
delivered and presumably received at San Fernando, La
Union, was actually sold and distributed therein, this may
not be considered as a deviation from the terms of the
agreement, for such widening of the territory to be covered
by the agent or distributor was not prohibited by the
agreement itself, nor does the record show that such
expansion of the territory was due to instructions from the
plaintiff. While it is true that the contract (Exhibit A)
states that the distributor is willing to sell and distribute
the products of the company in Manila and Rizal, this
specification serves more as a manifestation that
Lorenzana entered into the agreement with the
understanding that his sphere of activity would be for these
places. But cer
241
VOL. 102, OCTOBER 31, 1957 241

Pacific Tobacco Corp., et al. vs. Lorenzana, et al
tainly nowhere in the same agreement appears a

restriction against his acceptance of additional territories,
if he so desired.
Appellant surety argues that the bond guarantees only
the payment of cigarettes, cigars or other tobacco products
that were delivered to and distributed by Lorenzana in
Manila and Rizal and at no other place. To adopt this line
of reasoning 'would be to harness a pliant argument to suit
appellant's purpose. The agreement required the
distributor to post a bond for P8,000, "P3,000 of which bond
shall answer for the faithful settlement of the account of
the distributor with the Company". The bond put up by
Lorenzana in the amount of P3,000, undertaken by the
Visayan Surety & Insurance Corporation, therefore, was
only to secure the prompt and faithf ul payment of the
accounts of the distributor to the company. The mention of
Manila and Rizal in said agreement was designed more as
a declaration or identification of the places wherein the
distributor was expressly authorized and assigned to sell
the cigar, cigarettes and tobacco products of the plaintiff,
which is no obstacle to the distributor's acceptance or
taking motu proprio of additional territories in order to
better fulfill his obligation to sell monthly for the Company
not less than P20,000 worth of cigarettes and other tobacco
products and could by no means alter his liability to turn
over to the company payments therefor, and that is
precisely his obligation secured by the bond.
Appellant, maintaining that the alleged modification of
the agreement released the surety from its liability,
invokes the rule of strictissimi juris under which, it is
claimed, surety bonds must be strictly construed and
cannot be extended beyond their terms. Although We might
acknowledge that a surety is a favorite of the law and his
contract strictissimi juris, this rule has no bearing on the
case at bar. Anyway, it commonly refers to an
accommodation surety and should not be extended to favor
a compensated surety, as is appellant in the instant
242

case. The rationale of this doctrine is reasonable an

accommodation surety acts without motive of pecuniary
gain and, hence, should be protected against unjust
pecuniary impoverishment by imposing on the principal
duties akin to those of a fiduciary. This cannot be said of a
compensated corporate surety which is a business
association organized for the purpose of assuming classified
risks in large numbers, for profit and on an impersonal
basis, through the medium of standardized written
contractual forms drawn by its own representatives with
the primary aim of protecting its own interests (See
Stearn's The Law of Suretyship, 4th ed., 402403).
American courts in refusing to apply this rule on
compensated sureties have expressed themselves in
varying language. Sometimes it is. said that a corporate
compensated surety is not entitled to the benefit of the rule
of strictissimi juris (U. S. vs. Gao, F. Pawling & Co. 297 F.
65) or that the contract is. to be construed against the
surety and in favor of the promisee (Consolidated Indem. &
Ins. Co. vs. State, 184 Ark. 581, 43 S. W. [2d] 240) or that
the contract is like one of insurance, hence one or the other
of the above rules is to be applied (Lassetter vs. Backer, 26
Ariz. 224, 224 P. 810 Md. Cas. Co. vs. Dunlap, 68 F. [2d]
289), and it was even said:
"The law does not have the same solicitude for corporations
engaged in giving indemnity bonds for profit as it does for
individual surety who voluntarily undertakes to answer for the
obligations of another. Although calling themselves sureties, such
corporations are in fact insurers, and in determining their rights
and liabilities the rules peculiar to suretyship do not apply"
(Metropolitan Casualty Insurance Co. vs. United Brick & Tile Co.
[1934], 29 P. [2d] 771).
Even assuming, however, for the sake of argument that the

delivery of the merchandise at a place other than that
appearing in the contract constitutes an alteration of the
same, is it a material deviation that would release the
surety from its liability?
A material alteration of a contract is such a change in
the terms of the agreement as either imposes some new
243
VOL. 102, OCTOBER 31, 1957 243

obligation on the party promising or takes away some

obligation already imposed. A change in the form of the
contract which does not effect one or the other of these
results is immaterial, and will not discharge the surety
(Stearn's The Law of Suretyship, 4th ed., p. 98). To be
material an alteration must change the legal effect of the
original contract (New Amsterdam Casualty Co. vs. W. T.
Taylor Const. Co., 12 F. [2d] 972).
It cannot be denied that the obligation of the principal
remained the sameto settle his accounts to the company
at the specified time. The addition or diminution of the
territories covered by his previous assignment will not alter
or affect that duty to make payments on time. Apart from
the fact that the alteration in the instant case, if there was
any, is not material as to relieve the surety from its
liability under the bond, there is not even an iota of proof
that such deviation caused the surety any loss or injury or
that such delivery caused the distributor's failure to pay
his accounts. The weight of authority is to the effect that:
A corporation engaged in the business of suretyship for profit

cannot successfully defend a suit merely by showing a change in
the contract, whether beneficial or otherwise, as is the rule in
ordinary suretyship, but must prove that the change is material
and prejudicial (City of Philadelphia vs. Ray., 266 Pa. 345 109
Alt. 689).
It is wellsettled that the rule of strictissimi juris, ordinarily
applied in relief of an individual surety, is not applied in case of
compensated sureties and that where a bonding company, for a
monetary consideration, has insured against failure of
performance of a contract, it must show that it has suffered some
injury by reason of departure from the strict terms of the contract,
before it can for that reason be discharged from its liability
(Pickens County vs. National Surety Co. 13 F. [2d] 758 [C, C. A.]
4th, 1926).
A departure from the terms of the contract will not have the
effect of discharging a compensated surety unless it appears that
such departure has resulted in injury, loss or prejudice to the
surety (Chapman vs. Hoage, 296 U. S. 526).
It has been said that to allow compensated surety companies to
collect and retain premiums for their services, graded according to
244

The Actg. Collector of Customs vs. The Court of Tax Appeals, et al.
the nature and extent of the risk, and then to repudiate their
obligations on slight pretexts which have no relation to the risk,
would be most unjust and immoral, and would be a perversion of
the wise and just rules designed for the protection of voluntary
sureties (M. H. Waller Realty Co. vs. American Surety Co., 60
Utah, 435).
Wherefore, the decision appealed from is hereby affirmed,

with costs against appellant. It is so ordered,
Pars, C. J., Padilla, Montemayor, Bautista, Angelo,

Labrador, Concepcin, Reyes, J. B. L., and Endencia, JJ.,
concur.
Judgment affirmed.
_______________
No. L24835. July 31, 1970.
REPARATIONS COMMISSION, plaintiffappellee, vs.

NORTHERN LINES INC,and FIELDMENS INSURANCE
COMPANY,INC, defendantsappellants.
Contracts Interpretation of contracts Construction to give

effect to provisions of contract.Contracts should be so con
______________
14 To vs. Republic, supra.
15 Pages 1718, t.s.n., Baria.
204
Reparations Commission vs. Northern Lines, Inc.
strued as to harmonize and give effect to the different provisions

thereof.
Declaratory relief Cannot be granted after a breach of

contract.An action for declaratory relief may be entertained
only before breach or violation of the law or contract to which it
refers. After such alleged breach of the law or contract, or once
the aforementioned issue has arisen, an ordinary action is the
proper remedy.
Actions Defense When not pleaded Effect.The defense that

the contract in dispute had expired, when not pleaded in the
answer or otherwise raised in the trial court, cannot be set up, for
the first time, on appeal.
Surety bonds Construction When strict construction of surety

bands does not apply.The rule of strict construction of surety
bonds does not apply to the engagements of corporate sureties
http://central.com.ph/sfsreader/session/0000015cda285c6130b128cb003600fb002c009e/t/?o=False 1/18
engaged in the business of furnishing bonds for compensation,

and who are, furthermore, secured from all possible loss by
adequate counterbonds.
Same Stipulation that nullifies effect of bond is void.A

stipulation in a bond to the effect that the liability thereunder
would expire a year before the first installments of the principal
obligation had become due is null and void because said
stipulation in effect nullifies the nature of the bond and therefore
unfair and unreasonable as well as a subtle way of making
money thru trickery and deception.
Attorneys fees Discretion of court in fixing amount of fees.

Courts of justice have discretion to fix the amount of attorneys
fees.
Same Same Case at bar.The court did not abuse its

discretion in fixing the amount of attorneys fees awarded to the
Surety at P300 despite the agreed amount of 20% of the total
amount due where the Surety relied mainly upon the defenses set
up by the Buyer and that the ultimate liability of the Surety is
principally dependent upon the amount of the principal obligation
that the Buyer may be unable to satisfy.

Manila. Lantin, J.

Manguera, Sarmiento & Pacunayan for plaintiff
appellee.
Tipon, Velasco, Dizon, Rubio & Associates for defen
205
VOL. 34, JULY 31, 1970 205

dantappellant Fieldmens Insurance Co., Inc.

San Juan, Africa & Benedicto for defendant
appellant Northern Lines, Inc.
CONCEPCION, C.J.:
This appeal, taken by the Northern Lines, Inc., and

Fieldmens Insurance Co., Inc., from a decision of the Court
of First Instance of Manila in Cases Nos. 50194 and 51542
thereof which were jointly tried and disposed of, has been
certified to Us by the Court of Appeals, questions purely of

law having been raised in the appeal.
It appears that, pursuant to Rep. Act No. 1789, the
Reparations Commissionhereinafter referred to as the
Commissionhad awarded two (2) vessels to the Northern
Lines Inc., a corporation organized and existing under the
Philippine lawhereinafter referred to as the Buyerfor
use in the interisland shipping. According to the schedules
of payment agreed upon between the parties, complete
delivery of one of the vesselsthe M/S Magsaysay, later
named M/S Don Salvadortook place on April 25, 1960,
and that of the otherthe M/S Estancia, later named M/S
Don Amandoon May 26, 1960. These vessels were the
object of separate deeds of conditional purchase and sale of
reparations goods, executed by the Commission, as vendor,
and the Buyer, as vendee, the first dated September 12,
1960, and the second October 20, 1960. In conjunction with
these contracts and in line with the provisions thereof
Surety Bonds Nos. 3825 and 4123 were executed, on April
25, 1960 and May 30, 1960, respectively, by the Buyer, as
principal, and the Fieldmens Insurance Co., as surety, in
favor of the Commission, to guarantee the faithful
compliance by the Buyer of its obligations under said
contracts. The Buyer undertook therein to pay for said
vessels the installments specified in a schedule of
payments, appended to each contract. The schedule for the
M/S Don Salvador (exM/S Magsaysay) reads as follows:
206

NAME OF ENDUSER NORTHERN LINES, INC.

ADDRESS 480 Padre Faura, Ermita, Manila
NATURE OF CAPITAL GOODS/SERVICES One (1)
Vessel M/S MAGSAYSAY divested of the cannery plant
DATE OF COMPLETE DELIVERY April 25, 1960
TOTAL F.O.B. COST P1,747,614.22
AMOUNT OF 1ST INSTALLMENT (10% OF F.O.B.
COST) P174,761.42
DUE DATE OF 1ST INSTALLMENT April 25, 1962
TERM: TEN (10%) EQUAL YEARLY
INSTALLMENTS
RATE OF INTEREST: THREE PERCENT (3%) PER
ANNUM
NO. OF INSTALLMENTS DATE DUE AMOUNT

1 April 25, 1963 P184,386.34

2 ""1964 184,386.34
3 ""1965 184,386.34
4 ""1966 184,386.34
5 ""1967 184,386.34
7 ""1968 184,386.34
6 ""1969 184,386.34
9 ""1970 184,386.34
8 ""1971 184,386.34
10 ""1972 184,386.34
whereas that for M/S Don Amando (exM/S Estancia) was

of the following tenor:
NAME OF ENDUSER NORTHERN LINES, INC.
ADDRESS 480 P. Faura, Ermita, Manila
NATURE OF CAPITAL GOODS/SERVICES One
vessel M/S Estancia Divested of the Cannery Plant
DATE OF COMPLETE DELIVERY May 26, 1960
TOTAL F.O.B. COST P1,747,614.22
AMOUNT OF 1ST INSTALLMENT (10% OF F.O.B.
COST) P174.761.42
DUE DATE OF 1ST INSTALLMENT May 26, 1962
TERM: Ten (10) EQUAL YEARLY
INSTALLMENTS
207
VOL. 34, JULY 31, 1970 207


ANNUM
NO. OF INSTALLMENT DUE AMOUNT
1 May 26, 1963 P184,386.34
2 ""1964 184,386.34
3 ""1965 184,386.34
4 ""1966 184,386.34
5 ""1967 184,386.34
6 ""1968 184,386.34
7 ""1969 184,386.34

ANNUM
8 ""1970 184,386.34
9 ""1971 184,386.34
10 ""1972 184,386.34
On April 24, 1962, and May 26, 1962or one day before
the stated due date of the first installment for M/S Don
Salvador (exM/S Magsaysay), and on the stated due date
of the first installment as to M/S Don Amando (exM/S
Estancia)the Buyer instituted Civil Cases Nos. 50194
(regarding M/S Don Salvador, formerly Magsaysay) and
50488 (regarding M/S Don Amando, formerly Estancia) of
the Court of First Instance of Manila to secure, by way of
declaratory relief, a declaration to the effect that the first
installments under the aforementioned contracts would be
due and demandable on April 25, 1963 and May 26, 1963,
respectively. Soon thereafter, or on September 10, 1962,
the Commission commenced Civil Case No. 51542 of the
same Court, against the Buyer and the Surety. The
Commission allegedin two separate causes of action set
forth, in the complaint thereinthat, despite repeated
demands, the defendants (Buyer and Surety) had refused
to pay the first installments of P174,761.42 each, that had
become due and demandable on April 25 and May 26, 1962,
respectively. Hence, it prayed that the Buyer and the
Surety be sentenced to pay, jointly and severally, to the
Commission the aggregate sum of P349,522.84, with
interest thereon at the legal rate, in addition to attorneys
fees and the costs.
In its answer to the complaint, the Buyer admitted some
allegations and denied other allegations thereof, and, by
208

way of special defense, averred that the Commission has no

cause of action until Civil Cases Nos. 50488 and 50194
shall have been decided. The Suretys answer contained
similar admissions and denials, apart from adopting as its
own those made in the Buyers answer, and set up a cross
claim against the Buyer, for reimbursement of whatever
the Surety may have to pay to the Commission by reason of
its complaint, including interests, and for the sum
P10,541.68 representing unpaid premiums and
documentary stamps due on the two bonds above

mentioned, plus attorneys fees and interests.
Subsequently, or on October 29, 1962, Branch XIII of the
Court of First Instance of Manila dismissed Case No. 50488
involving the M/S Don Amando or Estanciawhereupon
the Buyer appealed to this Court, where the case was
docketed as L20725. The same was, however, dismissed
July 2, 1963, for failure of the Buyer, as appellant therein,
to file its brief within the reglementary period. In due
course thereafter, or on April 30, 1964, Branch VII of said
Court of First Instance rendered, in Cases Nos. 50194
regarding M/S Don Salvador or Magsaysayand 51542
the action filed by the Commissionwhich had been jointly
tried, a decision dismissing the petition for a declaratory
relief in Case No. 50194, with costs against the Buyer, as
petitioner therein, and: (a) sentencing the Buyer and the
Surety, as defendants in Case No. 51542, to pay jointly and
severally, to the Commission, the sum of P174,761.42,
under each of the two (2) causes of action alleged in the
complaint, with interest thereon at the legal rate, from the
date of the filing of the complaint, until fully paid
although the liability of the Surety under each cause of
action was not to exceed P174,761.42and the sum of
P1,000 as attorneys fees, apart from the costs (b) ordering
the Buyer to reimburse the Surety whatever amount it
may pay to the Reparations Commission, with interest at
the rate of 12% per annum and (c) sentencing the Buyer
to pay the Surety the sum of P10,641.68, representing
unpaid premiums and documentary stamps, with interest
thereon at
209
VOL. 34, JULY 31, 1970 209

the legal rate and P300, by way of attorneys fees. A

reconsideration of this decision having been denied, the
Buyer and the Surety appealed to the Court of Appeals,
which later certified the appeal to this Court.
The Buyer alleges that the trial court erred: (1) in
interpreting the contracts in question in favor of the
Commission, which drafted the same (2) in not
interpreting said contracts in such a manner as to prevent
inconsistency and absurdity (3) in not taking1 into
account the delay in the use of the goods subjectmatter of
the contracts in question in interpreting the latter (4) in
not holding that the action filed by the Commission (Case
No. 51542) is barred by the actions for declaratory

judgment filed by the Buyer (Civil Cases Nos. 50194 and
50488) and (5) in rendering judgment for the Commission
and the Surety on their main claims, interest, attorneys
fees and costs.
The Surety, in turn, contends that the trial court erred:
(1) in declaring that the first installments of the purchase
price became due on April 25, 1962 and May 26. 1962,
respectively (2) in holding the Surety jointly and severally
liable with the Buyer to pay to the Commission the two
first installments of said purchase price under FICI Surety
Bonds Nos. 3825 and 4123 (3) in not holding the
Commission liable to pay the Surety nominal damages,
attorneys fees and costs and (4) in not ordering the Buyer
to pay to the Surety attorneys fees equivalent to 20% of
the amount which the latter may pay to the Commission
by reason of the judgment in its favor.
1. The main issue for determination in this appeal is
that raised in the Buyers first three (3) assignments of
error and in the Suretys first assignment of error, namely:
when did the first installment under the two (2) contracts
become due?
The Buyer states that, in both contracts two due dates
are given for the respective first installments. In the case of
M/S Don Salvador, April 25, 1962, and April 25, 1963
while in the case of M/S Don Amando, May 26,
210

1962, and May 26, 1963. The question is, which are the
correct due dates intended by the parties? The defendant
appellantthe Buyerclaims that they are the second
and later dates given, while the plaintiffappelleethe
Commissionclaims that they are the first and earlier
dates. His Honor, the trial Judge, sustained the latter
contention.
In support of its claim, the Buyer argues that there is an
ambiguity in said contracts, with should be resolved
against the Commission, because it is the latter who
caused the ambiguity that otherwise, there would result
an inconsistency and absurdity, because the contracts
provide for ten (10) equal yearly installments, but, under
the theory of the Commission, there would be two (2) first
unequal installments, one for P174,761.42 and another for
P184,386.34, and the latter would be followed by nine (9)
yearly (installments each for P184,386.34, which, together

with the first two (2), would aggregate eleven (11)
installments, instead of ten (10). This contention is
manifestly untenable.
(a) The major premise in appellants process of
reasoning is that the installments due on April 25, 1963,
and May 26, 1963, are first installments, although they
are not so designated in the schedule appended to each of
the contracts between the parties. Appellants, moreover,
assume that the first installment is included in the ten
(10) equal yearly installments mentioned subsequently to
said first installment. In fact, however, only one
installment is labelled as first in each one of said
schedules, and that is the installment due on April 25,
1962as regards M/S Don Salvador or Magsaysayand
that due on May 26, 1962as regards M/S Don Amando
or Estancia. The schedules do not describe the ten (l0)
equal yearly installmentsfollowing the one
characterized therein as firstas first, second, third, etc.
installmentsmeaning number, not order or sequence,
of installmentsand the numerals 1, 2, 3, 4, 5, 6, 7, 8, 9, 10
written before each one of said ten (10) equal yearly
installments. It is true that the one therein num
211
VOL. 34, JULY 31, 1970 211

bered 1 is, in fact, the first, in the list of ten (10) equal
yearly installments following the first, to accrue after
the due date of said first installment. Just the same, the
parties have not so described (as first)in the schedules
forming part of their contractsthe installments numbered
1 in the list contained in each. Moreover, considering that
the words TERM: Ten (10) EQUAL YEARLY
INSTALLMENTS, appear after the lines reading:
AMOUNT OF ITS INSTALLMENT (10% OF F.O.B.
COST) P174,761.42 and DUE DATE OF 1ST
INSTALLMENT April 25, 1962 (or May 26, 1962), and
that, subsequently to said TERM: Ten (10) EQUAL
YEARLY INSTALLMENTS, there is a list of ten (10)
equal yearly installments, it is clear that the latter do not
include the one designated as first installment.
It is well settled that laws and contracts should be so
construed as to harmonize
1
and give effect to the different
provisions thereof. Upon the other hand, the interpretation
insisted upon by the Buyer and the Surety, would, not only
create the contradictions or absurdities they point out

and which, admittedly, should be avoidedbut, also,
render meaningless and set at naught the provisions in
said schedules to the effect that the amount of (the) 1st
installment is P174,761.42, and that the due date of 1st
installment would be April 25, 1962, as regards the M/S
Don Salvador or Magsaysay, and May 26, 1962, as
regards the M/S Don Amando or Estancia. In fact, the
Buyer maintains that these provisions should
_______________
1 Mangila v. Lantin, L24735, Oct. 31, 1969 U.P. Board of Regents v.

Auditor General, L19617, Oct. 31, 1969 Asturias Sugar Central, Inc. v.
Commissioner of Customs, L19337, Sept. 30, 1969 PNB v. Court of
Appeals, L27117, July 30, 1969 Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., L21601, Dec. 28, 1968 Rivera v. San Miguel
Corp., L26197, Aug 30 1968 People v. Doriquez, L24444, L24445, July
29, 1968 Alhambra Cigar & Cigarette Co. v. Securities & Exchange
Commission, L23606, July 29, 1968 Andico v. Judge Roan, L26563,
April 16, 1968 Le Hua Sia v. Hon. Reyes. L21686, April 16, 1968
Bachrach Trans. Co.. Inc. v. Rural Transit Employees Assn., L21768,
Aug. 23, 1966 Republic v. Reyes, L22550, May 19, 1966.
212

Reparations Commission vs. Northern Lines, Inc,
be treated as surplusage and, hence, disregarded or

ignored. Incidentally, thus reveals the inherent infirmity of
the theory advanced by the Buyer and the Surety.
(b) The pertinent part of Section 12 of Rep. Act No. 1789,
pursuant to which the vessels in question were sold to the
Buyer, reads:
x x x Capital goods x x x disposed of to private parties as

provided for in subsection (a) of Section two hereof shall be sold on
a cash or credit basis, under rules and regulations as may be
determined by the Commission. Sales on a credit basis shall be
payable in installments: Provided, That the first installment shall
be paid within twentyfour months after complete delivery of the
capital goods and the balance within a period not exceeding ten
years, xxx, plus the service provided for in section ten hereof:
Provided, further, That the unpaid balance of the price thereof
shall bear interest
2
at the rate of not more than three percent per
annum, x x x.
It should be noted that, pursuant to the schedules attached

to the contracts with the Buyer, the complete delivery of
the vessels took place on April 25, and May 26, 1960,
respectively, so that the 24 months fixed by law for the
payment of the first installment expired on April 25, 1962
and May 26, 1962, which are the very due dates stated in
the aforementioned schedules for the payment of the
respective 1st installments. What is more, in view of said
legal provision, the Commission had no authority to agree
that the 1st installment be paid on any later date, and the
Buyer must have been aware of this fact. Hence, the
parties could not have intended the first installments to
become due on April 25 and May 26, 1963. It is, likewise,
obviousparticularly when considered in relation to the
provision above quotedthat the ten (10) equal yearly
installments, mentioned in the schedules, refer to the
balance of the price to be paid by the Buyer, after
deducting the first installment, so that, altogether there
would be eleven installments, namely, the first, which
would be 10% of F.O.B. cost of the vesselas agreed upon
between the Governments of the Philippines and Japan
and ten (10) equal yearly installments,
______________
2 Italics ours.
213
VOL. 34, JULY 31, 1970 213

representing the balance of the amount due to the

Commission from the Buyer, including the interest
thereon.
(c) The Buyer insists that the vessels were delivered
late, and that, consequently, it would be more in line with,
the spirit of R.A. No. 1789 to declare that the first
installments fell due on April 25 and May 26, 1963,
respectively. But, the Buyer seeks, not merely the
postponement of the first installments due date, but, also,
exemption from the obligation to pay its amount of
P174,761.42. Besides, the dates of complete delivery of
the vessels are explicitly stated in the schedules as being
April 25, 1960 and May 26, 1960. The Buyer would have
surely refused to sign the schedules if said entries therein
were not true. The signature affixed thereon by the Buyer
and the fact that April 25, and May 26, 1960 were made
the basis for the date of maturity, not only of the first
installment, but, also, of the subsequent ten (10) equal
yearly installments, clearly show that both parties were
agreed that complete delivery of the vessels had been made
on the dates set forth in said schedules.
d) This is borne out by the fact that FICI Surety Bonds
Nos. 3825 and 4123 are each for the sum P174,761.42.
According to paragraph (5) of the Suretys crossclaim,
which is admitted in the Buyers answer thereto, the latter
had agreed to pay the premiums and the cost of
documentary stamps on said bonds for 2 years x x x from
April 25, 1960 and May 30, 1960, respectively. There can
thus be no doubt that the Buyer and the Surety understood
that the first installments would fall due on April 25, and
May 26, 1962 and that the amount of each of those
installment would be P174,761.42, not P184,386,34, which
would be due on April 25, and May 26, 1963 as appellants
would have the Court believe.
(e) The Surety argues that the first installment is the
one marked No. 1, for P184,386.34, which if paid in (10)
equal yearly installments amounts to P1,843,863.40, which
is the equivalent of the total contract price with interest, of
the reparations goods in question. This is not
214

ferae. Precisely, it is only by including the first

installment of P174,761.42, among the obligations of the
Buyer, and charging the stipulated 3% yearly interest on
the balance of the cost price (of P1,747,614.22) after such
payment, and after the payment of each of the ten (10) equal
yearly installments of P184,386.34, that the full amount of
said cost price, plus interest, could be satisfied. In other
words, the price agreed upon and the interest thereon would
not be satisfied in full, unless the first installment of
P174,761.42 were paid in 1962, in addition to the ten (10)
installments of P184,386.34 each falling due yearly from
1963 to 1972.
2. Appellants assail the decision appealed from, upon
the ground that the Commission had no cause of action
against them until the cases (Nos. 50194 and 50488) for a
declaratory relief shall have been decided, and that,
consequently, the lower court erred in dismissing Case No.
50194 instead of Case No. 51552.
As above pointed out, Case No. 50488 was dismissed by

Branch XIII of the Court of First Instance of Manila, on
October 29, 1962, and the order of dismissal became final
and executory upon the dismissal of the appeal in L20725
of the Supreme Court, en July 2, 1963, months before the
rendition of the decision of Branch VII of the trial court,
which is the object of the present appeal, on April 30, 1964.
As regards Case No. 50194, which was commenced on April
24, 1962, the contract involved therein (with reference to
the M/S Don Salvador or Magsaysay) was infringed by the
Buyer when it failed to pay the first installment due the
next day, April 25, 1962. The lower court was, accordingly,
justified in dismissing that case, inasmuch as an action for
declaratory relief may be entertained only before breach
3
or
violation of the law or contract to which it refers. The
purpose of the action is to secure an authoritative
statement of the rights and obligations of the parties under
said law or contract, for their guidance in the enforcement
thereof or compliance
______________
3 Rule 64, Sec. 1, Rules of Court.
215
VOL. 34, JULY 31, 1970 215

therewith, not 4 to settle issues arising from an alleged

breach thereof. Accordingly, after such alleged breach of
the law or contract, or once the aforementioned issue has
arisen, an ordinary
5
action is the proper remedy. Thus, in
Samson v. Andal, this Court said:
x x x If there has been a violation, declaratory6

relief cannot be
granted, for the reason that Sec. 2, Rule 66 relative to said
remedy, provides that A contract or statute may be construed
before there has 7been a breach thereof. After breach, the regular
remedy obtains.
What is more, Rule 64, Section 6, of the Rules of Court is clear
and explicit about it. It provides:
x x x If before the final termination of the case, a breach or
violation of an instrument, or a statute, executive order or
regulation, or ordinance, should take place, the action may
thereupon be converted into an ordinary action, and parties
allowed to file such pleadings as may be necessary or proper.
Then, too, the facts of record strongly suggest that Cases

Nos. 50194 and 50488 for declaratory relief were
commenced in anticipation of an action for breach of
contract, said cases having been filed precisely on the eve of
the due date of the first installment, as to M/S Don
Salvador or Magsaysay, and on the very due date of the
first installment, as to M/S Don Amando or Estancia. The
situation in the case at bar is thus substantially
8
identical
to that obtaining in Teodoro v. Mirasol in which the
following language was used:
In the case at bar, We are led to the belief that the present action
in the Court of First Instance was prompted by a desire on
plaintiffs part to anticipate the action for unlawful detainer, the
probability of which was apparent xxx. xxx plaintiff took
advantage of defendants delayed xxx suit to file this case in the
Court of First Instance in anticipation of the action for unlawful
detainer, in order perhaps that he may claim that the action in
the Court of First Instance
______________
4 Dy Poco v. Comm. of Immigration, L22313, March 31, 1966.

5 89 Phil. 627, 628.
6 Of the old Rules, now Rule 64. Sec. 1.
7 Italics ours.
8 99 Phil. 150, 153154.
216

was prior to the unlawful detainer case, and, therefore, should

enjoy preference over the action filed in the Municipal Court.
It is to be noted that the Rules do not require as a ground for
dismissal of a complaint that there is a prior pending action. They
provide that there is a pending action, not a pending prior action.
The fact that the unlawful detainer suit was of a later date is no
bar to the dismissal of the present action, xxx.
x x x plaintiffs action for declaratory relief is improper this
action is meant only for those cases where a contract is desired to
be construed prior to its breach because of an impending
controversy that the parties thereto may be informed of the rights
thereunder. In the case at bar, xxx there has already been a
breach x x x hence the action for a declaratory judgment is no
longer proper.
x x x x x x x x x
There is no longer any need for the action, even if proper,

because the matter could, be threshed out in the unlawful detainer
9
suit that the defendant had instituted in the municipal court.
Indeed, otherwise, an action for a declaratory relief could

be availed of to, in effect, suspend, during its pendency, the
force and operation of the contracts in question, and
thereby achieve a compulsory deferment or postponement
of the maturity of the obligations therein validly contracted
and assumed. Obviously, the Court cannot give the stamp
of its approval thereto.
3. The Surety maintains that, pursuant to the terms of
its Bonds Nos. 3825 and 4123, the same expired on April
25, and May 26, 1961, respectively, so that it was no longer
liable under the Bonds when the first installments
became due on April 25 and May 26, 1962.
Suffice it to say that, not having been pleaded in the
Suretys answer or otherwise raised in the lower court,
such defense cannot be set up, for the first time, in this
_______________
9 Italics ours.
217
VOL. 34. JULY 31, 1970 217

10
appeal. Moreover, it is inconsistent with the crossclaim of
the Surety, against the Buyer, for the sum of P10,641.68,
representing the premiums and the cost of documentary
stamps on said Bonds, for a period of two (2 ) years from,
April 25, 1960 and May 30, 1960, which premiums and
documentary stamps could not be due if the bonds were not
in force during said period of two (2) years.
Again, in said bonds, the Buyer, as principal, and the
Surety, as such, firmly bound themselves unto the
Reparations Commission, in the sum of P174,761.42,
pursuant to the contract between the Buyer and, the
Commission, on condition that, if the Buyer shall well and
truly keep, do and perform, each and every, all and
singular, the matters and things in the contract set forth
and specified to be by the Buyer done and performed at
the time and in the manner in said contract specified, and
shall pay over, make good and otherwise satisfy the
obligations required under the contract, then the said bond

x x x shall be released upon payment of all the sums due
to the Commission, otherwise, said bond shall ipso facto be
forfeited in full in favor of said Commission.
Thus, the intention of the parties was, clearly, to
guarantee compliance with the aforementioned obligations.
The first of such obligations, in point of time, was the
payment by the Buyer of the first installments which
were to become due on April 25 and May 26, 1962, that is,
one year or about a year after the alleged expiration of the
Bonds. Were We to accept the theory of the Surety, the
result would be that it had never contracted any obligation
or assumed any liability in favor of the Commission, in
consequence of the execution of said bonds and that, for all
intents and purposes, the contracts under
_______________
10 Atlas Consolidated Mining & Development Corp. v. Workmens

Compensation Commission, L22439, May 29, 1970: Permanent Concrete
Products, Inc. v. Teodoro, L29766, Nov. 29, 1968 Gutierrez v. Court of
Appeals, L25972, Nov. 20, 1968 Yu Kimteng Construction Corp. v.
Manila Railroad Co., L17027, March 3, 1967 Board of Assessment
Appeals v. Manila Electric Co., L15334, Jan. 31, 1964.
218

consideration were, accordingly, devoid of any guarantee.

Such result is manifestly contrary to the intention of the
parties. And this explains why the Surety has not set up
said defense in its answer.
Referring to the stipulation in a bond to the effect that
the liability thereunder would expire on the date of
maturity of the principal obligation, this Court declared
that said stipulation in effect nullified the nature of said
bond, and was, therefore unfair and unreasonable, as well
as a subtle
11
way of making money thru trickery and
deception. The situation in the case at bar is even worse,
since the Surety contends that its bond expired about a
year before the first installments had become due.
It may not be amiss to note that the rule of strict
construction of surety bonds does not apply to the
engagements of corporate sureties engaged in the business
of furnishing bonds for compensation, and who are,
furthermore, secured
12
from all possible loss by adequate
counterbonds.
4. The Surety impugns the P300 awarded thereto by
way of attorneys fees, upon the ground that, the fee agreed
upon with the Buyer is 20% of the total amount due. It is
well settled, however, that courts of justice
13
have discretion
to fix the amount of attorneys fees, and We do not feel
that such discretion has been abused by His
______________
11 Ongsiako v. World Wide Insurance & Surety Co., 104 Phil. 61, 64.
12 Republic v. Umali, L23066, March 1, 1968 Pastoral v. Mutual Sec.
Ins. Corp., L20469, August 31, 1965 Atkins, Kroll v. Reyes, 105 Phil. 640,
644 Pacific Tobacco Corp. v. Lorenzana, 102 Phil. 234 Philippine Surety
& Ins. Co. v. Royal Oil Products, 102 Phil. 326.
13 San Miguel Brewery, Inc. v. Magno, L21879, Sept. 29, 1967
Insurance Co. of North America v. Manila Port Service, L23124, Oct. 11,
1967 Balmes v. Suson, L27235, May 22, 1969 Philippine Trust Co. v.
Policarpio, L22685, August 25, 1969 Nielson & Co. v. Lepanto
Consolidated Mining Co., L21601, December 28, 1968 De la Cruz v. De la
Cruz, L27759, April 17, 1970.
219
VOL. 34, JULY 31, 1970 219

Honor, the trial Judge, considering that the Surety had

mainly relied upon the defenses set up by the Buyer, and
that the ultimate liability of the Surety is principally
dependent upon the amount of the principal obligation that
the Buyer may be unable to satisfy.
The other assignments of error made by appellants
herein are mere corollaries to those already disposed of,
and, hence, need no further discussion.
WHEREFORE, the decision appealed from is hereby
affirmed in toto, with costs against appellants herein.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro,

Fernando, Teehankee, Barredo and Villamor, JJ., concur.
Decision affirmed.
Notes.(a) Interpretation of contracts with conflicting or

uncertain provisions.All the provisions of a contract
should be given effect by reconciling apparent
contradictions or inconsistencies (De la Rama Steamship
Co. vs. Tan, L8784, May 21, 1956) or by restricting, when

necessary, words or clauses of general meaning in order to
give a more limited clause its proper effect (Hibberd vs.
Estate of McElroy, 25 Phil. 164).
The whole contract must be interpreted or read together
in order to arrive at its true meaning. Certain words,
phrases and clauses cannot be segregated and then made
to control (Barretto vs. Santa Marina, 26 Phil. 200 Ignacio
vs. Martinez, 33 Phil. 576 Hanlon vs. Haussermann, 40
Phil. 796).
Always the cardinal rule is to give effect to the intention
of the parties (Kasilag vs. Rodriguez, 69 Phil. 217).
(b) Declaratory relief.An action for declaratory relief or
to determine the proper construction of a contract, statute
or ordinance can be brought only before the contract,
statute or ordinance has been breached, it being
immaterial that no case is pending asserting the breach
(De Borja vs. Villadolid, L1897, Nov. 28, 1949, 47 O.G.
220

Yap vs. Republic
2315 Santos vs. Aquino, L5101, Nov. 28, 1953, 49 O.G.

5344 Samson vs. Andal, L3439, July 31, 1951
Government Service Insurance System Employees
Association vs. Alvendia, L15614, May 30, 1960). The
proper remedy after breach is by regular action, not by
proceeding for declaratory relief (Samson vs. Andal, supra).
To rule otherwise would be to prejudice a pending case,
where there is one, and to encourage multiplicity of suits.
(De Borja vs. Villadolid, supra Government Service
Insurance System Employees Association vs. Alvendia,
supra).
For cases where action for declaratory relief was held
proper because no breach had yet taken place (see City of
Baguio vs. National Waterworks and Sewerage Authority,
L12032, Aug. 81, 1959 Shell Company of the Philippines,
Ltd. vs. Municipality of Sipocot, L12680, March 20, 1959).
(c) The law forms part of, and is read into, every contract.
The rule is that the law forms part of, and is read into,
every contract, unless clearly excluded therefrom in those
cases where such exclusion is allowed (Liberation
Steamship Co., Inc., vs. Court of Industrial Ralations, L
25389, June 27, 1968, 23 SCRA 1105 Taurus Taxi Co., Inc.
vs. Capital Insurance & Surety Co., Inc., L23491, July 31,
1968, 24 SCRA 454).
______________
[No. 26118. December 31, 1926]
PHILIPPINE NATIONAL BANK, plaintiff and appellant,

vs. MARIANO ESCUETA, CIRILO B. SANTOS and
TEOFILO VILLONGCO, defendants and appellants.
1. PRINCIPAL AND SURETY WITHDRAWAL OF

SURETY EFFECT OF ACCEPTANCE OF
WITHDRAWAL.The three defendants and two other
stockholders of a corporation styled the Island Trading
Company executed a bond or socalled surety agreement to
guarantee the payment to the plaintiff bank of all debts
incurred by the Trading Company upon its current credit
account with the bank. The document was delivered to the
bank and retained by it without objection and credit
extended to the Trading Company on the strength of the
surety agreement. The agreement contained a clause to
the effect that it might be revoked by the guarantors at
any time upon fortyeight hours' notice in writing to the
bank, but that such revocation should not operate to
relieve the guarantors from the responsibility for
obligations incurred by the principal prior to the
revocation. One of the sureties gave notice to the bank
that he desired to withdraw from the agreement, Held:
That in the absense of evidence to the effect that the bank
had given its consent to such withdrawal, the surety
agreement still subsisted and that none of the sureties
were relieved from their responsibility under the
agreement.
2. ID. IMPLIED ACCEPTANCE OF BOND.The

acceptance of a bond or surety agreement need not
necessarily be express or in writing, but the fact that the
agreement was delivered to the plaintiff bank and credit
extended to the Island Trading Company on the strength
thereof, sufficiently indicate acceptance of the agreement
by the bank.
3. ID. LIABILITY OF SURETIES.In its books of

accounts, the plaintiff bank changed the principal, the
Island Trading Company, a higher rate of interest than
that fixed in the surety agreement, but in its action
http://central.com.ph/sfsreader/session/0000015cda297445f478543f003600fb002c009e/t/?o=False 1/8
against the sureties, it demanded only the rate of interest

specified in the agreement, Held: That in these
circumstances the sureties were not released from their
liability.

Dionisio de Leon and Carlos B. Hilado for plaintiff
appellant.
992

National Bank vs. Escueta,
Eusebio Orense and Victoriano Yamzon for

defendantsappellants.
OSTRAND, J.:
In its complaint the plaintiff alleges "that on February 14,

1919, and to secure the payment of any obligation the
Island Trading Co., a corporation duly organized under the
laws of the Philippine Islands, might contract with the
Philippine National Bank, the plaintiff, Mariano Escueta,
Cirilio B. Santos, Teofilo Villongco, the defendants and
Wm. Kennedy and Rafael Villanueva, signed jointly and
severally, a surety agreement in favor of said bank, copy of
which is hereto attached and made a part hereof as Exhibit
A. Wm. Kennedy is now dead and Rafael Villanueva
withdrew from said agreement on April 6, 1920 and for
these reasons they are not made parties defendants in the
complaint. That the present indebtedness of the principal,
the Island Trading Co., to the plaintiff, the Philippine
National Bank and f or which the above surety agreement
was executed, amounts to P26,736.10, with interest at the
rate of 6 per cent per annum from January 1, 1924," all of
which is due and unpaid.
The plaintiff therefore asks judgment against the
defendants, jointly and severally, for said sum and interest
with costs. The surety agreement referred to in the
complaint and made a part thereof reads as follows:
"This surety agreement, executed at the City of Manila,
P. L, on this 14th day of February, 1919, by Mariano
Escueta, Rafael Villanueva, Cirilo B. Santos, Wm. Kennedy
and Teofilo Villongco, all of lawful age and residents of the
City of Manila, P. I., herein referred to as the Guarantors,
and the Philippine National Bank, herein referred to as the

Creditor, bears witness that:
"Whereas, the Island Trading Co., Inc., of Manila, P. L,
herein referred to as the Principal, desires to obtain
credits, loans, overdrafts, discounts, etc., from the Creditor,
for all of which the Creditor requires security and the
Guarantors, on account of valuable consideration received
from
993
VOL. 50, DECEMBER 31, 1926 993

National Bank vs. Escueta
the Principal, are desirous of assisting the Principal in

obtaining such credits, etc., and of becoming such security
"Now, therefore, for the purpose abovementioned, the
Guarantors, jointly and severally, hereby guarantee and
warrant to the Creditor, its successors or assigns, the
prompt .payment at maturity of all the notes, drafts, bills
of exchange, overdrafts and other obligations of every kind,
on which the Principal may now be indebted, or may
hereafter become indebted to the Creditor, plus the interest
thereon at the rate of six and onehalf (6%) per cent per
annum, and the costs and expenses of the Creditor incurred
in connection therewith.
"In case of default by the Principal in the payment at
maturity of any of the obligations above mentioned, or in
case of the Principal's failure promptly to respond to any
other lawful demand made by the Creditor, the
Guarantors, jointly and severally, agree to pay to the
Creditor, its successors or assigns, upon demand, all
outstanding obligations of the Principal whether due or not
due, and whether held by the Creditor as principal or
agent and it is agreed that a certified statement by the
Creditor as to the amount due from the Principal shall be
accepted as correct by the Guarantors without question,
and may be admitted by any court as conclusive evidence.
"The Guarantors expressly waive all rights to demand of
payment and notice of nonpayment and protest, and agree
that the securities of every kind, that are now and may
hereafter be left with the Creditor, its successors, indorsees
or assigns, as collateral to any evidences of debt or
obligations, or upon which a lien may exist therefor may be
withdrawn or surrendered at any time, and the time of
payment thereof extended, without notice to, or consent by
the guarantors, and that the liability on this guaranty shall
be direct and immediate and not contingent upon the
pursuit by the Creditor, its successors, indorsees or assigns,

of whatever remedies it or they have against the Principal
or the securities or lien it or they may possess, and
994

the guarantors will at any time on demand, whether due or

not due, pay to the Creditor any overdraft of the Principal.
"This instrument is intended to be a complete and
perfect indemnity to the Creditor for any indebtedness or
liability of any kind owing by the Principal to the Creditor
from time to time, and to be valid and cotinuous without
further notice to the Guarantors, and may be revoked by
the Guarantors at any time, but only after fortyeight
hours' notice in writing to the Creditor, and such
revocation shall not operate to relieve the Guarantors from
the responsibility for obligations incurred by the Principal
prior to the termination of such period.
(Sgd.) "MARIANO ESCUETA

"RAFAEL VlLLANUEVA
"CIRILO B. SANTOS
"WM. KENNEDY
"TEOFILO VlLLONGCO
"Guarantors"
In their answer, the defendants make a general denial of

the allegations of the complaint and, in substance, set up
as special defenses that the aforesaid surety agreement
was never accepted by the plaintiff that the plaintiff had
unduly and without the consent of the defendants,
extended the time for the payment of the debt by the
principal, the Island Trading Co., Inc., and thereby relieved
the defendants from their liabilities as sureties that the
plaintiff without the knowledge and consent of the
defendants released the surety, Rafael Villanueva, from his
obligations under the agreement, and that the plaintiff
should have presented its claim against the estate of the
surety, Wm. Kennedy, deceased, but have failed to do so
and that, consequently, the defendants cannot be held
liable for the shares of these two sureties.
Upon trial, the court below found that the defendants
were liable for the sum of P26,736.10, less onefifth, said
onefifth representing the liability of the deceased surety,

995
VOL. 50, DECEMBER 31, 1926 995

Wm. Kennedy, but should be credited with the sum of

P17,076.68, the value of certain merchandise sent by the
Island Trading Co., Inc., through the plaintiff to Shanghai,
China, to be there disposed of by the Shanghai branch of
the plaintiff corporation and of which transaction no
account had been rendered by the plaintiff. Judgment was
therefore rendered in favor of the plaintiff and against the
defendants for the sum of P7,727.54, with legal interest
from April 5, 1924, and without costs. From this judgment
both the plaintiff and the defendants appealed.
Under its first assignment of error, the plaintiff
appellant argues that the court below erred "in finding that
from the sum of P26,736.10 prayed for by the
plaintiffappellant in its complaint, there should be
deducted the amount of P17,076.68 supposed value of
certain goods which are alleged to have been sent by the
Island Trading Co., Inc., to the Pongee & Produce Co.,
Shanghai, thru the branch office of the plaintiffappellant
in Shanghai."
The only evidence as to the transaction referred to in
this assignment of error is the testimony of the def endant
Escueta in which the following questions and answers are f
ound:
"Q. Aside from all that, do you know if some goods
outside of the Philippines and in foreign countries were
sold by the bank, which goods were also the property of. the
Island Trading Co., Inc., and of which the bank had also
taken possession?A. Yes sir.
"Q. What are those goods?A. In May, 1921, the Island
Trading Co., Inc., thought of sending certain goods to
Shanghai, to a firm the Pongee & Produce Co. to be sold in
the amount of P17,076.68 as per invoice copy of which * * *
"Mr. Orense: Copy of which we ask should be marked
Exhibit 8.
" (Witness continuing.) When these goods were already
packed up came Mr. Wilson, son, who was also working in
the National Bank. As it was his custom to go often
996

National Bank vs. Escueta,
to our office to transact business with the manager, when

he saw the box containing the said goods, furious he said to
the manager: Why do you send those goods to Shanghai
without the consent of the bank? Then Goldenberg, in my
presence, said: I had your permission.Alright, but you
must send those goods to Shanghai thru the bank and that
the firm Pongee & Produce Co. cannot sell said goods
without the authority of the Manager of the Bank's Branch
in Shanghai.
"Q. Were those sent to Shanghai thru the bank?A. Yes
sir.
"Q. And after said goods were sent to Shanghai, do you
know if they were sold there and who sold them?A. Up to
the year 1923, said goods were not sold and afterwards
ultimately the bank has ignored it completely and we do
not know what has been done by the Bank with those
goods.
"Q. What was the value of those goods at the time they
were sent to Shanghai thru the bank?A. It appears in
this invoice, P17,076.68.
"Q. That amount or the proceeds of those goods if they
were sold in Shanghai by the branch of the bank, do you
know if they were credited to the account of the Island
Trading Co., Inc., with the Philippine National Bank?A. I
think, not, because it seems now that nobody in the bank
knows about these goods which were sent to Shanghai."
In the opinion of the writer, the testimony quoted is
hardly sufficient to charge the plaintiff with the
responsibility for the disposal of the merchandise alleged to
have been shipped to Shanghai. The Island Trading Co.
was a commercial organization and presumably kept
records of its transactions, but there seems to be no
document or book entry showing that the goods were
shipped to Shanghai through the plaintiff bank or any of its
branches. If the shipping documents were transmitted or
delivered to the bank, there should have been a letter of
transmittal,
997
VOL. 50, DECEMBER 31, 1926 997

of which the Island Trading Co. must have retained a copy,

but no such letter or copy has been offered in evidence the
invoice referred to in the testimony is, if anything, in favor

of the plaintiff inasmuch as it may be construed to indicate
that the invoiced goods were shipped to the Pongee &
Produce Co., Shanghai. The majority of the members of the
court are, however, of the opinion that the uncontradicted
testimony of Mr. Escueta must be accepted as true and that
it shows sufficiently that the bank assumed control over
the merchandise, that it was its duty to account therefor,
and that having failed to do so, it must be charged with the
value of the goods.
The plaintiffappellant's second assignment of error is to
the effect that the court below erred in finding that the
surety, Rafael Villanueva, had been released from
responsibility by the plaintiffappellant and in deducting,
for that reason, onefifth from the amount due the plaintiff.
This assignment, is, we think, well taken. There is
absolutely no evidence in the record showing that the
plaintiff gave its consent to Villanueva's withdrawal from
the surety agreement, or that it released him from
responsibility. The fact that he was not made a defendant
in this action is not sufficient to show such consent or
release the sureties were jointly and severally bound and
the action might be brought against either of them without
joining the cosureties. It is further to be noted that the
defendants made no motion in the court below to have
Villanueva included as a party defendant.
The defendantsappellants present seven assignments of
error, none of which can be sustained. Under the first three
and the fifth, it is argued that it has not been shown that
the plaintiff accepted the surety agreement. This is a
question of fact, which in our opinion was correctly
determined by the trial court. The document evidencing the
agreement was delivered to the plaintiff bank and retained
by it without objection. It also appears that the bank, on
the strength of the agreement, extended credit to the Is
998

People vs. Eriia
land Trading Co. These facts sufficiently indicate the

acceptances. Such acceptances need not necessarily be
express or in writing.
The fourth assignment of error has reference to the fact
that the plaintiff, in its transactions with the Island
Trading Co., charged a higher rate of interest than that
fixed in the surety agreement and the defendants argue
that one of the principal conditions of the agreement was

thereby violated and altered by the plaintiff and the
sureties consequently released. This contention cannot
successfully be maintained. Whatever interest the plaintiff
may have charged the Island Trading Co. in its accounts,
the fact remains that as against the sureties, it is
demanding only the rate of interest specified in the
agreement, which still remains unchanged and in force.
The defendantsappellants' other assignments of error
are so clearly untenable as to require no discussion.
For the reasons stated, the appealed judgment is hereby
modified by increasing the plaintiff's recovery to the full
sum of P9,659.42, with interest at the rate of 6 per cent
per annum from April 3, 1924. In all other respects, the
judgment is affirmed without costs. So ordered.
Avancea, C. J., Street, Malcolm, Johns, Romualdez,

Judgment modified.
____________

Texas Co. vs. Alonso
whom the petitioner bore a grudge, it would be the barest

conjecture to say that there was one to do away with
Gregorio. Conspiracy not having been established, the peti
tioner is liable alone for the injuries inflicted by him upon
the deceased. (People vs. Caballero, 53 Phil., 585.) The
finding of the Court of Appeals"It has been fully estab
lished that the deceased died of the injuries inflicted by
appellants Cipriano Ofiasa, Lazaro Carpio, and Alejandro
Carpio"is hardly a precise statement of the extent and
result of the injuries individually inflicted by the herein
petitioner.
The case is remanded to the Court of Appeals for a de
termination of the petitioner's liability, in the light of his
participation in the crime, and for the imposition of the
corresponding penalty. So ordered.
Avancea, C. J., Abad Santos, Diaz, Moran, and

Horrileno, J J., concur.
Case remanded.
[No. 47495.August 14, 1941]

THE TEXAS COMPANY (PHIL.), INC., petitioner, vs. TOMAS
ALONSO, respondent.
SURETYSHIP AND GUARANTY OFFER OF GUARANTY ACCEPTANCE NOTICE OF
ACCEPTANCE TO SURETY OR GUARANTOR CASE AT BAR.The bond in

question was executed at the request of the petitioner by virtue of the
following clause of the agency contract: "Additional Security.The
Agent shall whenever requested by the Company in addition to the
guaranty herewith provided, furnish further guaranty or bond,
conditioned upon the Agent's faithful performance of this contract, in
such form and amount and with such bank as surety or with such
individuals or firms as joint and several sureties as shall be
satisfactory to the company." In view of the foregoing clause which
should be the law between the parties, it is obvious that, before a
bond is accepted by the petitioner, it has to be in such form and
http://central.com.ph/sfsreader/session/0000015cda2ab032f650ab2f003600fb002c009e/t/?o=False 1/7
amount and with such sureties as shall be satisfactory thereto in

other words, the bond is subject to petitioner's approval. The logical
implication arising from this requirement is that, if the petitioner is
satisfied with
91
VOL. 73, AUGUST 14, 1941 91

any such bond, notice of its acceptance or approval should necessarily

be given to the proper party in interest, namely, the surety or
guarantor. There is no evidence in this case tending to show that the
respondent, T.A., ever had knowledge of any act on the part of the
petitioner amounting to an implied acceptance, so as to justify the
application of the decision in National Bank vs. Escueta (50 Phil.,
991).
PETITION for review on certiorari.

C. D. Johnston & A. P. Deen for petitioner.
Tomas Alonso in his own behalf.
LAUREL,J.:
On November 5, 1935 Leonor S. Bantug and Tomas
Alonso were sued by the Texas Company (P. I.), Inc. in the
Court of First Instance of Cebu for the recovery of the sum
of P629, unpaid balance of the account of Leonor S. Bantug
in connection with her agency contract with the Texas
Company for the faithful performance of which Tomas
Alonso signed the following:
"For value received, we jointly and severally do hereby bind

ourselves and each of us, in solidum, with Leonor S. Bantug the
agent named in the within and foregoing agreement, for full and
complete performance of same hereby waiving notice of non
performance by or demand upon said agent, and consent to any
and all extensions of time for performance. Liability under this
undertaking, however, shall not exceed the sum of P2,000,
Philippine currency."
"Witness the hand and seal of the undersigned affixed in the
presence of two witnesses, this 12th day of August, 1929."
Leonor S. Bantug was declared in default as a result of

her failure to appear or answer, but Tomas Alonso filed an
answer setting up a general denial and the special defenses
that Leonor S. Bantug made him believe that he was
merely a cosecurity of one Vicente Palanca and that he
was never notified of the acceptance of his bond by the

Texas Com
92

pany. After trial, the Court of First Instance of Cebu

rendered judgment on July 10, 1937, which was amended
on February 1, 1938, sentencing Leonor S. Bantug and
Tomas Alonso to pay jointly and severally to the Texas
Company the sum of P629, with interest at the rate of six
per cent (6%) from the date of the filing of the complaint,
and with proportional costs. Upon appeal by Tomas Alonso,
the Court of Appeals modified the judgment of the Court of
First Instance of Cebu in the sense that Leonor S. Bantug
was held solely liable for the payment of the aforesaid sum
of P629 to the Texas Company, with the consequent
absolution of Tomas Alonso. This case is now before us on
petition for review by certiorari of the decision of the Court
of Appeals. It is contended by the petitioner that the Court
of Appeals erred in holding that there was merely an offer
of guaranty on the part of the respondent, Tomas Alonso,
and that the latter cannot be held liable thereunder
because he was never notified by the Texas Company of its
acceptance.
The Court of Appeals has placed reliance upon our
decision in National Bank vs. Garcia (47 Phil., 662), while
the petitioner invokes the case of National Bank vs.
Escueta, (50 Phil., 991). In the first case, it was held that
there was merely an offer to give bond and, as there was no
acceptance of the offer, this court refused to give effect to
the bond. In the second case, the sureties were held liable
under their surety agreement which was found to have
been accepted by the creditor, and it was therein ruled that
an acceptance need not always be express or in writing. For
the purposes of this decision, it is not indispensable for us
to invoke one or the other case above cited. The Court of
Appeals found as a fact, and this is conclusive in this
instance, that the bond in question was executed at the
request of the petitioner by virtue of the following clause of
the agency contract:
"Additional Security.The Agent shall whenever requested by

the Company in addition to the guaranty herewith provided,
furnish further guaranty or bond,
93
VOL. 73, AUGUST 14, 1941 93

conditioned upon the Agent's faithful performance of this

contract, in such form and amount and with such bank as surety
or with such individuals of firms as joint and several sureties as
shall be satisfactory to the Company."
In view of the foregoing clause which should be the law

between the parties, it is obvious that, before a bond is
accepted by the petitioner, it has to be in such form and
amount and with such sureties as shall be satisfactory
thereto in other words, the bond is subject to petitioner's
approval. The logical implication arising from this re
quirement is that, if the petitioner is satisfied with any
such bond, notice of its acceptance or approval should
necessarily be given to the proper party in interest,
namely, the surety or guarantor. In this connection, we are
likewise bound by the finding of the Court of Appeals that
there is no evidence in this case tending to show that the
respondent, Tomas Alonso, ever had knowledge of any act
on the part of the petitioner amounting to an implied
acceptance, so as to justify the application of our decision in
National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a
few words explanatory of the rule regarding the necessity
of acceptance in case of bonds. Where there is merely an
offer of, or proposition for, a guaranty, or merely a con
ditional guaranty in the sense that it requires action by the
creditor before the obligation becomes fixed, it does not
become a binding obligation until it is accepted and, unless
there is a waiver of notice, until notice of such acceptance is
given to, or acquired by, the guarantor, or until he has
notice or knowledge that the creditor has performed the
conditions and intends to act upon the guaranty.
(National Bank vs. Garcia, 47 Phil., 662 28 C. J., sec.
21, p. 901 24 Am. Jur., sec. 37, p. 899.) The acceptance
need not necessarily be express or in writing, but may be
indicated by acts amounting to acceptance. (National Bank
vs. Escueta, 50 Phil., 991.) Where, upon the other hand, the
transaction is not merely an offer of guaranty but amounts
to a direct or unconditional promise of guaranty,
94

unless notice of acceptance is made a condition of the

guaranty, all that is necessary to make the promise binding
is that the promisee should act upon it, and notice of
acceptance is not necessary (28 C. J., sec. 25, p. 904 24 Am.
Jur., sec 37, p. 899), the reason being that the contract of
guaranty is unilateral (Visayan Surety and Insurance
Corporation vs. Laperal, G. R. No. 46515, promulgated
June 14, 1940).
The decision appealed from will be, as the same is here
by, affirmed, with costs of this instance against the peti
tioner. So ordered.
Avancea, C. J., Abad Santos, and Diaz, JJ., concur.
OZAETA, J., with whom concur MORAN and HORRILLENO, J J.,

dissenting:
We concede that a statement of fact made, by the Court
of Appeals is conclusive upon this Court in a petition for
review on certiorari. But when it appears from the decision
of the Court of Appeals itself that such a statement is but a
conclusion drawn by that Court from the facts found by it,
and that such conclusion is patently erroneous, we hold
that this Court should disregard it.
Of that nature, we believe, is the following statement
made by the Court of Appeals in the course of its ratio
cination :
"La fianza prestada por el apelante se otorg a requerimiento

de la demandante en virtud de la siguiente clusula (15) del
contrato de agencia Exhibit A, que dice as:
"'ADDITIONAL SECURITY.The Agent shall, whenever requested
by the Company in addition to the guaranty herewith provided,
furnish further guaranty or bond, conditioned upon the agent's
faithful performance of this contract, in such form and amount
and with such bank as surety or with such individuals or firms as
joint and several sureties as shall be satisfactory to the Company.'
" (Pages 89, appendix to petitioner's brief.)
It is important to note that the abovequoted statement

forms part of the court's ratio decidendi and not of its
95
VOL. 73, AUGUST 14, 1941 95

findings of fact. Its findings of fact appear in the first three

paragraphs of its decision, which we quote as follows:
"El 12 de agosto de 1929 la demandante y el demandado

Leonor S. Bantug celebraron un contrato, (Exhibit A) por virtud
del cual aquella nombro a este Agente vendedor de sus productos
petrolferos en el Municipio de Maasin, Provincia de Leyte,
mediante pago de una comisin sobre el valor de todos los efectos
que llegase a vender, obligandose por su parte Leonor S. Bantug
cmo Agente, a ingresar y pagar a la compaa el importe neto de
las ventas realizadas, despus de deducir su comisin y los dems
gastos de agencia que se estipularon en el referido contrato.
"En el mismo documento Exhibit A, el otro demandado Tomas
Alonso suscribi una fianza, obligndose mancomunada y
solidariamente con el Agente Leonor S. Bantug a cumplir
fielmente las condiciones del contrato de Agencia hasta la suma
de P2,000.
"El estado de cuentas de la agencia que se present en el juicio
cmo Exhibit B, demuestra que la ultima liquidacion arroja un
balance contra el Agente Leonor S. Bantug por la cantidad de
P629 y cmo esta suma no ha sido pagada ni por Leonor S.
Bantug ni por su fiador Tomas Alonso, a pesar de los
requerimientos que se les ha hecho, de ahi que la demandante, el
18 de noviembre de 1938, dedujo accin en el Juzgado de Primera
Instancia de Cebu para el cobro de dicha suma y sus intereses
legales desde la presentacin de la demanda." (Pages 13,
appendix to petitioner's brief.)
Now if, as found by the Court of Appeals itself, the

agency contract between the petitioner and Leonor S.
Bantug was Exhibit A, dated August 12, 1929, and that
that very same document was on the same date signed by
the respondent Tomas Alonso as bondsman or surety of the
agent, how could the bond in question, which formed part
of Exhibit A, be held to have been executed by virtue of
clause 15 of said document providing for additional sec
96

urity? Indeed, that very clause says that the agent shall
furnish further guaranty or bond "in addition to the gua
ranty herewith provided," whenever requested by the com
pany. The "guaranty herewith provided" was obviously the
bond or guaranty given by the respondent on the same date
and in the same document. It appears clear to us, therefore,
that the bond Exhibit A, being the original guaranty, could

not be the "additional guaranty" mentioned in clause 15 of
said Exhibit A. Moreover, it does not appear that any bond
or guaranty, other than that of the respondent, to secure
the performance of the agency contract in question was in
force on and after August 12, 1929.
Another illogical conclusion drawn by the Court of Ap
peals is this:
"Por el requerimiento que contiene la clusula preinserta, de

que el Agente puede prestar una garanta adicional a satisfaccin
de la compaa, debe entenderse que la fianza prestada por el
apelante era una oferta o proposicin de garanta, cuya
efectividad dependa de la aceptacin de la compaa, comnicada
al garante." (Page 9, appendix to petitioner's brief.)
If, as previously found by the Court of Appeals, the

herein respondent executed the bond in question "a reque
rimiento de la demandante," how could said bond be
understood as an "offer or proposition of guaranty" from
Alonso to the plaintiff?
Yet the judgment of the Court of Appeals, as well as the
affirming decision of the majority of this court, is based on
the conclusion that the bond sued upon was an additional
guaranty that it constituted a mere offer of guaranty and,
therefore, had to be accepted by the petitioner and that,
not having been accepted, it is inefficacious. We have
shown that such conclusion is unwarranted.
Our vote is to reverse the decision of the Court of
Appeals and to affirm that of Judge Felix Martinez of the
Court of First Instance of Cebu, who tried this case.
Judgment affirmed.
[No. 19439. January 17, 1923]
PERFECTA POBLETE, plaintiff and appellee, vs. Lo

SINGCO, RUPERTO CARREON and FABIANO
BENIPAYO, defendants and appellants.
1. CONTRACTS BY WHOM EXIGIBLE ACTION BY

CREDITOR NOT PARTY TO CONTRACT.Two
individuals, intending to assume liability as sureties for a
debt contracted or about to be contracted by their
principal, executed a document in conjunction with the
latter, declaring themselves to be jointly and severally
bound with him for the payment of the debt to the
creditor. Said document was then delivered by the
principal to the creditor and the latter, upon the faith
thereof, extended credit to the principal as contemplated
by all parties. Held: That, upon default of the principal in
the payment of the debt, an action could be maintained by
the creditor against the sureties on their contract of
suretyship, although such creditor was not an immediate
party thereto.
2. PRINCIPAL AND SURETY DISPARITY BETWEEN

OBLIGATION OF PRINCIPAL AND OBLIGATION OF
SURETY.While the obligation of a surety cannot be
greater than that of his principal, either as to the amount
or as to the burdensome character of the conditions, a lack
of coincidence in other respects between the obligation
assumed by the principal and that assumed by the surety
does not render the obligation of the latter invalid.

Albay. Gloria, J.
No appearance for the appellant Lo Singco.
Pedro Sabido and Domingo Imperial for the other
appellants.
Manly, Goddard & Lockwood for appellee.
370

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Poblete vs. Lo Singco
STREET J.:
By the amended complaint in this action, the plaintiff,

Doa Perfecta Poblete, widow and resident of Tabaco,
Albay, seeks to recover a sum of money of the defendant Lo
Singco, as principal, and of his two codefendants, Ruperto
Carreon and Fabiano Benipayo, as joint and solidary
sureties. At the hearing in the Court of First Instance of
the Province of Albay judgment was rendered in favor of
the plaintiff to recover jointly and severally of all three
defendants the sum of P15,000, with lawful interest on
P5,000 from March 14, 1919, and on the remainder from
November 13, 1920. Upon this the defendants took steps to
bring the case by appeal to this court, but only the two
sureties have assigned error to the judgment.
It appears that in September of the year 1918, the
plaintiff was the owner of certain lands in the
municipalities of Malinao and Tabaco, of the Province of
Albay, which contained valuable plantings of hemp then
about ready to be cut. In the latter part of said month the
defendant Lo Singco, a resident of Polangui, Albay,
presented himself to the plaintiff and indicated a desire to
cut and remove such of the hemp as was then in a fit state
for stripping, under a form of agreement commonly known
in that region as the pujanza, which involves a letting of
the land by the owner to a lesseepurchaser for the purpose
of a single stripping.
In response to this suggestion, the plaintiff informed Lo
Singco that the price would be P20,000, payable in part
upon the making of the contract and the balance on time,
with adequate security for the deferred payments. Lo
Singco indicated his conformity with these terms and went
away to find the necessary sureties. Individuals suited to
this purpose were found in the defendants Ruperto Carreon
and Fabiano Benipayo and with a view to effecting the
object desired, a document was on September 30, 1918,
371
VOL. 44, JANUARY 17, 1923 371

executed before a notary public in Polangui, Albay, by

these three.
This document (Exhibit B) starts out with a recital of

the fact that Lo Singco had made a contract, commonly
known as the pujanza, with Doa Poblete, of Tabaco, for
the taking of the hemp on certain lands owned by her in
the province, at the price of P20,000 for the stripping. The
document then continues as f ollows:
"Therefore, we, the Chinaman Lo Singco as principal,
Ruperto Carreon and Fabiano Benipayo as sureties of the
Chinaman Lo Singco bind ourselves in the amount of
fifteen thousand pesos, Philippine currency, the same to be
paid in conformity with the terms of the contract, to wit:
the Chinaman Lo Singco will pay Mrs. Pitang Poblete as
follows: P5,000 at the delivery of this document P5,000
three months after this first payment and P10,000,
Philippine currency, six months after this second
installment is completely paid to the said owner, Mrs.
Pitang Poblete, her executors and assigns. The conditions
of this obligation are such that if the said Chinaman, Lo
Singco fails to comply with his obligation under his
contract of lease (pujanza), we, the undersigned sureties,
without excluding the principal, Lo Singco, from this
contract of suretyship, faithfully bind ourselves, our heirs
and successors, jointly and severally to pay the amount
guaranteed by this contract of suretyship. And if the
contracting party, Lo Singco, fulfills the obligation
contracted by him, then and in that event this obligation
shall be null and void, otherwise it shall remain in full
force and effect." (Exhibit B.)
Armed with this paper, Lo Singco presented himself
again to the plaintiff and on October 4, 1918, the contract
for the letting of the hemp lands to Lo Singco was reduced
to form and duly signed by both parties (Exhibit A). At the
same time the contract of suretyship, or guaranty, was de
372

livered to the plaintiff, and Lo Singco made the first

payment of P5,000, as stipulated. Lo Singco then proceeded
to strip the lands of the plantings of hemp, but he has
made no further payment upon account of his obligations to
the plaintiff, and this action against him and his sureties
has resulted.
The defense interposed in behalf of the two sureties
the present appellantsis based on two grounds. The first
is that the plaintiff is not a party to the document of
suretyship (Exhibit B), and it is therefore supposed that

she cannot maintain an action thereon. The second is that
the supposed contract of suretyship is a nullity because of
certain discrepancies between the terms stated in the
document of suretyship (Exhibit B) and the contract of
lease (pujanza), to which it is appurtenant. These
objections to the maintenance of the action will be
considered in turn.
The answer to the contention that the plaintiff cannot
maintain an action against the sureties on the Exhibit B is
to be found, we think, in the consideration that this
document was undoubtedly intended to create a legal
obligation upon delivery to the plaintiff and there is
nobody else who could possibly maintain an action to
enforce the engagements expressed therein except the
plaintiff. It is undoubtedly a general rule that a contract is
binding only upon the parties who execute them and their
heirs (art. 1257, Civil Code) but the same article which
announces this doctrine creates an exception in the case of
stipulations in favor of a third person who gives notice of
acceptance before revocation of the stipulation. In the case
before us the plaintiff accepted this contract of suretyship,
and upon the faith of it allowed another person to strip her
lands of valuable plantings of hemp. There was no
revocation of the offer before it was accepted, nor, so far as
appears, at any time before demand was made upon the
sureties for the fulfillment thereof. Under these
circumstances notification of acceptance, other than such
as is involved in the making of demand, was unnecessary.
We are accordingly of the
373
VOL. 44, JANUARY 17, 1923 373

opinion that the contract of suretyship is obligatory upon

the appellants, and that the plaintiff, having accepted and
acted upon the faith of the same, can maintain an action
thereon against them.
With respect to the discrepancies between the contract
of suretyship (Exhibit B) and the contract for the letting of
the land (Exhibit A), we note that the first is expressed in
more general terms than the latter. For instance, Exhibit A
contains a provision not found in Exhibit B to the effect
that the cutting of the hemp shall be so conducted that' no
plant shall be cut unless it is more than 1 meter high, and
it is f urther stipulated that the purchaser shall pay 50
centavos for each immature plant that is taken or

destroyed.
In the document Exhibit B the land supposed to be the
subject of the contract of pujanza is described as three
parcels of hemp land while in Exhibit A the lands which
are the subject of the contract are described as consisting of
four parcels. The largest of the parcels described in the two
contracts is identified by the circumstance that it has a
circumf erence of about three thousand brazas. The other
two parcels spoken of in Exhibit B are not particularly
described but are said to be all within the municipality of
Tabaco. In the Exhibit A, where the three additional
parcels are specially described, they are all placed in the
adjoining municipality of Malinao. It appears, however,
from the testimony that all of the parcels referred to in
Exhibit B were delivered to Lo Singco, and the only
possible difference between the two contracts with
reference to the land ref erred to therein is that somewhat
more land passes to Lo Singco under the contract Exhibit A
than is called for in the Exhibit B and it is evident that
there is a mere mistake of description in Exhibit B in the
part where two of the parcels in question are supposed to
be in Tabaco.
Again, another discrepancy between the two documents
is that, if regard is had to Exhibit A, the last installment of
the purchase price, consisting of P10,000, should be paid
374

on the last day of March, 1919 while according to the

contract Exhibit B, said installment of the purchase price is
said to be payable at the end of June of the same year.
We are of the opinion that none, or all of these
discrepancies, affect the validity of the contract of
suretyship. So far as they are material, the terms of the
contract of suretyship fall short of the requirements of the
principal contract. In other words, the contract of
suretyship is more favorable to the sureties than the
principal contract is to the principal debtor.
Now, it is well recognized that sureties may bind
themselves to obligations distinct from those to which their
principal is liable and it is expressly declared in article
1140 of the Civil Code that solidarity may exist even
though the creditors and debtors are not bound in the same
manner or upon the same terms and conditions. The only
restriction upon this proposition is found in the rule that

the obligation of the surety cannot be greater than that of
the principal, either as to the amount or as to the
burdensome character of the conditions. Such is the
express provision of article 1826 and even to that
proposition the authors of the Code hasten to add that if
the surety binds himself for more than the principal is
bound, his liability shall be reduced to the limits of that of
the principal debtor. The thing to be noted here is that lack
of coincidence between the obligations assumed by the
principal and the sureties does not render the obligations of
the latter invalid.
For the reasons stated, we are of the opinion that no
error was committed by the trial judge in giving judgment
against the appellants in conformity with the obligations
assumed by them as sureties for the defendant Lo Singco.
The judgment will therefore be affirmed, with costs. So
ordered.
Araullo, C. J., Malcolm, Avancea, Villamor, Ostrand,

Johns, and Romualdez, JJ., concur.
Judgment affirmed.
375
VOL. 44, JANUARY 22, 1923 375

People vs. Gutierrez
VOL. 14, AUGUST 31, 1965 1011

Pastoral vs. Mutual Security Insurance Corp.
No. L20469. August 31, 1965.
PEDRO C. PASTORAL, petitioner, vs. MUTUAL

SECURITY INSURANCE CORPORATION and THE
HONORABLE COURT OFAPPEALS, respondents.
Suretyship When guaranty requires action by the creditor

before the obligation becomes fixed Case at bar.The surety bond
requires the lessor to report to the surety any violations of the
lease contract within five days, otherwise, the bond will be null
and void. The surety bond was executed on October 22, 1957, and
copy thereof was received by the lessor on November 21, 1957. By
then, the lessee defaulted in two payments of the rentals, which
defaults the lessor should have reported between October 610
and November 610, as required by the bond, but did so only on
December 5, 1957. Held: By imposing on the lessorthe condition
of notifying it within five days of default, the surety made it
necessary that the lessor should accept the bond and the lessor
could not do so before learning of it. The rule is that where the
guaranty requires action by the creditor before the obligation
becomes fixed, it is not binding until accepted (National Bank vs.
Garcia, 47 Phil. 662 Texas Co. [Phils.] Inc. vs. Alonso, 73 Phil.
90). The suretyship contract, therefore, was not perfected, and
was. not binding on the lessor until November 21, when he
received copy thereof and tacitly accepted it. The latest default
happened on November 5. The 5day period to notify expired
November 10, and the lessor only learned of the existence of the
condition on November 21. By not notifying the lessor earlier, the
surety must be deemed to have waived the condition as to rentals
already due, since a condition is deemed fulfilled when the obligor
voluntarily prevents its fulfillment.
Same Contract of guaranty or surety, prospective in operation
unless a contrary intent is shown.A contract of guaranty or
suretyship is only prospective, and not retroactive in operation
unless a contrary intent is clearly shown. Consequently, the lessor
in the instant case was entitled to assume that the fiveday notice
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provided by the surety bond did not, and was not intended to
include any defaults incurred prior to his acceptance.
Same Same Rule of strictissimi juris not applicable to
compensated sureties.The rule holding sureties to be favorites of
the law, and their contracts to be strictissimi juris, does not apply
to compensated sureties.
PETITION for review of a decision of the Court of Appeals.
1012


San Juan, Africa & Benedicto for petitioner.
Vicente L. San Luis for respondents.
REYES, J.B.L., J.:
Petition by Pedro C Pastoral for the review and reversal of

a decision of the Court of Appeals (in its Case CAG.R. No.
29180R), that absolved the Mutual Security Insurance
Corporation of its liability to the said petitioner, reversing
the decision of the Court of First Instance of Manila.
The facts are stated by the Court of Appeals to be as
follows:
It appears that on and from October 1, 1957, plaintiff Pedro C.

Pastoral leased a crane to defendant Mapada & Company, Inc., at
a monthly rental of P900.00, Exhibit A. The contract provides that
if the crane be not returned 10 days after notice therefor,
defendant will pay plaintiff P15,000, as the value of the crane. In
compliance with paragraph 2(b) of Exhibit A, defendant on
October 22, 1957, put up a surety bond, Exhibit B, in the total
amount of P15,000 executed by appellant Mutual Security
Insurance Corporation to fully and faithfully guarantee
compliance by defendant of all the conditions and obligations
under the lease contract. Upon request of defendant which was
expecting some money from the construction contract with the
government about the end of November, plaintiff deferred its
collection of rentals for the months of October and November,
1957 until the beginning of December but when no payment was
made despite demands, plaintiff advised, and demanded payment
from, the surety company on December 5, 1957, Exhibit C. Up to
the date of the trial and despite numerous demands by plaintiff,
defendant failed to pay any rental (except P2,000 in March, 1958
from the Bureau of Public Highways) nor to return the crane to

plaintiff.
After trial, judgment was rendered in favor of plaintiff and
against the defendants, ordering the latter solidarily to pay the
plaintiff the sum of P7,700 as unpaid rentals up to and including
the month of September, 1958 when the complaint was filed plus
P900 as monthly rental from the month of October, 1958 until the
crane is actually returned, or in default thereof to pay to plaintiff
the sum of P15,000 for the crane, provided that the amount for
which appellant Mutual Security Insurance Corporation shall be
liable shall not exceed the sum of P15,000 and to pay the costs.
Only the surety company appealed, urging that the trial
1013
VOL. 14, AUGUST 31, 1965 1013

court erred in not holding that it was released from liability under
the surety bond which had become null and void from the failure
of plaintiff to report within five days to appellant the violation of
the lease contract.
The Contract of Lease of Construction Equipment, Exhibit A,
provides inter alia: 2. That the lessee obligates to pay a monthly
rental of Nine Hundred Pesos (P900) Philippine Currency payable
at the residence of the LESSOR xxx while the surety bond,
Exhibit B, after guaranteeing compliance with the lease contract
provides: Any violation of said contract will be reported to the
herein Surety Company within (5) days, otherwise, this bond will
be null and void.
Upon the facts above narrated, the Court of Appeals

decided that Pastorals failure to notify the surety of the
principals defaults between October 610 and November 6
10, 1957, and in notifying the surety only on December 5,
1957, constituted a violation of the conditions of the bond
that exonerated the surety from liability.
Unable to obtain reconsideration of the decision,
Pastoral resorted to this Court.
We find the appealed decision to be in error.
On the basis that Pastoral received a copy of the bond
(containing the requirement to notify the surety of any
default within 5 days) only on November 21, 1957and
this date is not seriously disputedPastorals obligation to
notify it within five (5) days of the defaults in the payment
of the first two monthly rentals, falling due in early
October and early November, had become impossible of
performance, so that compliance with the 5day notice
requirement had become excused for those two months. No

reason is shown why Pastoral should anticipate that the
surety would impose this condition when the lease contract
merely required that lessee Mapada & Co., Inc. should
furnish a surety bond. That Pastoral knew nothing about
such a condition before November 21 is further emphasized
by the fact that in late October or early November he
agreed with Mapada & Co., Inc., to defer payment of the
October and November rentals to the end of November.
By imposing on Pastoral the condition of notifying it
within 5 days of default, the surety company made it
necessary that Pastoral should accept the bond and
Pastoral could not do so before learning of it.
1014

This Court has ruled that where the guaranty requires

action by the creditor before the obligation becomes fixed, it
is not binding until accepted (National Bank vs. Garcia, 47
Phil. 63 Texas Co. [Phil.] Inc. vs. Alonzo, 73 Phil. 90). The
rule is grounded on common sense otherwise, the debtor
and the guarantor could easily defraud the creditor by
inserting in the bond conditions that would render it
nugatory.
The suretyship contract, therefore, was not perfected
and was not binding on Pastoral until November 21, 1957,
when he received copy thereof and tacitly accepted it. By
then two defaults had already occurred (even disregarding
the extension agreement of October 31, hereinafter
discussed) and Pastoral was in no position to give notice of
them within 5 days after default, as required by the bond,
because the latest happened on November 5. The 5day
period to notify expired November 10, and Pastoral only
learned of the existence of the condition on November 21.
Ad impossibilia nemor tenetur. In fact, by not notifying
Pastoral earlier, the surety must be deemed to have waived
the condition as to rentals already due, since a condition is
deemed fulfilled when the obligor voluntarily prevents its
fulfillment (Civ. Code, Art. 1186).
The Court of Appeals held that Pastoral was dutybound
to know and secure copy of the surety contract within a
reasonable time from its execution on October 22, 1957,
and that not having done so, he was chargeable with its
contents. We find no justification for this pronouncement. If
anyone was obligated to notify Pastoral of the conditions
attached to the bond, that one was the guarantor. Pastoral

was not obligated to inquire, since his assent to the
condition was necessary and if no acceptable bond was
forthcoming, he could always rescind the lease of the
machinery to Mapada & Co., Inc., and recover his crane.
The Court of Appeals further held that the act of
Pastoral in granting to the debtor on October 31, 1957 time
up to the end of November, 1957 to pay the rentals that fell
due on the first five days of October and November,
1015
VOL. 14, AUGUST 31, 1965 1015

without the suretys consent, constituted a material

alteration that discharged the surety. We agree with
appellant that this view is untenable. When Pastoral
agreed on October 31 that the October and November
rentals be paid at the end of November, he had not yet
learned of them on November 21. On the latter date, the
debtor was not yet in default, because the extension given
had wiped out the previous failures to pay on October 5 and
November 5. The first default after the bond had become
effective in law (on November 21) occurred on the last day
of November, and Pastoral gave notice thereof to the surety
on the 5th day of December, within the fiveday period
prescribed by the bond.
A contract of guaranty or suretyship is only prospective,
and not retroactive in operation (Socony Vacuum, Corp. vs.
Miraflores, 67 Phil. 304 El Venceder vs. Canlas, 44 Phil.
699 Asiastic Petroleum Co. vs. De Pio, 46 Phil. 167), unless
a contrary intent is clearly shown. Consequently, Pastoral
was entitled to assume that the notice provided by the
surety bond did not, and was not intended to include any
defaults incurred prior to his acceptance. The surety, which
drafted the bond, could have expressly provided, if it so
chose, that the fiveday notice therein provided should
extend to the amounts of falling due on October 5 and
November 5, but the surety failed to do so, and cannot
blame Pastoral therefor.
The fault in the reasoning of the Court of Appeals lies in
its assumption that the surety bond became effective
immediately, without taking into account that the fiveday
notice provision required the creditors assent to become
effective and binding. This assent could not be given before
November 21, when Pastoral learned of the condition for
the first time and tacitly agreed to it, as shown by his
notice to the surety on December 5, that the principal

debtor had defaulted.
It is worth stressing here that this Court has repeatedly
decided (Pacific Tobacco Co. vs. Lorenzana and Visayan
Surety, L8086, October 31, 1957 Phil. Surety vs. Royal Oil
Products, L9981, Oct. 31, 1957 Atkins Kroll & Co. vs.
Reyes, L11936, April 30, 1959) that the rule
1016

Dy vs. Republic
holding sureties to be favorites of the law, and their

contracts to be strictissimi juris, does not apply to
compensated sureties, following United States Fidelity &
Guaranty Co. vs. Golden Pressed & Fire Brick Co., 191
U.S. 416, 48 L. ed. 242:
We are familiar with the old rule of strict construction in favor of

the surety, based upon the underlying principle that formerly
parties became sureties, not for hire but as a matter of
accommodation, usually lending their names through motives of
friendship, and hence a surety obligation would be construed most
strongly in their favor. But the rule strictissimi jurisa has no
application to surety companies, organized for the purpose of
conducting an indemnity business at established rates of
compensation.
and which, it may be added, protect themselves against

loss by exacting adequate counterbonds.
WHEREFORE, the decision of the Court of Appeals is
reversed, and that of the Court of First Instance of Manila
is upheld and confirmed. Respondentappellee Mutual
Security Insurance Corporation shall pay the costs in all
instances.
Bengzon, C.J., Concepcion, Dizon, Regala,

Makalintal Bengzon, J.P., and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.
Decision reversed.
o0o
[No. L8437. November 28, 1956]
ESTATE OF K.H. HEMADY, deceased, vs. LUZON

SURETY CO., INC., claimant and appellant.
________________
1 Article 90, Revised Penal Code.
389
VOL. 100, NOVEMBER 28, 1956 389

Estate of Hemady vs. Luzon Surety Co., Inc.
1. CONTRACTS BlNDING EFFECT OF CONTRACTS

UPON HEIRS OF DECEASED PARTY.The binding
effect of contracts upon the heirs of the deceased party is
not altered by the provision in the Rules of Court that
money debts of a deceased must be liquidated and paid
from his estate before the residue is distributed among
said heirs (Rule 89). The reason is that whatever payment
is thus made from the estate is ultimately a payment by
the heirs and distributees, since the amount of the paid
claim in fact diminishes or reduces the shares that the
heirs would have been entitled to receive. The general
rule, therefore, is that a partys contractual rights and
obligations are transmissible to the successors.
2. ID. SURETYSHIP NATURE OF OBLIGATION OF

SURETY.The nature of the obligation of the surety or
guarantor does not warrant the conclusion that his
peculiar individual qualities are contemplated as a
principal inducement for the contract. The creditor expects
of the surety nothing but the reimbursement of the
moneys that said creditor might have to disburse on
account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting
from an obligation to give and to the creditor, it was
indifferent that the reimbursement should be made by the
surety himself or by some one else in his behalf, so long as
the money was paid to it.
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3. ID. ID. QUALIFICATION OF GUARANTOR

SUPERVENING INCAPACITY OF GUARANTOR,
EFFECT ON CONTRACT.The qualification of integrity
in the guarantor or surety is required to be present only at
the time of the perfection of the contract of guaranty. Once
the contract of guaranty has become perfected and
binding, the supervening dishonesty of the guarantor (that
is to say, the disappearance of his integrity after he has
become bound) does not terminate the contract but merely
entitles the creditor to demand a replacement of the
guarantor. But the step remains optional in the creditor: it
is his right, not his duty, he may waive it if he chooses,
and hold the guarantor to his bargain.
APPEAL from an order of the Court of First Instance of

Rizal. Caluag, J.
Claro M. Recto for appellee.
Tolentino & Garcia and D.R. Cruz for appellant.
390

REYES, J.B. L., J.:
Appeal by Luzon Surety Co., Inc., from an order of the

Court of First Instance of Rizal, presided by Judge
Hermogenes Caluag, dismissing its claim against the
Estate of K.H. Hemady (Special Proceeding No. Q293) for
failure to state a cause of action.
The Luzon Surety Co. had filed a claim against the
Estate based on twenty different indemnity agreements, or
counter bonds, each subscribed by a distinct principal and
by the deceased K.H. Hemady, a surety solidary guarantor)
in all of them, in consideration of the Luzon Surety Co.'s of
having guaranteed, the various principals in favor of
different creditors. The twenty counterbonds, or indemnity
agreements, all contained the following stipulations:
Premiums.As consideration for this suretyship, the

undersigned jointly and severally, agree to pay the COMPANY
the sum of ________________________ (P__________) pesos,
Philippines Currency, in advance as premium there of for every
___________ months or fractions thereof, this ________ or any
renewal or substitution thereof is in effect.
Indemnity.The undersigned, jointly and severally, agree at

all times to indemnify the COMPANY and keep it indemnified
and hold and save it harmless from and against any and all
damages, losses, costs, stamps, taxes, penalties, charges, and
expenses of Whatsoever kind and nature which the COMPANY
shall or may, at any time sustain or incur in consequence of
having become surety upon this bond or any extension, renewal,
substitution or alteration thereof made at the instance of the
undersigned or any of them or any order executed on behalf of the
undersigned or any of them and to pay, reimburse and make good
to the COMPANY, its successors and assigns, all sums and
amount of money which it or its representatives shall pay or cause
to be paid, or become liable to pay, on account of the undersigned
or any of them, of whatsoever kind and nature, including 15% of
the amount involved in the litigation or other matters growing out
of or connected therewith for counsel or attorneys fees, but in no
case less than P25. It is hereby further agreed that in case of
extension or renewal of this we equally bind ourselves for the
payment thereof under the same terms
391
VOL. 100, NOVEMBER 28, 1956 391

and conditions as above mentioned without the necessity of

executing another indemnity agreement for the purpose and that
we hereby equally waive our right to be notified of any renewal or
extension of this which may be granted under this indemnity
agreement.
Interest on amount paid by the Company.Any and all sums of
money so paid by the company shall bear interest at the rate of
12% per annum which interest, if not paid, will be accummulated
and added to the capital quarterly order to earn the same
interests as the capital and the total sum thereof, the capital and
interest, shall be paid to the COMPANY as soon as the
COMPANY shall have become liable therefore, whether it shall
have paid out such sums of money or any part thereof or not.
* * * * * *
*
Waiver.It is hereby agreed upon by and between the

undersigned that any question which may arise between them by
reason of this document and which has to be submitted for
decision to Courts of Justice shall be brought before the Court of
competent jurisdiction in the City of Manila, waiving for this
purpose any other venue. Our right to be notified of the
acceptance and approval of this indemnity agreement is hereby

likewise waived.
* * * * * *
*
Our Liability Hereunder.It shall not be necessary for the

COMPANY to bring suit against the principal upon his default, or
to exhaust the property of the principal, but the liability
hereunder of the undersigned indemnitor shall be jointly and
severally, a primary one, the same as that of the principal, and
shall be exigible immediately upon the occurrence of such
default. (Rec. App. pp. 98102.)
The Luzon Surety Co., prayed for allowance, as a

contingent claim, of the value of the twenty bonds it had
executed in consideration of the counterbonds, and further
asked for judgment for the unpaid premiums and
documentary stamps affixed to the bonds, with 12 per cent
interest thereon.
Before answer was filed, and upon motion of the
administratrix of Hemadys estate, the lower court, by
order of September 23, 1953, dismissed the claims of Luzon
Surety Co., on two grounds: (1) that the premiums due and
cost of documentary stamps were not contemplated
392

under the indemnity agreements to be a part of the

undertaking of the guarantor (Hemady), since they were
not liabilities incurred after the execution of the
counterbonds and (2) that whatever losses may occur
after Hemadys death, are not chargeable to his estate,
because upon his death he ceased to be guarantor.
Taking up the latter point first, since it is the one more
far reaching in effects, the reasoning of the court below ran
as follows:
The administratrix further contends that upon the death of

Hemady, his liability as a guarantor terminated, and therefore, in
the absence of a showing that a loss or damage was suffered, the
claim cannot be considered contingent. This Court believes that
there is merit in this contention and finds support in Article 2046
of the new Civil Code. It should be noted that a new requirement
has been added for a person to qualify as a guarantor, that is:
integrity. As correctly pointed out by the Administratrix, integrity
is something purely personal and is not transmissible. Upon the

death of Hemady, his integrity was not transmitted to his estate
or successors. Whatever loss therefore, may occur after Hemadys
death, are not chargeable to his estate because upon his death he
ceased to be a guarantor.
Another clear and strong indication that the surety company
has exclusively relied on the personality, character, honesty and
integrity of the now deceased K.H. Hemady, was the fact that in
the printed form of the indemnity agreement there is a paragraph
entitled Security by way of first mortgage, which was expressly
waived and renounced by the security company. The security
company has not demanded from K.H. Hemady to comply with
this requirement of giving security by way of first mortgage. In
the supporting papers of the claim presented by Luzon Surety
Company, no real property was mentioned in the list of properties
mortgaged which appears at the back of the indemnity
agreement. (Rec. App., pp. 407408).
We find this reasoning untenable. Under the present Civil

Code (Article 1311), as well as under the Civil Code of 1889
(Article 1257), the rule is that
Contracts take effect only as between the parties, their assigns

and heirs, except in the case where the rights and obligations
393
VOL. 100, NOVEMBER 28, 1956 393

arising from the contract are not transmissible by their nature, or

by stipulation or by provision of law.
While in our successional system the responsibility of the

heirs for the debts of their decedent cannot exceed the
value of the inheritance they receive from him, the
principle remains intact that these heirs succeed not only
to the rights of the deceased but also to his obligations.
Articles 774 and 776 of the New Civil Code (and Articles
659 and 661 of the preceding one) expressely so provide,
thereby confirming Article 1311 already qouted.
ART. 774.Succession is a mode of acquisition by virtue of which

the property, rights and obligations to the extent of the value of
the inheritance, of a person are transmitted through his death to
another or others either by his will or by operation of law.
ART. 776,The inheritance includes all the property, rights
and obligations of a person which are not extinguished by his
death.
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court

ruled:
Under the Civil Code the heirs, by virtue of the rights of

succession are subrogated to all the rights and obligations of the
deceased (Article 661) and can not be regarded as third parties
with respect to a contract to which the deceased was a party,
touching the estate of the deceased (Barrios vs. Dolor, 2 Phil. 44).
* * * * * *
*
The principle on which these decisions rest is not affected by

the provisions of the new Code of Civil Procedure, and, in
accordance with that principle, the heirs of a deceased person
cannot be held to be third persons in relation to any contracts
touching the real estate of their decedent which comes in to their
hands by right of inheritance they take such property subject to
all the obligations resting thereon in the hands of him from whom
they derive their rights.
(See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874

and de Guzman vs. Salak, 91 Phil., 265).
394

The binding effect of contracts upon the heirs of the

deceased party is not altered by the provision in our Rules
of Court that money debts of a deceased must be liquidated
and paid from his estate before the residue is distributed
among said heirs (Rule 89). The reason is that whatever
payment is thus made from the estate is ultimately a
payment by the heirs and distributees, since the amount of
the paid claim in fact diminishes or reduces the shares that
the heirs would have been entitled to receive.
Under our law, therefore, the general rule is that a
partys contractual rights and obligations are transmissible
to the successors. The rule is a consequence of the
progressive depersonalization of patrimonial rights and
duties that, as observed by Victorio Polacco, has
characterized the history of these institutions. From the
Roman concept of a relation from person to person, the
obligation has evolved into a relation from patrimony to
patrimony, with the persons occupying only a
representative position, barring those rare cases where the
obligation is strictly personal, i.e., is contracted intuitu
personae, in consideration of its performance by a specific

person and by no other. The transition is marked by the
disappearance of the imprisonment for debt.
Of the three exceptions fixed by Article 1311, the nature
of the obligation of the surety or guarantor does not
warrant the conclusion that his peculiar individual
qualities are contemplated as a principal inducement for
the contract. What did the creditor Luzon Surety Co. expect
of K.H. Hemady when it accepted the latter as surety in the
counterbonds? Nothing but the reimbursement of the
moneys that the Luzon Surety Co. might have to disburse
on account of the obligations of the principal debtors. This
reimbursement is a payment of a sum of money, resulting
from an obligation to give and to the Luzon Surety Co., it
was indifferent that the reimbursement should be made by
Hemady himself or by some one else in his behalf, so long
as the money was paid to it.
395
VOL. 100, NOVEMBER 28, 1956 395

The second exception of Article 1311, p. 1, is

intransmissibility by stipulation of the parties. Being
exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be
expressly established, or at the very least, clearly inferable
from the provisions of the contract itself, and the text of the
agreements sued upon nowhere indicate that they are non
transferable.
"(b) Intransmisibilidad por pacto.Lo general es la

transmisibilidad de darechos vs obligaciones le excepcion, la
intransmisibilidad. Mientras nada se diga en contrario impera el
principio de la transmision, como elemento natural a toda relacin
juridica, salvo las personalsimas. Asi, para la no transmisin, es
menester el pacto expreso, porque si no, lo convenido entre partes
trasciende a sus herederos.
Siendo estos los continuadores de la personalidad del causante,
sobre ellos recaen los efectos de los vinculos juridicos creados por
sus antecesores, vs para evitarl, si asi se quiere, es indespensable
convension terminante en tal sentido.
Por su esencia, el derecho vs la obligacin tienden a ir ms all
de las personas que les dieron vida, vs a ejercer presin sobre los
sucesores de esa persona cuando no se quiera esto, se impone una
estipulacion limitativa expresamente de la transmisibilidad of de
cuyos trminos claramente se deduzca la concresin del concreto a
las mismas personas que lo otorgon. (Scaevola, Codigo Civil,

Tomo XX, p. 541542) (Italics supplied.)
Because under the law (Article 1311), a person who enters

into a contract is deemed to have contracted for himself
and his heirs and assigns, it is unnecessary for him to
expressly stipulate to that effect hence, his failure to do so
is no sign that he intended his bargain to terminate upon
his death. Similarly, that the Luzon Surety Co., did not
require bondsman Hemady to execute a mortgage indicates
nothing more than the companys faith and confidence in
the financial stability of the surety, but not that his
obligation was strictly personal.
The third exception to the transmissibility of obligations
under Article 1311 exists when they are not transmissible
by operation of law. The provision makes ref
396

erence to those cases where the law expresses that the

rights or obligations are extinguished by death, as is the
case in legal support (Article 300), parental authority
(Article 327), usufruct (Article 603), contracts for a piece of
work (Article 1726), partnership (Article 1830 and agency
(Article 1919). By contract, the articles of the Civil Code
that regulate guaranty or suretyship (Articles 2047 to
2084) contain no provision that the guaranty is
extinguished upon the death of the guarantor or the surety.
The lower court sought to infer such a limitation from
Art. 2056, to the effect that one who is obliged to furnish a
guarantor must present a person who possesses integrity,
capacity to bind himself, and sufficient property to answer
for the obligation which he guarantees. It will be noted,
however, that the law requires these qualities to be present
only at the time of the perfection of the contract of
guaranty. It is selfevident that once the contract has
become perfected and binding, the supervening incapacity
of the guarantor would not operate to exonerate him of the
eventual liability he has contracted and if that be true of
his capacity to bind himself, it should also be true of his
integrity, which is a quality mentioned in the article
alongside the capacity.
The foregoing concept is confirmed by the next Article
2057, that runs as follows:
ART. 2057.If the guarantor should be convicted in first

instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that a
specified person should be guarantor.
From this article it should be immediately apparent that

the supervening dishonesty of the guarantor (that is to say,
the disappearance of his integrity after he has become
bound) does not terminate the contract but merely entitles
the creditor to demand a replacement of the guarantor. But
the step remains optional in the credi
397
VOL. 100, NOVEMBER 28, 1956 397

tor: it is his right, not his duty he may waive it if he

chooses, and hold the guarantor to his bargain. Hence
Article 2057 of the present Civil Code is incompatible with
the trial courts stand that the requirement of integrity in
the guarantor or surety makes the latters undertaking
strictly personal, so linked to his individuality that the
guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K.H.
Hemady in favor of Luzon Surety Co. not being rendered
intransmissible due to the nature of the undertaking, nor
by the stipulations of the contracts themselves, nor by
provision of law, his eventual liability thereunder
necessarily passed upon his death to his heirs. The
contracts, therefore, give rise to contingent claims provable
against his estate under section 5, Rule 87 (2 Moran, 1952
ed., p. 437 Gaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that which

arises when a person is bound as surety or guarantor for a
principal who is insolvent or dead. Under the ordinary contract of
suretyship the surety has no claim whatever against his principal
until he himself pays something by way of satisfaction upon the
obligation which is secured. When he does this, there instantly
arises in favor of the surety the right to compel the principal to
exonerate the surety. But until the surety has contributed
something to the payment of the debt, or has performed the
secured obligation in whole or in part, he has no right of action
against anybodyno claim that could be reduced to judgment.
(May vs. Vann, 15 Pla., 553 Gibson vs. Mithell, 16 Pla., 519
Maxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7

Baxt. [Tenn.], 119 Ernst vs. Nou, 63 Wis., 134.)"
For defendant administratrix it is averred that the above

doctrine refers to a case where the surety files claims
against the estate of the principal debtor and it is urged
that the rule does not apply to the case before us, where the
late Hemady was a surety, not a principal debtor. The
argument evinces a superficial view
398

Capital Ins. & Surety Co., Inc. vs. Eberly
of the relations between parties. If under the Gaskell

ruling, the Luzon Surety Co., as guarantor, could file a
contingent claim against the estate of the principal debtors
if the latter should die, there is absolutely no reason why it
could not file such a claim against the estate of Hemady,
since Hemady is a solidary codebtor of his principals.
What the Luzon Surety Co. may claim from the estate of a
principal debtor it may equally claim from the estate of
Hemady, since, in view of the existing solidarity, the latter
does not even enjoy the benefit of exhaustion of the assets
of the principal debtor.
The foregoing ruling is of course without prejudice to the
remedies of the administratrix against the principal
debtors under Articles 2071 and 2067 of the New Civil
Code.
Our conclusion is that the solidary guarantors liability
is not extinguished by his death, and that in such event,
the Luzon Surety Co., had the right to file against the
estate a contingent claim for reimbursement. It becomes
unnecessary now to discuss the estates liability for
premiums and stamp taxes, because irrespective of the
solution to this question, the Luzon Suretys claim did state
a cause of action, and its dismissal was erroneous.
Wherefore, the order appealed from is reversed, and the
records are ordered remanded to the court of origin, with
instructions to proceed in accordance with law. Costs
against the AdministratrixAppellee. So ordered.
Pars, C.J., Bengzon, Padilla, Montemayor, Bautista

Angelo, Labrador, Concepcion, Endencia and Felix, JJ.,
concur.
Order reversed.
_____________
[No. 42518. August 29, 1936]
WlSE & Co., INC., plaintiff and appellee, vs. DIONISIO P.

TANGLAO, defendant and appellant.
1. SURETYSHIP AND GUARANTY THE SURETYSHIP

MUST BE EXPRESS.An obligation of suretyship, under
the law, must be express. It is not inferable from any of
the clauses of the contract that T became D's surety for
the payment of the latter's indebtedness to the plaintiff.
Therefore, T could not have con
373
VOL. 63, AUGUST 29, 1936 373
Wise & Co. vs. Tanglao
tracted any personal responsibility for the payment of said

debt.
2. ID. BENEFIT OF EXHAUSTION.Granting that

defendant T may be considered as a surety under the
contract, even then the action against him does not lie on
the ground that all the legal remedies against the debtor
have not previously been exhausted (art. 1830, Civil Code,
and decision of the Supreme Court of Spain of March 2,
1891).

Manila. Sison, J.
The appellant in his own behalf.
Franco & Reinoso for appellee.
AVANCEA, C. J.:
In the Court of First Instance of Manila, Wise & Co.

instituted civil case No. 41129 against Cornelio C. David
for the recovery of a certain sum of money. David was an
agent of Wise & Co. and the amount claimed from him was
http://central.com.ph/sfsreader/session/0000015cda2f40826241d45b003600fb002c009e/t/?o=False 1/4
the result of a liquidation of accounts showing that he was

indebted in said amount. In said case Wise & Co. asked
and obtained a preliminary attachment of David's property.
To avoid the execution of said attachment, David succeeded
in having his Attorney Tanglao execute on January 16,
1932, a power of attorney (Exhibit A) in his favor, with the
following clause:
"To sign for me as guarantor for himself in his indebtedness to

Wise & Company of Manila, which indebtedness appears in civil
case No. 41129, of the Court of First Instance of Manila, and to
mortgage my lot (No. 517F of the subdivision plan Psd20, being
a portion of lot No. 517 of the cadastral survey of Angeles, G. L. R.
O. Cad. Rec. No. 124), to guarantee the said obligations to the
Wise & Company, Inc., of Manila."
374

On the 18th of said month David subscribed and on the 23d

thereof, filed in court, the following document (Exhibit B) :
"COMPROMISE
"Come now the parties, plaintiff by the undersigned attorneys and

defendant in his own behalf and respectfully state:
"I. That defendant confesses judgment for the sum of six

hundred forty pesos (P640), payable at the rate of eighty
pesos (P80) per month, the first payment to be made on
February 15, 1932 and successively thereafter until the
full amount is paid that plaintiff accepts this stipulation.
"II. That as security for the payment of the said sum of P640,
defendant binds in favor of, and pledges to the plaintiff,
the following real properties:
"1. House of light materials described under tax declaration

No. 9650 of the municipality of Angeles, Province of
Pampanga, assessed at P320.
"2. Accesoria apartments with a ground floor of 180 sq. m.
with the first story of cement and galvanized of iron
roofing located on the lot belonging to Mariano Tablante
Geronimo, said accesoria is described under tax
declaration No. 11164 of the municipality of Angeles,
Pampanga, assessed at P800.
"3. Parcel of land described under Transfer Certificate of Title

No. 2307 of the Province of Pampanga recorded in the
name of Dionisio Tanglao of which defendant herein holds
a special power of attorney to pledge the same in favor of
Wise & Co., Inc., as a guarantee for the payment of the
claim against him in the above entitled cause. The said
parcel of land is bounded as follows: NE. lot No. 517 'Part'
de Narciso Garcia SE. Calle Rizal SW. lot No. 517 'Part'
de Bernardino Tiongco NW. lot No. 508 de Clemente
Dayrit containing 431 sq. m. and described in tax
declaration No. 11977 of the municipality of Angeles,
Pampanga, assessed at P423
.
375
VOL. 63, AUGUST 29, 1936 375

"That this guaranty is attached to the properties above mentioned

as first lien and for this reason the parties agree to register this
compromise with the Register of Deeds of Pampanga, said lien to
be cancelled only on the payment of the full amount of the
judgment in this ,case.
"Wherefore, the parties pray that the above compromise be
admitted and that an order issue requiring the Register of Deeds
of Pampanga to register this compromise previous to the filing of
the legal fees."
David paid the sum of P343.47 to Wise & Co., on account of

the P640 which he bound himself to pay under Exhibit B,
leaving an unpaid balance of P296.53.
Wise & Co. now institutes this case against Tanglao for
the recovery of said balance of P296.53.
There is no doubt that under Exhibit A, Tanglao
empowered David, in his name, to enter into a contract of
suretyship and a contract of mortgage of the property
described in the document, with Wise & Co. However,
David used said power of attorney only to mortgage the
property and did not enter into the contract of suretyship.
Nothing is stated in Exhibit B to the effect that Tanglao
became David's surety for the payment of the sum in
question. Neither is this inferable from any of the clauses
thereof, and even if this inference might be made, it would
be insufficient to create an obligation of suretyship which,
under the law, must be express and cannot be presumed.
It appears from the foregoing that defendant Tanglao
could not have contracted any personal responsibility for
the payment of the sum of P640. The only obligation which

Exhibit B, in connection with Exhibit A, has created on the
part of Tanglao, is that resulting from the mortgage of a
property belonging to him to secure the payment of said
P640. However, a foreclosure suit is not instituted in this
case against Tanglao, but a purely personal action for the
recovery of the amount still owed by David.
At any rate, even granting that defendant Tanglao may
be considered as a surety under Exhibit B, the action does
376

People vs. Makabangan
not yet lie against him on the ground that all the legal
remedies against the debtor have not previously been
exhausted (art. 1830 of the Civil Code, and decision of the
Supreme Court of Spain of March 2, 1891). The plaintiff
has in its favor a judgment against debtor David for the
payment of the debt. It does not appear that the execution
of this judgment has been asked for and Exhibit B, on the
other hand, shows that David has two pieces of property
the value of which is in excess of the balance of the debt the
payment of which is sought of Tanglao in his alleged
capacity as surety.
For the foregoing considerations, the appealed judgment
is reversed and the defendant is absolved from the
complaint, with the costs to the plaintiff. So ordered.
VillaReal, Abad Santos, Imperial, Diaz, Recto, and

Laurel, JJ., concur.
judgment reversed.
_____________
VOL. 74, SEPTEMBER 29, 1943 367

Mira Hermanos, Inc. vs. Manila Tobacconists
[No. 48979.September 29, 1943]

MIRA HERMANOS, INC., plaintiffappellee, vs. MANILA
TOBACCONISTS, INC., ET AL., defendants. PROVIDENT IN
SURANCE CO., defendantappellant.
1.SURETYSHIP AND GUARANTY WHEN ONE OF TWO SURETIES IS EXEMPT FROM
LIABILITY UPON ITS ADDITIONAL BOND.By virtue of a written contract

(Exhibit A) whereby Mira Hermanos, Inc., agreed to deliver to the
Manila Tobacconists merchandise for sale on consignment under
certain specified terms and the Manila Tobacconists agreed to pay to
the former on or before the 20th day of each month the invoice value
of all the merchandise sold during the preceding month, Mira
Hermanos, Inc., required of the Manila Tobacconists, Inc., a bond of
P3,000, which was executed by the Provident Insurance Co. on
September 2, 1939 (Exhibit B), to secure the fulfilment of the
obligation of the Tobacconists under the contract (Exhibit A) up to the
sum of P3,000. In the month of October, 1940, the volume of the busi
ness of the Tobacconists having increased so that the merchandise
received by it on consignment from Mira Hermanos exceeded P3,000
in value, Mira Hermanos required of the Tobacconists an additional
bond of P2,000, and in compliance with that requirement the
defendant Manila Compaia de Seguros executed a bond of P2,000
(Exhibit C) with the same terms and conditions (except as to the
amount) as the bond of the Provident Insurance Co. On June 1, 1941,
a final and complete liquidation was made of the transactions
between Mira Hermanos and the Tobacconists, as a result of which
there was found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists recognized but was
unable to pay. Thereupon Mira Hermanos made a demand upon the
two surety companies for the payment of said sum. The Provident
Insurance Co. paid only the sum of P1,363.67, which is 60% of the
amount owed by the Tobacconists to Mira Hermanos, alleging that
the remaining 40 per cent should be paid by the other surety, Manila
Compania de Seguros, in accordance with article 1837 of the Civil
Code. Held: That the bond of P3,000 filed by the Provident Insurance
Co. responded for the obligation of the Tobacconists up to the sum of
P3,000, inasmuch as the bond of P2,000 filed by the Manila
Compaia de Seguros responded for the obligation of the Tobacconists
only insofar as it might exceed P3,000 and up to P5,000.
http://central.com.ph/sfsreader/session/0000015cda3057673922192f003600fb002c009e/t/?o=False 1/7
2.ID. ID.There would have been no need for the additional bond of
P2,000 if its purpose were to cover the first P2,000 already
368

covered by the P3,000 bond of the Provident Insurance Co. Indeed, if

the purpose of the additional bond of P2,000 were to cover not the
excess over and above P3,000 but the first P2,000 of the obligation of
the principal debtor like the bond of P3,000 which covered only the
first P3,000 of said obligation, then it would result that had the
obligation of the Tobacconists exceeded P3,000, neither of the two
bonds would have responded for the excess, and that was precisely
the event against which Mira Hermanos wanted to protect itself by
demanding the additional bond of P2,000. For instance, suppose that
the obligation of the principal debtor, the Tobacconists, amounted to
P5,000 if both bonds were coextensive up to P2,000as would
logically follow if appellant's contention were correctthe result
would be that the first P2,000 of the obligation would have to be
divided between and paid equally by the two surety companies, which
should pay P1,000 each, and of the balance of P3,000 the Provident
Insurance Co. would have to pay only P1,000 more because the
liability is limited to the first P3,000, thus leaving the plaintiff in the
lurch as to the excess of P2,000. That was manifestly not the
intention of the parties. As a matter of fact, when the Provident gave
its bond and fixed the premium thereon it assumed an obligation of
P3,000 in solidum with the Tobacconists without any expectation of
any benefit of division with any other surety. The additional bond of
P2,000 was, more than a year later, required by the creditor and
certainly not for the benefit of the original surety, which was not
entitled to expect any such benefit.
3.ID. ID. ARTICLE 1837 OF THE CIVIL CODE.This article refers to several
sureties of only one debtor for the same debt. In the instant case,
altho the two bonds on their face appear to guarantee the same debt
coextensively up to P2,000that of the Provident Insurance Co. alone
extending beyond that sum up to P3,000it was pleaded and
conclusively proven that in reality said bonds, or the two sureties, do
not guarantee the same debt because the Provident Insurance Co.
guarantees only the first P3,000 and the Manila Compaia de
Seguros, only the excess over and above said amount up to P5,000.
Article 1837 does not apply to this factual situation.

Manila. Vera, J.
369
VOL. 74, SEPTEMBER 29, 1943 369

E. V. Filamor for appellant.

Ramirez & Ortigas for appellee.
Ernesto Zaragoza for defendant, Manila Compaia de
Seguras.
OZAETA,J.:
This appeal has been certified to this Court by the Court
of Appeals because it involves only a question of law arising
from the following facts:
By virtue of a written contract (Exhibit A) entered into
between Mira Hermanos, Inc., and Manila Tobacconists,
Inc., the former agreed to deliver to the latter merchandise
for sale on consignment under certain specified terms and
the latter agreed to pay to the former on or before the 20th
day of each month the invoice value of all the merchandise
sold during the preceding month. Mira Hermanos, Inc.,
required of the Manila Tobacconists, Inc., a bond of P3,000,
which was executed by the Provident Insurance Co., on
September 2, 1939 (Exhibit B), to secure the fulfilment of
the obligation of the Tobacconists under the contract
(Exhibit A) up to the sum of P3,000.
In the month of October, 1940, the volume of the
business of the Tobacconists having increased so that the
merchandise received by it on consignment from Mira
Hermanos exceeded P3,000 in value, Mira Hermanos
required of the Tobacconists an additional bond of P2,000,
and in compliance with that requirement the defendant
Manila Compaia de Seguros, on October 16, 1940,
executed a bond of P2,000 (Exhibit C) with the same terms
and conditions (except as to the amount) as the bond of the
Provident Insurance Co.
On June 1, 1941, a final and complete liquidation was
made of the transactions between Mira Hermanos and the
Tobacconists, as a result of which there was found a
balance due from the latter to the former of P2,272.79,
which indebtedness the Tobacconists recognized but was
unable to pay. Thereupon Mira Hermanos made a demand
upon the two surety companies for the payment of said
sum.
370

The Provident Insurance Co. paid only the sum of

P1,363.67, which is 60% of the amount owed by the
Tobacconists to Mira Hermanos, alleging that the
remaining 40% should be paid by the other surety, Manila
Compania de Seguros, in accordance with article 1837 of
the Civil Code. The Manila Compaia de Seguros refused
to pay the balance, contending that so long as the liability
of the Tobacconists did not exceed P3,000, it was not bound
to pay anything because its bond referred only to the
obligation of the Tobacconists in excess of P3,000 and up to
P5,000. Hence Mira Hermanos, Inc., brought this action
against the Manila Tobacconists, Inc., Provident Insurance
Co., and Manila Compaia de Seguros to recover from them
jointly and severally the sum of P909.12 with legal interest
thereon from the date of the complaint.
The controversy is mainly between the two surety com
panies. In its answer the defendant Manila Compaia de
Seguros alleged as a special defense:
"4.Que la fianza otorgada por esta demandada 'Manila

Compaia de Seguros', el Octubre de 1940 fue exigida por la
demandante solo cuando el importe de las mercancias servidas
por esta y pedidas por la demandada Manila Tobacconists, Inc.,
excedio de la suma de P3,000 garantizada por la otra demandada
Provident Insurance Co. por lo que quedo entendido entre la
demandante y las tres demandadas que la fianza de P2,000
prestada el Octubre de 1940 por esta demandada, 'Manila
Compaia de Seguros', se limitaba y era para responder
solamente del importe de mercancias servidas a la demandada
Manila Tobacconists, Inc., en tanto en cuanto el valor de esas
mercancias excediese de P3,000 asegurada por la fianza P3,000 de
la Manila Tobacconists, Inc."
To that the defendant Provident Insurance Co. replied:

"Que no es verdad el hecho alegado por la demandada 'Manila

Compaia de Seguros' en el parrafo 4 de su contestacin que dice: 'que
quedo entendido entre la demandante y las tres demandadas que la
fianza de P2,000 prestada el Octubre de 1940 por esta demandada
"Manila Com
371
VOL. 74, SEPTEMBER 29, 1943 371

paia de Seguros" se limitaba y era para responder solamente del

importe de mercancias servidas a la demandada Manila Tobacconists,
Inc., en tanto en cuanto el valor de esas mercancias excediese de P3,000

asegurada por la fianza de P3,000 de la "Manila Tobacconists, Inc."'
"Que la demandada, aqui compareciente, nunca ha tenido
conocimiento ni menos prestado su consentimiento a esa supuesta
inteligencia.
"Que esta demandada no puede ser privada del beneficio de division a
que tiene derecho como cofiador, sin que conste expresamente, por
escrito, su conformidad y consentimiento de renunciar a su derecho."
Thus there was an issue of fact between the two surety

companies, viz.: whether the understanding between the
plaintiff and the three defendants was, that the bond of
P2,000 given by the Manila Compaia de Seguros was
limited to and responded for the obligation of the
Tobacconists only insofar as it might exceed the amount of
P3,000 secured by the bond of the Provident Insurance Co.
That issue of fact was decided by the trial court in favor of
the contention of the Manila Compaia de Seguros and
judgment was rendered by it against the Provident
Insurance Co. alone for the amount claimed by the
plaintiff.
Appellant's first two assignments of error (the third
being a mere consequence of the first two) read as follows:
"1.El juzgado inferior incurrio en error al hacer caso
omiso del beneficio de division reclamado por la demandada
Provident Insurance Co. of the Philippines con arreglo a lo
dispuesto en el Art. 1837 del Cdigo Civil.
"2.El juzgado erro al aplicar, en lugar de lo dispuesto
en el Art. 1837 del Cdigo Civil, una teoria suya,
declarando que la fianza de P3,000.00 prestada por
Provident Insurance Co. of the Philippines y la fianza de
P2,000 de Manila Compaia de Seguros, cada una tiene
una esfera de responsabilidad propia e independiente la
una de la otra."
Discussing these two assignments of error jointly,
counsel says:
"La unica cuestion que se presenta en esta causa es
pura
372

mente de derecho. Si el saldo deudor de P2,272.79 que

Tobacconists ha dejado de pagar, deben pagarlo en su
lugar, los dos fiadores proporcionalmente a la cuantia en
que se obligaron o debe pagarlo sola y exclusivamente la
fiadora Provident Insurance Co., como ordena la sentencia

opelada."
Thus it appears that the issue of fact raised by and
between the two surety companies before the trial court
and decided by the latter in favor of the appellee Manila
Compaia de Seguros is no longer raised before this Court,
appellant Provident Insurance Co. having limited the issue
in this appeal to whether or not it is entitled to the "benefit
of division" provided in article 1837 of the Civil Code,
which reads as follows:

"Art. 1837. Should there be several sureties of only one debtor

for the same debt, the liability therefor shall be divided among
them all. The creditor can claim from each surety only his
proportional part unless liability in solidum has been expressly
stipulated.
"The right to the benefit of division against the cosureties for
their respective shares ceases in the same cases and for the same
reason as that to an exhaustion of property against the principal
debtor."
With particuar reference to the second assignment of

error, we find that the statement of the trial court to the
effect that the bond of P3,000 responded for the obligation
of the Tobacconists up to the sum of P3,000 and the bond of
P2,000 responded for the obligation of the Tobacconists
only insofar as it might exceed P3,000 and up to P5,000, is
not a mere theory but a finding of fact based upon the
undisputed testimony of the witnesses called by the defend
ant Manila Compaia de Seguros in support of its special
defense hereinbefore quoted. While on its face the bond
given by the Manila Compaia de Seguros contains the
same terms and conditions (except as to the amount) as
those of the bond given by the Provident Insurance Co.,
nevertheless it was pleaded by the Manila Compaia de
Seguros and found proven by the trial court'"que la inten
373
VOL. 74, SEPTEMBER 29, 1943 373

cin realmente que se habia perseguido, por lo menos en lo

que respecta a la Manila Tobacconists, Inc., y la Manila
Compaia de Seguros, era la de que esta fianza de P2,000
habra de responder solamente por todo aquello que
excediera de los P3,000."
The evidence upon which that finding is based is not

only undisputed but perfectly reasonable and convincing.
For, as the trial court observed, there would have been no
need for the additional bond of P2,000 if its purpose were to
cover the first P2,000 already covered by the P3,000 bond
of the Provident Insurance Co. Indeed, we might add, if the
purpose of the additional bond of P2,000 were to cover not
the excess over and above P3,000 but the first P2,000 of the
obligation of the principal debtor like the bond of P3,000
which covered only the first P3,000 of said obligation, then
it would result that had the obligation of the Tobacconists
exceeded P3,000, neither of the two bonds would have
responded for the excess, and that was precisely the event
against which Mira Hermanos wanted to protect itself by
demanding the additional bond of P2,000. For instance,
suppose that the obligation of the principal debtor, the
Tobacconists, amounted to P5,000 if both bonds were co
extensive up to P2,000as would logically follow if
appellant's contention were correctthe result would be
that the first P2,000 of the obligation would have to be di
vided between and paid equally by the two surety com
panies, which should pay P1,000 each, and of the balance of
P3,000 the Provident Insurance Co. would have to pay only
P1,000 more because its liability is limited to the first
P3,000, thus leaving the plaintiff in the lurch as to the ex
cess of P2,000. That was manifestly not the intention of the
parties. As a matter of fact, when the Provident gave its
bond and fixed the premiums thereon it assumed an ob
ligation of P3,000 in solidum with the Tobacconists without
any expectation of any benefit of division with any other
surety. The additional bond of P2,000 was, more than a
year later, required by the creditor of the principal debtor
for the protection of said creditor and certainly not for
[No. 22177. December 2, 1924]
TUASON, TUASON, INC., plaintiff and appellee, vs.

ANTONIO MACHUCA, defendant and appellant.
1. SURETYSHIP ACTION BY SURETY.The surety may,

even before paying the principal obligation, institute
proceeding against the debtor under the provisions of
article 1843 of the Civil Code but then he must choose one
among the remedies granted by said article, and
specifically apply for it. And if he does not do so, but
brings an action for the recovery of the amount of the
principal obligation, which can be maintained only on the
fact of the payment of said obligation by the surety, the
action is groundless and must fail unless the fact of the
payment is proven.
2. ID. SPECIAL AGREEMENT.While the action brought

by the surety against the principal debtor does not come
under the provisions of article 1843, because the surety
has applied for the reim
562
Tuason, Tuason, Inc. vs. Machuca
bursement of a certain amount, which remedy is not

authorized by said article, yet it having been proven by
the evidence that the principal debtor has executed a
document in favor of the surety, wherein he bound himself
to pay the latter any such amount as he may have paid or
become bound to pay by virtue of the principal obligation,
and it having been shown that the surety has become
bound to pay the obligation because a final judgment had
been rendered against him to that effect, the remedy
applied for by the surety may be granted in this particular
case, although he may not yet have paid said judgment.
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Manila. Imperial, J.
Marcaida, Capili & Ocampo for appellant.
Antonio M. Opisso for appellee.
AVANCEA, J.:
By giving a bond in the sum of P9,663 executed by "Manila

Compaa de Seguros," the Universal Trading Company
was allowed by the Insular Collector of Customs to
withdraw from the customhouse sundry goods imported by
it and consigned through the Bank of the Philippine
Islands. Subsequently, the Bank of the Philippine Islands
claimed the value of the goods, and the Insular Collector of
Customs obligated the "Manila Compaa de Seguros" to
pay the sum of P9,663, the amount of the bond. Before
paying this amount to the Insular Collector of Customs, the
"Manila Compaa de Seguros" obtained from the
Universal Trading Company and Tuason, Tuason & Co., a
solidary note for the sum of P9,663 executed by said
companies in its favor. Before signing said note, Tuason,
Tuason & Co., in turn, caused the Universal Trading
Company and its president Antonio Machuca, personally,
to sign a document (Exhibit B), wherein they bound
themselves solidarily to pay, reimburse, and refund to the
company all such sums or amounts of money as it, or its
representatives, may pay or become bound to pay, upon its
obligation with "Manila Compaa de Seguros,"
563
VOL. 46, DECEMBER 2, 1924 563

whether or not it shall have actually paid such sum or

sums or any part thereof. The Universal Trading Company
having been declared insolvent, "Manila Compaa de
Seguros" brought an action in the lower court against
Tuason, Tuason & Co. to recover the value of the note for
P9,663 and obtained final judgment therein, which was
affirmed by this court on appeal, for the total sum of
P12,197.27, which1
includes the value of the note with
interest thereon. Subsequently, all the rights of Tuason,
Tuason & Co. were transferred to the plaintiff Tuason,
Tuason, Inc.
Later on Tuason, Tuason, Inc., brought this action to
recover of Antonio Machuca the sum of P12,197.27 which it
was sentenced to pay in the case filed against it by "Manila

Compaa de Seguros," plus P3,000 attorney's fees, and
P155.92 court's costs and sheriff's fees, that is, a total of
P15,353.19, together with P1,180.46 as interest upon the
sum of P15,353.19 at the rate of 10 per cent per annum
from October 8, 1922, to July 8, 1923, and interest on the
sum of P16,535.65 at the rate of 10 per cent from July 8,
1923, until this sum was paid, and, in addition the sum of
P1,653.65 for attorney's fees in this case. For its cause of
action, the plaintiff alleges that it had paid "Manila
Compaa de Seguros" the sum of P12,197.27, the amount
of the judgment against it. The dispositive part of the
judgment appealed from is as follows:
"Judgment is rendered against the defendant Antonio
Machuca, and he is hereby ordered to pay the plaintiff
company the sum of fifteen thousand three hundred fifty
three pesos and nineteen centavos (P15,353.19), with
compound interest thereon at the rate of ten per cent (10%)
per annum, to be computed quarterly, that is, one thousand
one hundred eighty pesos and fortysix centavos
(P1,180.46), which is ten per cent interest on the amount of
fifteen thousand three hundred fiftythree pesos and
nineteen centavos (P15,353.19) from October 8, 1922, to
July 8, 1923, and
_______________
1 R. G. No. 18101, promulgated July 10, 1922, not reported.
564

ten per cent on the sum of sixteen thousand five hundred

thirtythree pesos and sixtyfive centavos (P16,533.65) from
July 8, 1923, until full payment, to be computed quarterly,
besides the sum of one thousand six hundred fiftythree
pesos and sixtyfive centavos (P1,653.65), which is ten per
cent (10%) on the amount due and the interest thereon,
which said defendant promised to pay as penalty and
attorney's fees in the event of a suit being necessary to
recover the debt, and the costs. So ordered."
It appears from the evidence that what the plaintiff
alleges to be a payment made to "Manila Compaa de
Seguros'.' for the satisfaction of the judgment rendered in
favor of the latter is the execution by Albina Tuason of a
document Exhibit D in favor of "Manila Compaa de
Seguros." In this document Albina Tuason declares that

she assumes and makes hers the obligation to pay the
amount of said judgment to "Manila Compaa de Seguros"
within one year and mortgages a property described in the
document as security for this obligation. This obligation of
Albina Tuason was accepted by the "Manila Compaa de
Seguros," in the following terms: "/ accept the foregoing
security executed by Miss Albina Tuason in favor of 'Manila
Compaa de Seguros.' " It, thus, appears that the plaintiff
has not in fact paid the amount of the judgment to "Manila
Compaa de Seguros." The action brought by the plaintiff
is that which a surety, who pays the debt of the debtor, is
entitled to bring to recover the amount thus paid (art.
1823, Civil Code). It is evident that such a payment not
having been made, the alleged cause of action does not
exist.
The plaintiff company argues that, at all events, it is
entitled to bring this action under article 1843 of the Civil
Code, which provides that the surety may, even before
making payment, bring action against the principal debtor.
This contention of the plaintiff is untenable. The present
action, according to the terms of the complaint, is clearly
based on the fact of payment. It is true that, under article
1843, an action lies against the principal debtor even be
565
VOL. 46, DECEMBER 2, 1924 565

fore the surety pays the debt, but it clearly appears in the
complaint that this is not the action brought by the
plaintiff. Moreover this article 1843 provides several
cumulative remedies in favor of the surety, at his election,
and the surety who brings an action under this article must
choose the remedy and apply for it specifically. At any rate
this article does not provide for the reimbursement of any
amount, as is sought by the plaintiff.
But although the plaintiff has not as yet paid "Manila
Compaa de Seguros" the amount of the judgment against
it, and even considering that this action cannot be held to
come under article 1843 of the Civil Code, yet the plaintiff
is entitled to the relief sought in view of the facts
established by the evidence The plaintiff became bound, by
virtue of a final judgment, to pay the value of the note
executed by it in favor of "Manila Compaa de Seguros."
According to the document executed solidarily by the
defendant and the Universal Trading Company, the
defendant bound himself to pay the plaintiff as soon as the

latter may have become bound and liable, whether or not it
shall have actually paid. It is indisputable that the plaintiff
became bound and liable by a final judgment to pay the
value of the note to "Manila Compaa de Seguros."
The defendant also contends that the document executed
by Albina Tuason in favor of "Manila Compaa de
Seguros" assuming and making hers the obligation of
Tuason, Tuason & Co., was a novation of the contract by
substitution of the debtor, and relieved Tuason, Tuason &
Co. from all obligation in favor of "Manila Compaa de
Seguros." As to this, it is enough to say that if this was
what Albina Tuason contemplated in signing the document,
evidently it was not what "Manila Compaa de Seguros"
accepted. As above stated, "Manila Compaa de Seguros"
accepted this document only as additional security for its
credit and not as a novation of the contract.
Our conclusion is that the plaintiff has the right to
recover of the defendant the sum of P9,663, the value of the
note executed by the plaintiff in favor of "Manila Com
566

Calimbas vs. Paguio
paa de Seguros" which the plaintiff is under obligation to

pay by virtue of a final judgment. We do not believe,
however, that the defendant must pay the plaintiff the
expenses incurred by it in the litigation between it' and
"Manila Compaa de Seguros." That litigation was
originated by the plaintiff having failed to fulfill its
obligation with "Manila Compaa de Seguros," and it
cannot charge the defendant with the expenses which it
was compelled to make by reason of its own fault. It is
entitled, however, to the expenses incurred by it in this
action brought against the defendant, which are fixed at
P1,653.65 as attorney's f ees.
The judgment appealed from is modified, and the
defendant is sentenced to pay the plaintiff the sum of
P9,663, with interest thereon at the rate of 10 per cent per
annum from July 19, 1923, when the complaint was filed
until f ull? payment thereof, plus the sum of P1,653.65 for
attorney's fees, without special pronouncement as to costs.
So ordered.
Johnson, Street, Malcolm, Villamor, Ostrand, and

Romualdez, JJ., concur.
Judgment modified.
_______________
[No. 5470. March 22, 1910.]
Luis SAENZ DE VIZMANOS ONGQUICO, plaintiff and

appellant, vs. YAP CHUAN ET AL., defendants and
appellants.
BOND OF A DEBTOR TO PROTECT HIS SURETY.The

bond of a debtor to protect his surety is not a subbond nor a
second bond with respect to the original creditor it is not the
same as the first bond in favor of the debtor with respect to
such creditor. It is nothing but a substitution of the obligation
of the debtor with respect to
77
VOL. 16, MARCH 22, 1910. 77
Saenz vs. Yap Chuan.
his surety, and is necessarily governed by the legal provisions

which regulate the right of action of the surety against the party
for whom he gave the bond, that is, an action of subrogation
which lies with the surety to compel the debtor to comply with the
obligation to reimburse. This action arising out of the right of
subrogation is the remedy for securing reimbursement of the
amount that another has paid, and can not exceed, except there is
an express agreement to the contrary, the amount actually paid
by the surety in place of the debtor. The following terms of an
obligation can not be considered as an express agreement to the
contrary: "* * * bind themselves as such conjointly to reimburse or
pay whatever amounts the latter (the surety) may have to pay or
shall have paid by reason of the judicial bond," inasmuch as this
manner of expressing the intention of the obligated parties does
not constitute a true disjunctive proposition, but is merely
explanatory of the obligation as if contracted by the debtor
himself, the only natural and logical interpretation.

Manila. Araullo, J.
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Ortigas & Fisher, for plaintiff.

Chicote & Miranda, for defendants.
ARELLANO, C. J.:
Engracio Palanca, while judicial administrator of the estate

of Margarita Jose, gave bond, by order of the court before
which the proceedings thereon were had, to guarantee his
administration, which bond was executed by Engracio
Palanca himself, Luis S. de Vizmanos OngQuico,
Alejandra Palanca, and Juan Fernandez Lim Quin
Chuang, jointly and severally, in favor of the Government
of the United States in the Philippine Islands, for the sum
of P60,000, Philippine currency.
On the same date the said Engracio Palanca and five
others executed in favor of Luis S. de Vizmanos the
following bond: Yap Chuangco, f or P20,000 Yap Chutco, f
or P5,000 Palanca Yap Poco, for P5,000 Palanca
Tanguinlay, for P5,000 and Lim Pongco, for P5,000. All of
them signed the bond except the first named, Yap
Chuangco, who,
78

did not personally execute the bond this was done for him
by his attorney, Yap Chengtua.
In the said instrument the following appears:
"* * * and, it being possible that the case occur that Mr. Vizmanos
shall have to pay the said bond or a part thereof, as such surety,
whose responsibility or solvency in such capacity has been
accepted by the court up to the amount of forty thousand pesos,
Philippine currency, for the purpose of guaranteeing to the same
the reimbursement of the sum or sums which by reason of the
said bond he might have to pay, the executors of this instrument
have agreed that Messrs. Yap Chuangco, Yap Chutco, Carlos
Palanca Tanguinlay, Serafin Palanca Yap Poco, and Lim
Biampung, known as Lim Pongco, shall be the sureties of Don
Engracio Palanca in favor of Mr. Luis S. Vizmanos OngQuico,
binding themselves jointly as such to reimburse or to pay to the
said Mr. Vizmanos, his heirs and successors in interest, whatever
sums the said Vizmanos may have to pay or shall have paid by
reason of the judicial bond herein mentioned, subscribed by him
in favor of Mr. Palanca, up to the amount of forty thousand pesos,
Philippine currency, in the proportion of not exceeding P20,000 by
Yap Chuangco and P5,000 by each one of the other four herein
above mentioned."
On March 9, 1908, the court which tried the case

concerning the estate ordered Luis Saenz de Vizmanos
OngQuico, as surety in solidum of the exadministrator
Engracio Palanca, to pay to the estate the sum of
P41,690.15, Philippine currency, also the interest on the
said sum at the rate of 8 per cent per annum, counting
from December 27, 1905, with other sums set out in the
sentence. This judgment became final.
On March 31, 1908, Vizmanos OngQuico paid to the
administrator of the estate eight thousand pesos (P8.000),
Philippine currency, by the conveyance of property
belonging to him, he still owing P40,975.92, with interest
on the said amount at 8 per cent per annum from the 9th
day of March, 1908, the date of the judgment.
79
VOL, 16, MARCH 22, 1910. 79

On April 2, 1908, he instituted suit against the five sureties

above named who, with Engracio Palanca, executed the
bond before mentioned in his favor, praying the Court of
First Instance of the city of Manila to sentence them to pay
him: Yap Chuangco, P20,000, and the other four sureties,
Yap Chutco, Carlos Palanca Tanguinlay, Serafin Palanca
Yap Poco, and Lim Pongco, each P5,000, that is, these four
together P20,000 more, and jointly the costs of the action.
The court, in its judgment, acquitted Yap Chuangco
from the claim of the P20,000, assessing against the
plaintiff the part of the costs pertaining to this defendant,
and ordered each one of the four remaining defendants,
Yap Chutco, Carlos Palanca Tanguinlay, Serafin Palanca
Yap Poco, and Lim Biang Pon (alias Lim Pongco), to pay to
the plaintiff, Luis Saenz de Vizmanos, the sum of P2,000,
with legal interest at 6 per cent per annum on the said
respective sums from March 31, 1908, the date on which
the plaintiff paid to the present administrator of the estate
the said sum of P8,000, until its complete payment. The
said four defendants had also to pay jointly, that is, in
equal shares, the costs pertaining to them.
Both parties appealed from this sentence, each one
forwarding to this court his respective bill of exceptions,
together with all the evidence taken 'at the trial, besides
the stenographic notes which were also forwarded by

special order of the trial court.
The appeal having been heard before this court, it
appears that:
The defendants appealed on account of their having
been ordered to pay, each of them, P2,000, instead of only
P1,000, which according to the terms of the contract, each
one of them was bound to pay to the plaintiff. (Only error
alleged.)
The plaintiff appealed because the court ref used to
render judgment against the defendants for the maximum
sum for which each one had bound himself in the contract,
which
80

he calls a counterbond or subbond, that is, each one of the

four to pay P5,000. (Only error alleged.)
The share of P20,000 which the plaintiff claimed from
Yap Chuangco is not included in the former's appeal, from
the payment of which amount the latter is relieved in the
judgment, for he expressly states in his brief that he
conforms to this part of the judgment and that "his appeal
solely relates to the other defendants." (Brief, 4.)
With respect to the other four defendants, the plaintiff
and appellant claims that, notwithstanding his having paid
only P8,000 of his bond, the defendants ought to reimburse
him at the rate of P5,000 each, that is, all together to the
amount of P20,000. As above stated, the lower court only
sentenced them to reimburse their proportional share of
the P8,000 paid, to wit, P2,000 each, P8,000 all together.
Thus they would be paying even the proportional share
corresponding to Yap Chuangco, which is P4,000, whereas
the plaintiff appellant agrees that the share of the bond
concerning Yap Chuangco should be void by reason of its
having been executed by an attorney in fact of the latter
who did not possess sufficient power for this purpose.
Hence the only error alleged by the defendants in their
brief, inasmuch as, having deducted the P4,000 which Yap
Chuangco would have to pay, the other four defendants
must pay only P4,000, that is, P1,000 each.
"We can not but agree with this claim of the attorneys for the
defendantssay those of the plaintiffif this court, disregarding
the reasons contained in our brief, should declare that the
plaintiff is only entitled to recover the money that he really and

actually has expended, to wit, P8,000, then it appears
unquestionable that the defendants and appellants are only
compelled to pay P1,000 each, as their attorneys state in their
brief." (Brief, 2.)
With regard to the sole error alleged by the attorneys for

the plaintiff, it must first be considered that the bond
which the four defendants in turn executed in favor of the
plaintiff bondsman is not a subbond it is not of the same
81
VOL. 16, MARCH 22, 1910. 81

nature as that given by the latter in favor of Engracio

Palanca in the probate proceedings in connection with the
will of Margarita Jose. Although one bond is subordinate to
another, not for this reason are they of the same nature.
That of Vizmanos for Engracio Palanca in favor of the
estate is judicial and was approved by the probate judge
that of the defendants for Engracio Palanca in favor of
Vizmanos was extrajudicial and the probate judge had
nothing to do with it. The new administrator of the estate
had a right of action, and he exercised it against Vizmanos
to enforce the payment of the bond given by the latter, but
he has none nor can he exercise any whatsoever against
the four who gave bond for Engracio Palanca in favor of
Vizmanos. The only relation that exists between the one
bond and the other is merely that of antecedent and
consequent, in so far as that of Vizmanos in favor of the
estate was the cause of debt of that of the defendants in
favor of Vizmanos. The first one was strictly judicial, the
second merely contractual between the parties.
When a surety pays for the party under bond, he has a
right of action against such party for the recovery of the
amount paid by him.
"A surety who pays for a debtor shall be indemnified by the

latter." (Art. 1838, Civil Code.)
The surety Vizmanos who paid for the debtor Palanca must
be indemnified by Palanca. And as it was evident, when
Vizmanos became surety for Palanca, that the latter could
not pay him, Palanca obligated himself by the four
defendants, or, better said, the four defendants assumed
the obligation that rested upon Palanca to indemnify
Vizmanos for what the latter might pay for Palanca. This is
in fact the obligation that is now exercised. The action of

the surety against the party under bond or the debtor to
require the obligation of indemnity, has no other name nor
other nature in law than that of a subrogation it is an
unquestionable doctrine. The action of subrogation is
regulated in article 1839 of the Civil Code:
82

"By virtue of such payment the surety is subrogated in all the

rights which the creditor had against the debtor."
"But be it well understoodsays a commentatorthat this
subrogation can not be interpreted in such absolute terms as to
include more than the surety has paid, for, though it is true that
he puts himself in the place of the creditor and should have the
same rights as the latter in consequence of the subrogation, it is
no less certain that there would be an unjust enrichment to the
prejudice of the debtor, if the surety who pays for him were
permitted to claim more than what he paid. Moreover, the benefit
of subrogation is the means of utilizing the right of
reimbursement, and he could not collect as such the excess from
the rights and actions of the creditor over and above the advance
made by him." (12 Manresa, Civil Code, 304.)
The contract law says no more than this:
"Being that the case may occursay those obligatedthat the

said Vizmanos may have to pay the said bond or a part thereof * *
* f or the purpose of guaranteeing the reimbursement of the sum
or sums which by reason of the bond he may have to pay, the
executors have agreed and stipulated that * * * they shall be the
sureties of Don Engracio Palanca in favor of Sr. Luis S. Vizmanos,
binding themselves as such conjointly to reimburse or to pay * * *
whatever amounts the latter might have to pay or shall have paid
by reason of the judicial bond aforementioned. * * *"
Being as it is an action of subrogation, it is not exercisable

except in the case of payment. The surety is subrogated by
the payment, says the law, in all the rights that the creditor
had against the debtor. Being as it is an action of
indemnity it is not conceived how, rationally, the damage
not yet caused can be anticipated. When the purse of the
surety has suffered no detriment, to sue the debtor in order
that he provide funds for the surety in expectancy of the
action of the creditor, is not to ask an indemnity, but to
demand a guaranty to recover the loss
83
VOL. 16, MARCH 22, 1910. 83

when it may occur, and this guaranty is that already

obtained by the surety Vizmanos from Engracio Palanca on
the latter's placing beforehand four parties in his stead in
order that they may at the proper time insure him of the
restitution, the reimbursement of what he shall have paid.
To ask an indemnity of twenty, when the loss to be
indemnified is but eight, can in no wise be authorized
either by law or by reason.
The Civil Code specifies five cases as exceptions wherein
the surety, even before paying, may proceed against the
principal debtor, but "in all these cases the action of the
surety tends to obtain his release from the security or a
guaranty to defend him against any proceedings of the
creditor and from the danger of insolvency of the debtor."
(Art. 1843, Civil Code.) The security or bond given by the
four defendants in favor of the plaintiff Vizmanos had no
other purpose than, in case he should make payment to the
estate of Margarita Jose, to defend himself against the
proceedings of the administrator of the estate and from the
danger of insolvency of the debtor Palanca.
Although, in principle, by virtue of the contract in
question, the four defendants are obligated to the plaintiff
in the sum of P20,000, that is, at the rate of P5,000 each,
the action ad cautelam is, precisely, covered by such a
contract, and the action of subrogation, the only one
exercisable, is only available in the quality of a restitution
or reimbursement of the payment effected. In the present
case the plaintiff, by virtue of the contract ad cautelam, is
entitled to an action against the four defendants for
recovery from each of them up to the maximum amount of
P5,000, but he can not by such action, as surety for the
principal debtor, collect more than the sum which he
himself was actually compelled to pay.
In virtue of the foregoing, the judgment appealed from is
reversed in so far as it sentences each one of the four
defendants, Yap Chutco, Carlos Palanca Tanguinlay,
Serafin Palanca Yap Poco, and Lim Biang Pong (alias Lim
84

Loewenstein vs. Page.
Pongco), to pay to the plaintiff, Luis Saenz de Vizmanos,

the sum of P2,000. The amount to be paid is hereby fixed at
P1,000, to the payment of which, in favor of the aforesaid
plaintiff, each of the four defendants mentioned were
sentenced, "with legal interest at the rate of 6 per cent per
annum on the said respective sums, from March 31, 1908,
the date on which the plaintiff paid to the present
administrator of the said estate the said sum of P8,000,
until its complete payment. The said four defendants shall
pay the costs in equal shares." The costs of this instance
shall be assessed against the plaintiff and appellant
Vizmanos. So ordered.
Torres, Mapa, Johnson, and Moreland, JJ., concur.
Judgment modified.
_______________

Gidwani vs. Domestic Insurance Co. of the Phils.
*
No. L31442. June 24, 1983.
SPOUSES BHAGWANDAS & SATI GIDWANI and

SAMUEL SHARUFF, petitioners, vs. DOMESTIC
INSURANCE COMPANY OF THE PHILIPPINES and
MARINDUQUE MINING & INDUSTRIAL
CORPORATION (formerly Marinduque Iron Mines, Inc.)
and JUDGE FEDERICO C. ALIKPALA, respondents.
Bonds Insurance Law Actions In insurance law, the

indemnity agreement and the pledge agreement are two different
securities. An action instituted, therefore, against the counter
guarantors does not release or extinguish the lien of an insurer
against the shares of stock pledged in its favor.As aptly observed
by the trial court, there were two securities given to DOMESTIC
INSURANCE for the faithful compliance of the obligation of
PLASTIC ERA to pay the promissory note it executed in favor of
the Manufacturers Bank & Trust Co., namely, the counter
guaranty agreement jointly executed by PLASTIC ERA, Kishu
Gidwani and Bhagwandas Gidwani, and the second was the
pledge of shares of stock made by Sati B. Gidwani By paying the
promissory note to the Manufacturers Bank & Trust Company,
DOMESTIC INSURANCE thereby was subrogated to the rights of
the former to demand for and collect payment of the amount due
thereon from PLASTIC ERA, the maker of the promissory note.
Had DOMESTIC INSURANCE sued PLASTIC ERA under this
cause of action, and assuming that the ruling in the cited cases
which referred to real estate and chattel mortgages would also be
applicable where the security given is pledge, then the plaintiff
would thereafter be barred from enforcing its claim against any of
the securities given to it to guaranty the faithful payment of the
original obligation. The indemnity agreement Jointly signed by
PLASTIC ERA, Kishu Gidwani and Bhagwandas Gidwani and
the pledge agreement of the shares are the two securities, and as
the creditor did not avail of the remedy to obtain a personal
judgment against the debtor, it is not barred to enforce its claim
against both securities. From the nature of the situation,
DOMESTIC INSURANCE cannot prosecute its claim against the
http://central.com.ph/sfsreader/session/0000015cda33b9d81aaa3a08003600fb002c009e/t/?o=False 1/9
two securities in one and the same action. The foreclosure of the
pledged shares would not require an action in court, whereas it
would be necessary if the claim would be enforced under the
indemnity
_________________
* FIRST DIVISION.
733
VOL. 122, JUNE 24, 1983 733
agreement. The Court is, therefore, of the opinion and so holds

that the filing of Civil Case No. 46142, and securing a judgment
therein against the counterguarantors, did not release, much less
extinguish, the lien of DOMESTIC INSURANCE on the shares of
stock of Sati B. Gidwani which were pledged in its favor.
Same Same Same Same.Further, the pledge of the shares
of stock of Sati Gidwani did not release the obligation of the
indemnitors. The pledge was an additional security for the
indemnification of the damages and losses which Domestic
Insurance might, and did, suffer under the surety bond which it
issued for Plastic Era.
APPEAL by certiorari from the decision of the Court of

First Instance of Manila, Br. XXII. Alikpala, J.

Ernesto T. Zshornack, Jr. for petitioners.
Edgardo P. Cruz for respondent Domestic Insurance
Co. of the Philippines.
RELOVA, J.:
Appeal by certiorari from the decision of respondent Judge

of the Court of First Instance of Manila (Branch XXII), in
Civil Case No. 75092, entitled: Spouses Bhagwandas &
Sati Gidwani, et al. vs. Domestic Insurance Company of the
Philippines, et al., the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered dismissing

plaintiffs complaint, and spouses Bhagwandas Gidwani and Sati
B. Gidwani, with Samuel Sharuff, are jointly and severally
sentenced to pay to Domestic Insurance Company of the

Philippines and Marinduque Mining & Industrial Corporation the
sum of P1,500.00 each, plus the costs of suit.
Both parties are in agreement with respect to the finding of

facts made by respondent Judge, as stated in the appealed
decision, to wit:
The Manufacturers Bank & Trust Company granted Plastic Era

Manufacturing Co., Inc. (hereinafter referred to for brevity as
734

Plastic Era) a discounting line of P20,000.00. To secure the

payment of any loan which said bank may extend to Plastic Era,
the latter posted a surety bond for P20,000.00 issued by the
Domestic Insurance Company of the Philippines (hereinafter
referred to as Domestic Insurance).
On September 9, 1959, Plastic Era, Bhagwandas B. Gidwani
and Kishu Gidwani executed an indemnity agreement whereby
they bound themselves, jointly and severally, to indemnify
Domestic Insurance against all damages, losses and expenses
which the latter may incur as a consequence of having issued said
surety bond.
On September 10, 1959, Plastic Era signed and executed a
promissory note in favor of the Manufacturers Bank & Trust
Company, wherein the former promised to pay the latter the sum
of P20.000.00, with interest thereon at the rate of 10% per annum
payable 120 days from said date.
DOMESTIC INSURANCE required PLASTIC ERA to give
additional security and so on September 23, 1959, Sati B.
Gidwani, wife of Bhagwandas Gidwani, pledged to DOMESTIC
INSURANCE her shares of stock in three corporations, among
which were 12,000 shares of the Marinduque Iron Mines, Inc.
(which corporate name has subsequently been changed to
Marinduque Mining & Industrial Corporation). This pledge
agreement was to secure the fulfillment by PLASTIC ERA of its
undertaking to indemnify DOMESTIC INSURANCE from any
and all damages, losses and expenses which the latter may
sustain as a consequence of its having executed a surety bond in
favor of the Manufacturers Bank & Trust Company.
On September 26, 1959, the Marinduque Mining & Industrial
Corporation (hereinafter referred to as MARINDUQUE) was
notified of the pledge of the shares of Sati Gidwani and a stop
transfer notice was entered in its books. Since then, all stock
dividends declared and cash dividends paid corresponding to the

pledged shares were delivered to DOMESTIC INSURANCE.
PLASTIC ERA failed to pay the promissory note it executed in
favor of the Manufacturers Bank & Trust Company, and as a
result thereof, the latter in turn files a claim against the bond
issued by DOMESTIC INSURANCE, which on October 27, 1960,
paid the sum of P20.000.00 to said bank.
On January 26, 1961, DOMESTIC INSURANCE filed an
action in the Court of First Instance of Manila, which was
docketed therein as Civil Case No. 46142, against PLASTIC ERA,
Kishu Gidwani and Bhagwandas Gidwani, for the recovery of the
sum of P20,000.00 which DOMESTIC INSURANCE paid to the
735
VOL. 122, JUNE 24, 1983 735

Manufacturers Bank & Trust Company, plus interest and

attorneys fees.
On November 9, 1961, the Court of First Instance of Manila
rendered judgment in Civil Case No. 46142, based on a
compromise agreement, wherein the defendants therein were
sentenced to pay to DOMESTIC INSURANCE the sum of
P20,000.00, with interest thereon at the rate of 12% per annum
from October 27, 1960, plus P1,100.00 as attorneys fees, without
costs. The decision, however, provided that any amount payable to
the plaintiff in excess of P20.000.00, including interest and
attorneys fees would not be due until one year from the finality of
the judgment.
Pursuant to a writ of execution issued in said Civil Case No.
46142, the Sheriff garnished the liquidating dividends of
Bhagwandas Gidwani in the Old Manila Club amounting to
P3,950.00. One Gustav Real, claiming to be the assignee of said
dividends, filed a suit in the City Court of Manila against the
sheriff and DOMESTIC INSURANCE for the recovery thereof.
The City Court of Manila rendered judgment for Gustav Real but
DOMESTIC INSURANCE and the Sheriff appealed from the
decision and the appealed case is still pending before another
branch of this court.
On October 1, 1968, DOMESTIC INSURANCE requested
Notary Public Antonio Manzano to sell at public auction the
shares pledged to it by Sati Gidwani for the satisfaction of the
sum of P44,656.55. After the corresponding notice had been given,
on October 31, 1968, all the pledged shares were sold at public
auction for the sum of P19,322.30 to DOMESTIC INSURANCE,
which was the highest bidder.
On November 7, 1968, DOMESTIC INSURANCE surrendered

to MARINDUQUE the certificate of stock of the pledged shares
and requested that they be cancelled and new certificates of stock
issued in its name. In due time, MARINDUQUE complied, but it
only issued 232 and 46/100 shares in the name of DOMESTIC
INSURANCE, which was based on the adjusted new par value of
P15.00 per share, instead of the original par value of P0.10 per
share.
On November 5, 1968, the transfer agents of MARINDUQUE
on the same occasion received two letters signed by the spouses
Bhagwandas B. Gidwani and Sati B. Gidwani. In the first letter,
the spouses stated that they have assigned all their rights to
34,846 shares belonging to them in favor of Samuel Sharuff and
requested that the corresponding notation be made thereof in the
stock and transfer book of the corporation, with the promise,
however, that in due time . . . the stock certificate duly
accomplished and endorsed in
736

favor of Mr. Samuel Sharuff would be forwarded to

MARINDUQUE.
In the second letter, the Gidwani spouses stated that they
were not yet able to recover the corresponding stock certificates
which they assigned to Samuel Sharuff and so they requested
that they be cancelled, and thereafter new ones be issued in lieu
thereof in favor of Samuel Sharuff.
At first, the stock transfer clerk refused to acknowledge
receipt of the letters for the reason that the corresponding stock
certificates had not been enclosed therewith. Later, she had a
telephone conversation with a party who introduced himself as
Samuel Sharuff. After talking for a time, the party claiming to be
Samuel Sharuff was able to prevail upon the stock transfer clerk
to receive the two letters and to prepare a reply thereto along the
line suggested by the former. The stock transfer clerk typed the
letter, after which she signed it in behalf of the transfer agents of
MARINDUQUE. In the third paragraph of the letter, it was
stated that a stop transfer notation would be made in the records
of the corporation that the stock certificates in the name of either
the Gidwani spouses would be cancelled only if the instruction
accompanying them was to issue new shares in the name of
Samuel Sharuff.
On December 5, 1968, counsel for Sharuff wrote the transfer
agents of MARINDUQUE to cancel the stock certificates issued in
the name of DOMESTIC INSURANCE and to issue in lieu thereof

new ones in the name of his client.
The transfer agents of MARINDUQUE declined to recall the
shares issued in the name of the plaintiff with the explanation
that the stop order notation made at the instance of Samuel
Sharuff had no basis because the shares in question were pledged
to DOMESTIC INSURANCE and the pledge had been foreclosed,
with the pledgee acquiring them at the auction sale.
As a result of this denial the Gidwani spouses, joined by
Samuel Sharuff, sued DOMESTIC INSURANCE and
MARINDUQUE, and in their complaint, the plaintiffs prayed that
the pledge of the shares of Sati Gidwani be declared to have been
extinguished that the sale of the pledged shares to DOMESTIC
INSURANCE was null and void and that MARINDUQUE be
ordered to issue new shares in favor of Samuel Sharuff and to
condemn the defendants to pay attorneys fees in the sum of
P10,000.00.
737
VOL. 122, JUNE 24, 1983 737

The plaintiffs contend that the filing by DOMESTIC

INSURANCE of an action based on the counterguaranty, and
obtaining therein a judgment in its favor with a partial
satisfaction thereof, released the lien of the plaintiff on the shares
pledged to it by Sati Gidwani. The defendants, more particularly,
DOMESTIC INSURANCE, however, maintain the contrary view.
(Decision pp. 17)
Not satisfied with the decision of respondent Judge,

petitioners filed this appeal by certiorari, claiming that
respondent Judge erred: (1) when he did not find and hold
that the pledge constituted on the subject shares of stock
had already been extinguished and released at the time its
extrajudicial foreclosure was belatedly instituted by the
pledgee (2) when he did not invalidate for being null and
void the extrajudicial foreclosure of the pledge in question
(3) when he did not find and hold that since petitioner
pledgor Sati Gidwani continued to be the lawful owner of
the subject shares, her assignment thereof to Samuel
Sharuff was, therefore, valid and the same produced legal
and binding effects even as against the pledgee, Domestic
Insurance Company of the Philippines (4) when he did not
order Marinduque Mining and Industrial Corporation to
cancel the certificates of stock illegally issued to Domestic
Insurance Company of the Philippines and issue new stock
certificates to Samuel Sharuff, the assignee thereof and (5)

when he refused or failed to grant the other relief prayed
for in the complaint filed by herein petitioners.
It is the position of the petitioners that the pledge
constituted on the subject shares was given as security in
favor of Domestic Insurance to guarantee the fulfillment of
the obligation assumed by Plastic Era, Bhagwandas
Gidwani and Kishu Gidwani under the Indemnity
Agreement which they executed, jointly and severally, to
indemnify (Domestic Insurance) from and against any and
all liabilities, damages, losses, costs and expenses which
said (Domestic Insurance) may incur in consequence of
having became surety in its D.I.C.P. Surety Bond No.
04739 (Annex 1, Answer of Domestic Insurance) that the
pledge of the shares of stock of Sati Gidwani to respondent
Domestic Insurance was
738

extinguished when the latter sued Plastic Era,

Bhagwandas Gidwani and Kishu Gidwani in Civil Case No.
46142 of the Court of First Instance of Manila to enforce
the Indemnity Agreement and that when Domestic
Insurance instituted the above action and obtained a
favorable judgment against the defendants in Civil Case
No. 46142, said respondent abandoned and waived its
rights or cause of action under the Pledge Agreement.
We are not persuaded. As aptly observed by the trial
court, there were two securities given to DOMESTIC
INSURANCE for the faithful compliance of the obligation
of PLASTIC ERA to pay the promissory note it executed in
favor of the Manufacturers Bank & Trust Co., namely, the
counterguaranty agreement jointly executed by PLASTIC
ERA, Kishu Gidwani and Bhagwandas Gidwani, and the
second was the pledge of shares of stock made by Sati B.
Gidwani. By paying the promissory note to the
Manufacturers Bank & Trust Company, DOMESTIC
INSURANCE thereby was subrogated to the rights of the
former to demand for and collect payment of the amount
due thereon from PLASTIC ERA, the maker of the
promissory note. Had DOMESTIC INSURANCE sued
PLASTIC ERA under this cause of action, and assuming
that the ruling in the cited cases which referred to real
estate and chattel mortgages would also be applicable
where the security given is pledge, then the plaintiff would
thereafter be barred from enforcing its claim against any of

the securities given to it to guaranty the faithful payment
of the original obligation. The indemnity agreement jointly
signed by PLASTIC ERA, Kishu Gidwani and Bhagwandas
Gidwani and the pledge agreement of the shares are the
two securities, and as the creditor did not avail of the
remedy to obtain a personal judgment against the debtor, it
is not barred to enforce its claim against both securities.
From the nature of the situation, DOMESTIC
INSURANCE cannot prosecute its claim against the two
securities in one and the same action. The foreclosure of
the pledged shares would not require an action in court,
whereas it would be necessary if the claim would be
enforced under the indemnity agreement. The Court is,
therefore, of the opinion and so holds that the filing of Civil
Case No. 46142, and securing a judgment therein against
739
VOL. 122, JUNE 24, 1983 739

the counterguarantors, did not release, much less

extinguish, the lien of DOMESTIC INSURANCE on the
shares of stock of Sati B. Gidwani which were pledged in its
favor. Further, the pledge of the shares of stock of Sati
Gidwani did not release the obligation of the indemnitors.
The pledge was an additional security for the
indemnification of the damages and losses which Domestic
Insurance might, and did, suffer under the surety bond
which it issued for Plastic Era.
ACCORDINGLY, the appealed decision is hereby
AFFIRMED in toto. Without costs.
SO ORDERED.

Vasquez and Gutierrez, Jr., JJ., concur.
Decision affirmed.
Notes.Notice is taken by the Court that insurance

companies have been inventing excuses in order to avoid
their just obligations. (American Home Insurance Co. vs.
Court of Appeals, 109 SCRA 180.)
While the father of the deceased is an officer of the
corporation, it cannot be inferred that the deceased is a
member of the household of the insured since the insured is
the corporation which has a personality separate and
distinct from its officers and stockholders. (Summit

Guaranty & Ins. Co., Inc. vs. Court of Appeals, 110 SCRA
241.)
Where the sheriffs sale did not proceed because it was
restrained, the liability of the bonding company of the
judgmentcreditor does not become effective. (Santos vs.
Sibug, 104 SCRA 520.)
The insurer must indemnify the petitionerowner for the
total loss of the insured car under the theft clause of the
policy subject to the filing of such claim for reimbursement
or payment as it may have as subrogee against the Sunday
Machine Works, Inc. (Villacorta vs. Insurance Commission,
100 SCRA 467.)
o0o
740
[No. L9434. March 29, 1957]
GENERAL INDEMNITY CO., INC., plaintiff and appellee,

vs. ESTANISLAO ALVAREZ, defendant and appellant.
SURETY AND GUARANTY ACTION BY GUARANTOR

AGAINST PRINCIPAL DEBTOR WHEN PREMATURE.An
action by the guarantor against the principal debtor for
payment before the guarantor has paid the creditor, is
premature. Under Art. 2071 of the new Civil Code,, a
guarantor who has not paid the creditor can proceed against
the principal debtor only for the purpose of obtaining release
from the guaranty or a security against an eventual insolvency
of the debtor.

Manila. Santiago, J.
A.A. Dimaculangan for appellee.
Antonio Barredo for appellant.
REYES, J.B. L, J.:
Appeal taken by defendant Estanislao Alvarez from a

summary judgment rendered by the Court of First Instance
of Manila.
On February 18, 1954, appellee General Indemnity Co.,
Inc., filed a complaint (C. C. No. 22005) in the Court of
First Instance of Manila against appellant Estanislao
Alvarez for the recovery of the sum of P2,000 representing
the amount of a loan allegedly taken by the appellant
1060

General Indemnity Co., Inc. vs. Alvarez
from the Philippine National Bank, the payment of which

appellee guaranteed with an indemnity bond, and for
which appellant, as counterguaranty, executed in
plaintiffs ex avor a mortgage on his share in a parcel of
http://central.com.ph/sfsreader/session/0000015cda35519de81bfd93003600fb002c009e/t/?o=False 1/4
land (Annex A" of the complaint). The complaint further

alleged that the appellant failed to pay said loan, together
with interests, to the Philippine National Bank, as a result
of which the bank deducted the amount thereof from
plaintiffs deposit. Plaintiff likewise claimed the amount of
P426.07 as attorneys fees which the defendant agreed to
pay under the mortgage annexed to the complaint.
On March 29, 1954, appellant Estanislao Alvarez,
answered, admitting the fact of the loan and the execution
of the mortgage Annex A" of the complaint, but denying
knowledge of the alleged payment made by plaintiff to the
Philippine National Bank and as affirmative defense,
appellant averred that the loan in question was secured by
him only in accommodation of one Hao Lam, and that
plaintiff agreed not to take any steps against appellant and
the mortgage executed by him in plaintiffs favor until the
latter had failed to obtain payment from said Hao Lam.
Eight months later, or on November 24, 1954, plaintiff
filed a motion for summary judgment, claiming that
appellants answer, which admitted the genuineness and
due execution of the mortgage annexed to its complaint,
presented no real and meritorious defense and that it was
entitled to a summary judgment in its favor, based on the
affidavit of its comptroller Pedro R. Mendiola supporting
the motion, which states:
That he is the Comptroller of the General Indemnity Co., Inc.,

plaintiff in the aboveentitled case
That he has personal knowledge of the indebtedness of the
defendant as of January 31, 1954, in the sum of P2,130.36 plus
daily interest of P0.69 from February 1, 1954 until fully paid, and
the additional amount of P426.07 as attorneys fees
1061
VOL, 100, MARCH 29, 1957 1061

That he knows of his own personal knowledge that several

demands have been made upon the defendant for the payment of
the abovementioned obligation to the plaintiff, but
notwithstanding said demands, defendant has failed and refused
and still fails and refuses to pay the same. (Rec. on Appeal, pp.
1920)
The lower court found the motion for summary judgment

welltaken and on March 29, 1955, rendered judgment in
favor of plaintiff for the amount of P2,130.38, plus daily
interest of P0.69 from February 1, 1954 until payment, and

the additional sum of P426.07 attorneys fees, and costs.
Defendant filed a motion for reconsideration to have this
judgment set aside and the case set for hearing, but said
motion was denied, and so he appealed to this Court.
Insofar as appellant argues that the affirmative defense
in his answer that he secured the loan in question only to
accommodate a third party and that appellee promised not
to proceed against him until it had failed. to collect from
said third party, tenders genuine issues on the time and
manner of payment of the indebtedness in question,
appellee is correct in saying that said defense is immaterial
to its right of recovery, since the mortgage deed executed
by appellant in its favor (the genuineness and due
execution of which appellant admitted in his answer) shows
appellant to be the actual and only debtor, and appellant is
precluded from varying this representation by parol
evidence.
However, there is merit in appellants contention that
there exists a controversy in the complaint and answer as
to whether or not appellee had actually paid appellants
obligation to the Philippine National Bank, a matter which
should be decided in the affirmative before appellee, as
surety, can claim reimbursement from appellant, the
principal debtor. Appellee asserts that this issue was
brought up by appellant for the first time on appeal and
should, therefore, be ignored but contrary to appellees
assertion, this question was brought up by appellant in
1062

his answer, when he specifically denied the allegation of

the complaint that the Philippine National Bank deducted
from appellees deposit the amount of the loan in question,
by the following allegation:
3. * * * that he does not have sufficient knowledge or information

to form a belief as to the truth of the allegations regarding
payments made by plaintiff to the P.N.B." (Answer, Rec. App., p.
16)
And as the affidavit of plaintiffs comptroller Pedro R.

Mendiola, supporting the motion for summary judgment,
simply relates to the amount of the loan in question and
appellants failure to pay the same to appellee inspite of
repeated demands, but does not touch on the alleged

payment made by appellee to the bank, there was no
necessity for appellant to submit counteraffidavits to show
that such payment had not been made. Appellee likewise
contends that it is immaterial to its cause of action against
appellant whether or not it had actually paid the
Philippine National Bank, citing Art, 2071 of the New Civil
Code to the effect that a guarantor may proceed against the
principal debtor, even before having paid, when the debt
has become demandable. The last paragraph of this same
article, however, provides that in such instance, the only
action the guarantor can file against the debtor is to
obtain release from the guaranty, or to demand a security
that shall protect him from any proceeding by the creditor
and from the danger of insolvency of the debtor. An action
by the guarantor against the principal debtor for payment,
before the former has paid the creditor, is premature.
The judgment appealed from is hereby set aside and the
lower court is ordered to set anew this case for trial on the
sole issue of whether or not appellee General Indemnity
Co,, Inc., had already paid the loan in question to the
Philippine National Bank, after which a new judgment
shall be rendered. Costs against appellee General
Indemnity Co., Inc. So ordered.
1063
VOL. 100, MARCH 29, 1957 1063

Borlough vs. Fortune Interprises, Inc. and Ct. of Appeals
Pars, C.J., Bengzon, Padilla,, Reyes, A., Bautista

Angelo, Labrador, Concepcion, Endencia and Felix, JJ.,
concur.
Judgment set aside.
_____________
[No. 46534. October 16, 1939]
J. V. HOUSE, petitioner, vs. SIXTO DE LA COSTA,

JUDGE OF FlRST INSTANCE OF MANILA, BRANCH V,
ET AL., 'respondents.
SURETYSHIP AND GUARANTY RELEASE OF SURETY

FROM ITS OBLIGATION.The petitioner and C. P. B., under
the agreement of September 1st, substantially altered their
juridical relations as to the properties discharged from
attachment and for the delivery of which Far Eastern Surety &
Insurance Co., Inc,, was a surety, which alteration necessarily
released the latter from its obligations as such surety. The
properties discharged from attachment having been turned
over to the petitioner and thereafter publicly sold and
adjudicated to him under the said agreement, the obligation of
C. P. B. to return the properties to the Sheriff, in satisfaction of
the judgment in favor of the petitioner, was extinguished and
compliance therewith became impossible by petitioner's own
act, thereby resulting in the release of the surety from its
obligation to pay the value of said properties (articles 1184 and
1847 of the Civil Code.)
ORIGINAL ACTION in the Supreme Court. Certiorari.

Yuseco, Arteche and Abdon for petitioner.
Antonio Gonzalez for respondents.
AVANCEA, C. J.:
743
VOL. 68, OCTOBER 16, 1939 743

House vs. De La Costa
The petitioner, plaintiff in a civil case against C. P. Bush

and George Upton for the recovery of a sum of money,
obtained a preliminary attachment of certain properties of
the latter. Three days thereafter, Bush and Upton secured
the discharge of the attachment of these properties by
filing a bond posted by Far Eastern Surety & Insurance
http://central.com.ph/sfsreader/session/0000015cda366fe32587fac6003600fb002c009e/t/?o=False 1/3
Co., Inc., on August 25, 1934, for P2,000, the condition of

the bond being that, should the plaintiff and petitioner
House obtain a judgment against C. P. Bush, the latter
would return to the Sheriff of Manila the properties
discharged from attachment and, should he fail to do so,
the Far Eastern Surety & Insurance Co., Inc., would pay
the value thereof.
On September 1st following, the petitioner House and C.
P. Bush entered into an agreement, without the knowledge
or consent of the Far Eastern Surety & Insurance Co., Inc.,
whereby Bush delivered to the petitioner, together with
other properties, those discharged from attachment to be
sold at public auction. The petitioner was the highest
bidder in this sale and the properties were adjudicated to
him.
Eventually the petitioner obtained judgment against C.
P. Bush for the amount of P2,000, and the same not having
been satisfied, he asked for execution against Far Eastern
Surety & Insurance Co., Inc., as surety of C. P. Bush in the
discharge of the properties from the attachment. The court
denied this petition.
The petitioner alleges that the court exceeded and
abused its discretion in so ruling.
From the foregoing it appears that the petitioner and C.
P. Bush, under the agreement of September 1st,
substantially altered their juridical relations as to the
properties discharged from attachment and for the delivery
of which Far Eastern Surety & Insurance Co., Inc., was a
surety, which alteration necessarily released the latter
from its obligations as such surety. The properties
discharged from attachment having been turned over to the
petitioner and thereafter publicly sold and adjudicated to
744

Gong vs. Securities and Exchange Commission
to return the properties to the Sheriff, in satisfaction of the

judgment in favor of the petitioner, was extinguished and
compliance therewith became impossible by petitioner's
own act, thereby resulting in the release of the surety f rom
its obligation to pay the value of said properties (articles
1184 and 1847 of the Civil Code).
The petition is denied, with the costs to the petitioner.
So ordered.
VillaReal, Imperial, Diaz, Laurel, Concepcion, and

Moran, JJ., concur.
Petition denied.
_______________

Citizens Surety and Insurance Co., Inc. vs. Court of Appeals
*
No. L48958. June 28, 1988.
CITIZENS SURETY and INSURANCE COMPANY, INC.,

petitioner, vs. COURT OF APPEALS and PASCUAL M.
PEREZ, respondents.
Contracts Construction and Interpretation of Contracts In

order to judge the intention of the parties, their contemporaneous
and subsequent acts shall be principally considered.It is the
general rule that when the words of a contract are plain and
readily understandable, there is no room for construction thereof
(San Mauricio Milling Co. v. Ancheta, 105 SCRA 371). However,
this is only a general rule and it admits exceptions. On its face,
the document speaks of an assignment where there seems to be a
complete conveyance of the stocks of lumber to the petitioner, as
assigned. However, in the light of the circumstances obtaining at
the time of the execution of said deed of assignment, we can not
regard the transaction as an absolute conveyance. As held in the
case of Sy v. Court of Appeals, (131 SCRA 116, 124).
Same Same Obligations Dation in Payment There is no
dation in payment when there is no obligation to be extinguished.
The transaction could not be dation in payment. As pointed out
in the
________________
* THIRD DIVISION.
739
VOL. 162, JUNE 28, 1988 739
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concurring and dissenting opinion of Justice Edgardo L. Paras

and the dissenting opinion of Justice Mariano Serrano when the
deed of assignment was executed on December 4, 1959, the
obligation of the assignor to refund the assignee had not yet
arisen. In other words, there was no obligation yet on the part of
the petitioner, Citizens Surety and Insurance Co., to pay Singer
Sewing Machine Co. There was nothing to be extinguished on that
date, hence, there could not have been a dation in payment.
Same Same Same Deed of assignment cannot be regarded as
an absolute conveyance whereby the obligation under the surety
bonds was automatically extinguished.The deed of assignment
cannot be regarded as an absolute conveyance whereby the
obligation under the surety bonds was automatically
extinguished. The subsequent acts of the private respondent
bolster the fact that the deed of assignment was intended merely
as a security for the issuance of the two bonds. Partial payments
amounting to P55,600.00 were made after the execution of the
deed of assignment to satisfy the obligation under the two surety
bonds. Since later payments were made to pay the indebtedness,
it follows that no debt was extinguished upon the execution of the
deed of assignment. Moreover, a second real estate mortgage was
executed on April 12, 1960 and eventually cancelled only on May
15, 1962. If indeed the deed of assignment extinguished the
obligation, there was no reason for a second mortgage to still have
to be executed. We agree with the two dissenting opinions in the
Court of Appeals that the only conceivable reason for the
execution of still another mortgage on April 12, 1960 was because
the obligation under the indemnity bonds still existed. It was not
yet extinguished when the deed of assignment was executed on
December 4, 1959. The deed of assignment was therefore intended
merely as another collateral security for the issuance of the two
surety bonds.
PETITION for review of the decision of the Court of

Appeals.

F. Sumulong & Associates Law Offices for petitioner.
GUTIERREZ, JR., J.:
This is a petition to review the decision of the Court of

Appeals which reversed the decision of the Court of First
Instance of Batangas in a case involving a claim for a sum
of money against the estate of the late Nicasia Sarmiento,
administered by her husband Pascual M. Perez.
740

On December 4, 1959, the petitioner issued two (2) surety

bonds CSIC Nos. 2631 and 2632 to guarantee compliance
by the principal Pascual M. Perez Enterprises of its
obligation under a Contract of Sale of Goods entered into
with the Singer Sewing Machine Co. In consideration of the
issuance of the aforesaid bonds, Pascual M. Perez, in his
personal capacity and as attorneyinfact of his wife,
Nicasia Sarmiento and in behalf of the Pascual M. Perez
Enterprises executed on the same date two (2) indemnity
agreements wherein he obligated himself and the
Enterprises to indemnify the petitioner jointly and
severally, whatever payments advances and damage it may
suffer or pay as a result of the issuance of the surety bonds.
In addition to the two indemnity agreements, Pascual
M. Perez Enterprises was also required to put up a
collateral security to further insure reimbursement to the
petitioner of whatever losses or liabilities it may be made to
pay under the surety bonds. Pascual M. Perez therefore
executed a deed of assignment on the same day, December
4, 1959, of his stock of lumber with a total value of
P400,000.00. On April 12, 1960, a second real estate
mortgage was further executed in favor of the petitioner to
guarantee the fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with its
obligation under the contract of sale of goods with Singer
Sewing Machine Co., Ltd. Consequently, the petitioner was
compelled to pay, as it did pay, the fair value of the two
surety bonds in the total amount of P144,000.00. Except for
partial payments in the total sum of P55,600.00 and
notwithstanding several demands, Pascual M. Perez
Enterprises failed to reimburse the petitioner for the losses
it sustained under the said surety bonds.
The petitioner filed a claim for sum of money against the
estate of the late Nicasia Sarmiento which was being
administered by Pascual M. Perez.
In opposing the money claim, Pascual M. Perez asserts
that the surety bonds and the indemnity agreements had
been extinguished by the execution of the deed of
assignment.
After the trial on the merits, the Court of First Instance
of Batangas rendered judgment on April 15, 1968, the
741
VOL. 162, JUNE 28, 1988 741

WHEREFORE, considering that the estate of the late Nicasia

Sarmiento is jointly and severally liable to the Citizens Surety
and Insurance Co., Inc., for the amount the latter had paid the
Singer Sewing Machine Company, Ltd., the court hereby orders
the administrator Pascual M. Perez to pay the claimant the sum
of P144,000.00, with interest at the rate of ten (10%) per cent per
annum from the date this claim was filed, until fully paid, minus
the payments already made in the amount of P55,600.00. (pp. 97
98, Record on Appeal)
Both parties appealed to the Court of Appeals. On August

31, 1978, the Court of Appeals rendered its decision with
the following dispositive portion:
WHEREFORE, the decision rendered by the Court of First

Instance of Batangas on April 15, 1986 is hereby reversed and set
aside and another one entered dismissing the claim of the
Citizens Surety and Insurance Co., Inc., against the estate of the
late Nicasia Sarmiento. No pronouncement as to costs. (p. 37,
Rollo)
The petitioner raises the following alleged errors of the

respondent court as the issues in this petition for review:
RESPONDENT COURT OF APPEALS ERRED IN

CONCLUDING THAT THE OBLIGATION OF PRIVATE
RESPONDENT PASCUAL M. PEREZ HAD BEEN
EXTINGUISHED BY VIRTUE OF THE EXECUTION OF THE
DEED OF ASSIGNMENT (EXHIBIT 1) AND/ OR THE
RELEASE OF THE SECOND REAL ESTATE MORTGAGE
(EXHIBIT 2).
II
RESPONDENT COURT OF APPEALS ERRED IN

CONCLUDING THAT THERE WAS DATION IN PAYMENT BY
VIRTUE OF THE EXECUTION OF THE DEED OF
ASSIGNMENT (EXHIBIT 1).
III
RESPONDENT COURT OF APPEALS ERRED WHEN IT

TOTALLY REVERSED AND SET ASIDE THE DECISION OF
THE COURT OF FIRST INSTANCE OF BATANGAS THUS
DEPRIVING PETITIONER OF THE PRINCIPAL SUM DUE
PLUS INTEREST AND ATTORNEYS FEES. (p. 4, Petitioners

Brief)
742

The main issue in this petition is whether or not the

administrators obligation under the surety bonds and
indemnity agreements had been extinguished by reason of
the execution of the deed of assignment.
It is the general rule that when the words of a contract
are plain and readily understandable, there is no room for
construction thereof (San Mauricio Milling Co. v. Ancheta,
105 SCRA 371). However, this is only a general rule and it
admits exceptions.
Pascual M. Perez executed an instrument denominated
as Deed of Assignment. Pertinent portions of the deed
read as follows:
I, Pascual M. Perez, Filipino, of legal age, married, with

residence and postal address at 115 D. Silang, Batangas, as the
owner and operator of a business styled PASCUAL M. PEREZ
ENTERPRISES, with office at R31 Madrigal Building, Escolta,
Manila, hereinafter referred to as ASSIGNOR, for and in
consideration of the issuance in my behalf and in favor of the
SINGER SEWING MACHINE COMPANY, LTD., of two Surety
Bonds (C.S.I.C. Bond Nos. 2631 and 2632 each in the amount of
SEVENTY TWO THOUSAND PESOS (P72,000.00), or with a
total sum of ONE HUNDRED FORTYFOUR THOUSAND
PESOS (P144,000.00), Philippine Currency, by the CITIZENS
SURETY AND INSURANCE CO., INC., a corporation duly
organized and existing under and by virtue of the laws of the
Republic of the Philippines, with principal office at R306
Samanillo Building, Escolta, Manila, Philippines, and duly
represented in the act by its VicePresident and General
Manager, ARISTEO L. LAT, hereinafter referred to as
ASSIGNEE, assign by these presents, unto said ASSIGNEE, its
heirs, successors, administrators or assigns the herein
ASSIGNORS stock (Insured) of low grade lumber, class No. 2
COMMON kept and deposited at Tableria Tan Tao at Batangas,
Batangas, with a total measurement of Two Million (2,000,000.00)
board feet and valued of P0.20 per board feet or with a total value
of P400,000.00 which lumber is intended by the ASSIGNOR for
exportation under a Commodity Trade Permit, the condition being
that in the event that the herein assignor exports said lumber and
as soon as he gets the necessary export shipping and related and
pertinent documents therefor, the ASSIGNOR will turn said

papers over to the herein ASSIGNEE, conserving all of the latters
dominion, rights and interests in said exportation.
The ASSIGNEE hereby agrees and accepts this assignment
under the conditions abovementioned. (pp. 7779, Record on
Appeal)
743
VOL. 162, JUNE 28, 1988 743

On its face, the document speaks of an assignment where

there seems to be a complete conveyance of the stocks of
lumber to the petitioner, as assignee. However, in the light
of the circumstances obtaining at the time of the execution
of said deed of assignment, we can not regard the
transaction as an absolute conveyance. As held in the case
of Sy v. Court of Appeals, (131 SCRA 116, 124):
It is a basic and fundamental rule in the interpretation of

contract that if the terms thereof are clear and leave no doubt as
to the intention of the contracting parties, then the literal
meaning of the stipulations shall control but when the words
appear contrary to the evident intention of the parties, the latter
shall prevail over the former. (Labasan v. Lacuesta, 86 SCRA 16)
In order to judge the intention of the parties, their
contemporaneous and subsequent acts shall be principally
considered. (Italics supplied)
The petitioner issued the two (2) surety bonds on December

4, 1959 in behalf of the Pascual M. Perez Enterprises to
guaranty fulfillment of its obligation under the Contract of
Sale of Goods entered into with the Singer Sewing
Machine Co. In consideration of the two surety bonds, two
indemnity agreements were executed by Pascual M. Perez
followed by a Deed of Assignment which was also executed
on the same date.
In the case of Lopez v. Court of Appeals (114 SCRA 673),
we stated that:
The indemnity agreement and the stock assignment must be

considered together as related transactions because in order to
judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally
considered. (Article 1371, New Civil Code). Thus, considering that
the indemnity agreement connotes a continuing obligation of
Lopez towards Philamgen while the stock assignment indicates a
complete discharge of the same obligation, the existence of the

indemnity agreement whereby Lopez had to pay a premium of
P1,000.00 for a period of one year and agreed at all times to
indemnify Philamgen of any and all kinds of losses which the
latter might sustain by reason of it becoming a surety, is
inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of Philamgen. There would
have been no necessity for the execution of the indemnity
agreement if the stock assignment was really intended as an
absolute conveyance. Hence, there are
744

strong and cogent reasons to conclude that the parties intended

said stock assignment to complement the indemnity agreement
and thereby sufficiently guarantee the indemnification of
Philamgen should it be required to pay Lopez loan to Prudential
Bank. (at pp. 682683)
The respondent court stated that by virtue of the

execution of the deed of assignment, ownership of
administratorappellants lumber materials had been
transferred to the claimantappellant and this amounted to
dation in payment whereby the former is considered to
have alienated his property in favor of the latter in
satisfaction of a monetary debt (Article 1245). As a
consequence thereof, administratorappellants obligation
under the surety bonds is thereby extinguished upon the
execution of the deed of assignment. This statement is not
sustained by the records.
The transaction could not be dation in payment. As
pointed out in the concurring and dissenting opinion of
Justice Edgardo L. Paras and the dissenting opinion of
Justice Mariano Serrano when the deed of assignment was
executed on December 4, 1959, the obligation of the
assignor to refund the assignee had not yet arisen. In other
words, there was no obligation yet on the part of the
petitioner, Citizens Surety and Insurance Co., to pay
Singer Sewing Machine Co. There was nothing to be
extinguished on that date, hence, there could not have been
a dation in payment.
In the case of Lopez v. Court of Appeals (supra) we had
the occasion to explain:
Considering the above jurisprudence, We find that the debt or

obligation at bar has not matured on June 2, 1959 when Lopez
alienated his 4,000 shares of stock to Philamgen. Lopez

obligation would arise only when he would default in the payment
of the principal obligation (the loan) to the bank and Philamgen
had to pay for it. Such fact being adverse to the nature and
concept of dation in payment, the same could not have been
constituted when the stock assignment was executed. Moreover,
there is no express provision in the terms of the stock assignment
between Philamgen and Lopez that the principal obligation
(which is the loan) is immediately extinguished by reason of such
assignment. (at p. 686)
The deed of assignment cannot be regarded as an absolute

conveyance whereby the obligation under the surety bonds
745
VOL. 162, JUNE 28, 1988 745

was automatically extinguished. The subsequent acts of the

private respondent bolster the fact that the deed of
assignment was intended merely as a security for the
issuance of the two bonds. Partial payments amounting to
P55,600.00 were made after the execution of the deed of
assignment to satisfy the obligation under the two surety
bonds. Since later payments were made to pay the
indebtedness, it follows that no debt was extinguished upon
the execution of the deed of assignment. Moreover, a
second real estate mortgage was executed on April 12, 1960
and eventually cancelled only on May 15, 1962. If indeed
the deed of assignment extinguished the obligation, there
was no reason for a second mortgage to still have to be
executed. We agree with the two dissenting opinions in the
Court of Appeals that the only conceivable reason for the
execution of still another mortgage on April 12, 1960 was
because the obligation under the indemnity bonds still
existed. It was not yet extinguished when the deed of
assignment was executed on December 4, 1959. The deed of
assignment was therefore intended merely as another
collateral security for the issuance of the two surety bonds.
Recapitulating the facts of the case, the records show
that the petitioner surety company paid P144,000.00 to
Singer on the basis of the two surety bonds it had issued in
behalf of Pascual Perez Enterprises. Perez in turn was able
to indemnify the petitioner for its payment to Singer in the
amount of P55,600.00 thus leaving a balance of only
P88,400.00.
The petitioner surety company was more than

adequately protected. Lumber worth P400,000.00 was
assigned to it as collateral. A second real estate mortgage
was also given by Perez although it was later cancelled
obviously because the P400,000.00 worth of lumber was
more than enough guaranty for the obligations assumed by
the petitioner. As pointed out by Justice Paras in his
separate opinion, the proper procedure was for Citizens
Insurance and Surety Co., to collect the remaining
P88,400.00 from the sales of lumber and to return
whatever remained to Perez. We cannot order the return in
this decisions because the Estate of Mrs. Perez has not
asked for any return of excess lumber or its value. There
appears to have been other transactions, surety bonds, and
performance bonds between the petitioner and Perez
Enterprises but these
746

are extraneous matters which, the records show, have

absolutely no bearing on the resolution of the issues in this
petition.
With respect to the claim for interests and attorneys
fees, we agree with the private respondent that the
petitioner is not entitled to either one. It had the means to
recoup its investment and losses many times over, yet it
chose to litigate and delay the final determination of how
much was really owing to it. As stated by Justice Paras in
his separate opinion:
Interest will not be given the Surety because it had all the while
(or at least, it may be presumed that such was the case) the
P400,000.00 worth of lumber, from which value the refunding by
assignor could have been deducted if it had so informed the
assignor of the plan.
For the same reason as in No. (5), attorneys fees cannot be
charged, for despite the express stipulation on the matter in the
contract, there was actually no failure on the part of the assignor
to comply with the obligation of refunding. The means of
compliance was right there with the Surety itself: surely it could
have earlier conferred with the assignor on how to effect the
refunding. (p. 39, Rollo)
WHEREFORE, the petition is hereby DISMISSED. For the

reasons abovestated, the claim of Citizens Surety and
Insurance Co., Inc., against the estate of Nicasia Sarmiento

is DISMISSED.
SO ORDERED.
Fernan (Chairman), Feliciano, Bidin and Corts,

JJ., concur.
Petition dismissed.
Note.A party to an illegal transaction cannot recover

what she has given by reason of the contract or ask for
fulfillment of what has been promised her. (Avila vs. CA,
145 SCRA 541.)
o0o
747

Philippine National Bank vs. Manila Surety & Fidelity Co.,
Inc.
No. L20567. July 30, 1965.
PHILIPPINE NATIONAL BANK, petitioner, vs. MANILA

SURETY & FIDELITY CO., INC. and THE COURT OF
APPEALS (Second Division), respondents.
Agency Duty of agent to act with the care of a good father of a

family.An agent is required to act with the care of a good father
of a family and becomes liable for the damages which the
principal may suffer through his nonperformance.
Same Same Bank liable for neglect in collecting sums due its
debtor.A bank is answerable for negligence in failing to collect
the sums due its debtor from the latters own debtor, contrary to
said banks duty as holder of an exclusive and irrevocable power
of attorney to make such collections.
Suretyship Surety released when assigned funds permitted by
creditor to be exhausted without notifying former.By allowing
the assigned funds to be exhausted without notifying the surety,
the creditor deprives the surety of any possibility of recoursing
against that security, and therefore the surety is released.
PETITION for review of a decision of the Court of Appeals.

Besa, Galang & Medina for petitioner.
De Santos & Delfino for respondents.
777
VOL. 14, JULY 30, 1965 777

Inc.
REYES, J.B.L., J.:
http://central.com.ph/sfsreader/session/0000015cda38e928b221d0b0003600fb002c009e/t/?o=False 1/6
The Philippine National Bank petitions for the review and

reversal of the decision rendered by the Court of Appeals
(Second Division), in its case CAG.R. No. 24232R,
dismissing the Banks complaint against respondent
Manila Surety & Fidelity Co., Inc., and modifying the
judgment of the Court of First Instance of Manila in its
Civil Case No. 11263.
The material facts of the case, as found by the appellate
Court, are as follows:
The Philippine National Bank had opened a letter of
credit and advanced thereon $120,000.00 to Edgington Oil
Refinery for 8,000 tons of hot asphalt. Of this amount,
2,000 tons worth P279,000.00 were released and delivered
to Adams & Taguba Corporation (known as ATACO) under
a trust receipt guaranteed by Manila Surety & Fidelity Co.
up to the amount of P75,000.00. To pay for the asphalt,
ATACO constituted the Bank its assignee and attorney
infact to receive and collect from the Bureau of Public
Works the amount aforesaid out of funds payable to the
assignor under Purchase Order No. 71947. This
assignment (Exhibit A) stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said credit

accommodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby appointed
as our AttorneyinFact for us and in our name, place and
stead, to collect and to receive the payments to be made by
virtue of the aforesaid Purchase Order, with full power
and authority to execute and deliver on our behalf, receipt
for all payments made to it to endorse for deposit or
encashment checks, money order and treasury warrants
which said Bank may receive, and to apply said payments
to the settlement of said credit accommodation.
This power of attorney shall also remain irrevocable until our

total indebtedness to the said Bank have been fully liquidated.
(Exhibit E)
ATACO delivered to the Bureau of Public Works, and the

latter accepted, asphalt to the total value of P431,466.52.
Of this amount the Bank regularly collected, from
778

Inc.
April 21, 1948 to November 18, 1948, P106,382.01.

Thereafter, for unexplained reasons, the Bank ceased to
collect, until in 1952 its investigators found that more
moneys were payable to ATACO from the Public Works
office, because the latter had allowed another creditor to
collect funds due to ATACO under the same purchase
order, to a total of P311,230.41.
Its demands on the principal debtor and the Surety
having been refused, the Bank sued both in the Court of
First Instance of Manila to recover the balance of
P158,563.18 as of February 15, 1950, plus interests and
costs.
On October 4, 1958, the trial court rendered a decision,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation and

Manila Surety & Fidelity Co., Inc., to pay plaintiff,
Philippine National Bank, the sum of P174,462.34 as of
February 24, 1956, minus the amount of P8,000 which
defendant, Manila Surety Co., Inc. paid from March, 1956
to October, 1956 with interest at the rate of 5% per annum
from February 25, 1956, until fully paid provided that the
total amount that should be paid by defendant Manila
Surety Co., Inc., on account of this case shall not exceed
P75,000.00, and to pay the costs
2. Ordering crossdefendant, Adams & Taguba Corporation,
and thirdparty defendant, Pedro A. Taguba, jointly and
severally, to pay cross and thirdparty plaintiff, Manila
Surety & Fidelity Co , Inc., whatever amount the latter
has paid or shall pay under this judgment
3. Dismissing the complaint insofar as the claim for 17%
special tax is concerned and
4. Dismissing the counterclaim of defendants Adams &
Taguba Corporation and Manila Surety & Fidelity Co.,
Inc.
From said decision, only the defendant Surety Company

has duly perfected its appeal. The Central Bank of the
Philippines did not appeal, while defendant ATACO failed
to perfect its appeal.
The Bank recoursed to the Court of Appeals, which
rendered an adverse decision and modified the judgment of
the court of origin as to the suretys liability. Its motions for
reconsideration having proved unavailing, the Bank
appealed to this Court.
779
VOL. 14, JULY 30, 1965 779

Inc.
The Court of Appeals found the Bank to have been

negligent in having stopped collecting from the Bureau of
Public Works the moneys falling due in favor of the
principal debtor, ATACO, from and after November 18,
1948, before the debt was fully collected, thereby allowing
such funds to be taken and exhausted by other creditors to
the prejudice of the surety, and held that the Banks
negligence resulted in exoneration of respondent Manila
Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends
the power of attorney obtained from ATACO was merely an
additional security in its favor, and that it was the duty of
the surety, and not that of the creditor, to see to it that the
obligor fulfills his obligation, and that the creditor owed the
surety no duty of active diligence to collect any sum from
the principal debtor, citing Judge Advocate General vs.
Court of Appeals, G.R. No. L10671, October 23, 1958.
This argument of appellant Bank misses the point. The
Court of Appeals did not hold the Bank answerable for
negligence in failing to collect from the principal debtor but
for its neglect in collecting the sums due to the debtor from
the Bureau of Public Works, contrary to its duty as holder
of an exclusive and irrevocable power of attorney to make
such collections, since an agent is required to act with the
care of a good father of a family (Civ. Code, Art. 1887) and
becomes liable for the damages which the principal may
suffer through his nonperformance (Civ. Code, Art. 1884).
Certainly, the Bank could not expect that the Bank would
diligently perform its duty under its power of attorney, but
because they could not have collected from the Bureau even
if they had attempted to do so. It must not be forgotten that
the Banks power to collect was expressly made irrevocable,
so that the Bureau of Public Works could very well refuse
to make payments to the principal debtor itself, and a
fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional secu
780

Inc.
rity, still, by allowing the assigned funds to be exhausted

without notifying the surety, the Bank deprived the former
of any possibility of recoursing against that security. The
Bank thereby exonerated the surety, pursuant to Article
2080 of the Civil Code:
ART. 2080.The guarantors, even though they be solidary, are

released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages and
preferences of the latter. (Italics supplied.)
The appellant points out to its letter of demand, Exhibit

K, addressed to the Bureau of Public Works, on May 5,
1949, and its letter to ATACO, Exhibit G, informing the
debtor that as of its date, October 31, 1949, its outstanding
balance was P156,374.83. Said Exhibit G has no bearing
on the issue whether the Bank has exercised due diligence
in collecting from the Bureau of Public Works, since the
letter was addressed to ATACO, and the funds were to
come from elsewhere. As to the letter of demand on the
Public Works office, it does not appear that any reply
thereto was made nor that the demand was pressed, nor
that the debtor or the surety were ever apprised that
payment was not being made. The fact remains that
because of the Banks inactivity the other creditors were
enabled to collect P173,870.31, when the balance due to
appellant Bank was only P158,563.18. The finding of
negligence made by the Court of Appeals is thus not only
conclusive on us but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason
it advanced in support of the decision now under appeal,
because the rules on application of payments, giving
preference to secured obligations are only operative in
cases where there are several distinct debts, and not where
there is only one that is partially secured, the error is of no
importance, since the principal reason based on the Banks
negligence furnishes adequate support to the decision of
the Court of Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with
costs against appellant Philippine National Bank.
781
VOL. 14, JULY 30, 1965 781

Free Employees and Workers Asso. (FEWA) vs. Court of
Industrial Relations
Bengzon, C.J., Concepcion, Paredes, Dizon, Regala,

Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.
Barrera, J., on leave, did not take part
Decision affirmed.
o0o

*
G.R. No. 113931. May 6, 1998.
E. ZOBEL, INC., petitioner, vs. THE COURT OF

APPEALS, CONSOLIDATED BANK AND TRUST
CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.
Obligations Contracts Surety Guaranty Words and Phrases

Surety and Guaranty, Explained.A contract of surety is an
accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the
obligation if the debtor does not. A contract of guaranty, on the
other hand, is a collateral undertaking to pay the debt of another
in case the latter does not pay the debt.
Same Same Same Same Same Surety and Guaranty,

Distinguished Simply put, a surety is distinguished from a
guaranty in that a guarantor is the insurer of the solvency of the
debtor and
_______________
* SECOND DIVISION.
E. Zobel, Inc. vs. Court of Appeals
thus binds himself to pay if the principal is unable to pay while a

surety is the insurer of the debt, and he obligates himself to pay if
the principal does not pay.Strictly speaking, guaranty and
surety are nearly related, and many of the principles are common
to both. However, under our civil law, they may be distinguished
thus: A surety is usually bound with his principal by the same
http://central.com.ph/sfsreader/session/0000015cda3a3d70001b6c06003600fb002c009e/t/?o=False 1/12
instrument, executed at the same time, and on the same

consideration. He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of notice of
the default of the principal, no matter how much he may be
injured thereby. On the other hand, the contract of guaranty is
the guarantors own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of the
principal, and is often supported on a separate consideration from
that supporting the contract of the principal. The original contract
of his principal is not his contract, and he is not bound to take
notice of its nonperformance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal. Simply put, a
surety is distinguished from a guaranty in that a guarantor is the
insurer of the solvency of the debtor and thus binds himself to pay
if the principal is unable to pay while a surety is the insurer of the
debt, and he obligates himself to pay if the principal does not pay.
Same Same Same Same Same The use of the term

guarantee does not ipso facto mean that the contract is one of
guarantyauthorities recognize that the word guarantee is
frequently employed in business transactions to describe not the
security of the debt but an intention to be bound by a primary or
independent obligation.The use of the term guarantee does not
ipso facto mean that the contract is one of guaranty. Authorities
recognize that the word guarantee is frequently employed in
business transactions to describe not the security of the debt but
an intention to be bound by a primary or independent obligation.
As aptly observed by the trial court, the interpretation of a
contract is not limited to the title alone but to the contents and
intention of the parties.
Same Same Same Same Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not as a
guarantor.Having thus established that petitioner is a surety,
Article 2080 of
VOL. 290, MAY 6, 1998 3
the Civil Code, relied upon by petitioner, finds no application to

the case at bar. In Bicol Savings and Loan Association vs.
Guinhawa, we have ruled that Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not as a
guarantor.
Same Same Same Same Chattel Mortgages A creditors

failure to register the chattel mortgage did not release a guarantor
from his obligation where in the Continuing Guaranty the latter
bound itself to the contract irrespective of the existence of any
collateral.But even assuming that Article 2080 is applicable,
SOLIDBANKs failure to register the chattel mortgage did not
release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound
itself to the contract irrespective of the existence of any collateral.
It even released SOLIDBANK from any fault or negligence that
may impair the contract.

Court of Appeals.

Herrera, Teehankee & Faylona Law Offices for
petitioner.
De los Reyes, Banaga, Briones & Associates for
SOLIDBANK.
MARTINEZ, J.:
This petition1 for review on certiorari seeks the reversal of

the decision of the Court of Appeals dated July 13, 1993
which affirmed the Order of the Regional Trial Court of
Manila, Branch 51, denying petitioners Motion
2
to Dismiss
the complaint, as well as the Resolution dated February
15, 1994 denying the motion for reconsideration thereto.
_______________
1 Annex I, p. 80, Rollo The decision was penned by Justice Ma. Alicia
AustriaMartinez and concurred in by Justice Vicente V. Mendoza and
Justice Alfredo L. Benipayo.
2 Annex J, p. 91, ibid.

The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing

business under the name Agro Brokers, applied for a loan
with respondent Consolidated Bank and Trust Corporation
(now SOLIDBANK) in the amount of Two Million Eight
Hundred Seventy Five Thousand Pesos (P2,875,000.00) to
finance 3the purchase of two (2) maritime barges and one
tugboat which would be used in their molasses business.
The loan was granted subject to the condition that
respondent spouses execute a chattel mortgage over the
three (3) vessels to be acquired and that a continuing
guarantee be executed by Ayala International Philippines,
Inc., now herein petitioner E. Zobel, Inc., in favor of
SOLIDBANK. The respondent spouses agreed to the
arrangement. Consequently,
4
a chattel mortgage and a
Continuing Guaranty were executed.
Respondent spouses defaulted in the payment of the
entire obligation upon maturity. Hence, on January 31,
1991, SOLIDBANK filed a complaint for sum of money
with a prayer for a writ of preliminary attachment, against
respondents spouses and petitioner. The case was docketed
as Civil Case No. 9155909 in the Regional Trial Court of
Manila.
Petitioner moved to dismiss the complaint on the ground
that its liability as guarantor of the loan was extinguished
pursuant to Article 2080 of the Civil Code of the
Philippines. It argued that it has lost its right to be
subrogated to the first chattel mortgage in view of
SOLIDBANKs failure to register the chattel mortgage with
the appropriate government agency.
SOLIDBANK opposed the motion contending that
Article 2080 is not applicable because petitioner is not a
guarantor but a surety.
On February 18, 1993, the trial court issued an Order,
portions of which reads:
_______________
3 Annex A, p. 39, Rollo.

4 Annex B, pp. 4142.
VOL. 290, MAY 6, 1998 5

After a careful consideration of the matter on hand, the Court

finds the ground of the motion to dismiss without merit. The
document referred to as Continuing Guaranty dated August 21,

1985 (Exh. 7) states as follows:
For and in consideration of any existing indebtedness to you of Agro

Brokers, a single proprietorship owned by Mr. Raul Claveria for the
payment of which the undersigned is now obligated to you as surety and
in order to induce you, in your discretion, at any other manner, to, or at
the request or for the account of the borrower, x x x
The provisions of the document are clear, plain and explicit.

Clearly therefore, defendant E. Zobel, Inc. signed as surety.
Even though the title of the document is Continuing Guaranty,
the Courts interpretation is not limited to the title alone but to
the contents and intention of the parties more specifically if the
language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses and Zobel)
to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank
inasmuch as the said loan is covered by the Continuing Guaranty
by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition
of the guaranty. In its letter, it said that because of the
Continuing Guaranty in favor of the plaintiff the chattel mortgage
is rendered unnecessary and redundant.
With regard to the claim that the failure of the plaintiff to
register the chattel mortgage with the proper government agency,
i.e. with the Office of the Collector of Customs or with the
Register of Deeds makes the obligation a guaranty, the same
merits a scant consideration and could not be taken by this Court
as the basis of the extinguishment of the obligation of the
defendant corporation to the plaintiff as surety. The chattel
mortgage is an additional security and should not be considered
as payment of the debt in case of failure of payment. The same is
true with the failure to register, extinction of the liability would
not lie.
WHEREFORE, the Motion to Dismiss is hereby denied and
defendant E. Zobel, Inc., is ordered to file its answer to the
complaint5
within ten (10) days from receipt of a copy of this
Order.
_______________
5 Annex G, pp. 7075, Rollo.

Petitioner moved6
for reconsideration but was denied on
April 26, 1993.
Thereafter, petitioner questioned said Orders before the
respondent Court of Appeals, through a petition for
certiorari, alleging that the trial court committed grave
abuse of discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the
assailed decision the dispositive portion of which reads:
WHEREFORE, finding that respondent Judge has not committed

any grave abuse of discretion in issuing the herein assailed
orders, We hereby DISMISS the petition.
A motion for reconsideration filed by petitioner was denied

for lack of merit on February 15, 1994.
Petitioner now comes to us via this petition arguing that
the respondent Court of Appeals erred in its finding: (1)
that Article 2080 of the New Civil Code which provides:
The guarantors, even though they be solidary, are released
from their obligation whenever by some act of the creditor
they cannot be subrogated to the rights, mortgages and
preferences of the latter, is not applicable to petitioner (2)
that petitioners obligation to respondent SOLIDBANK
under the continuing guaranty is that of a surety and (3)
that the failure of respondent SOLIDBANK to register the
chattel mortgage did not extinguish petitioners liability to
respondent SOLIDBANK.
We shall first resolve the issue of whether or not
petitioner under the Continuing Guaranty obligated itself
to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a
person binds himself for another already bound, and agrees
with7 the creditor to satisfy the obligation if the debtor does
not. A contract of guaranty, on the other hand, is a
collateral
_______________
6 Annex H, p. 77, ibid.

7 Bouviers Law Dictionary, Vol. I, Eighth Edition, p. 1386 Hope vs.
Board, 43 La. Ann. 738, 9 South. 754.
VOL. 290, MAY 6, 1998 7

undertaking to pay the 8

debt of another in case the latter
does not pay the debt.
Strictly speaking, guaranty and surety are nearly
related, and many of the principles are common to both.
However, under our civil law, they may be distinguished
thus: A surety is usually bound with his principal by the
same instrument, executed at the same time, and on the
same consideration. He is an original promissor and debtor
from the beginning, and is held, ordinarily, to know every
default of his principal. Usually, he will not be discharged,
either by the mere indulgence of the creditor to the
principal, or by want of notice of the default of the
principal, no matter how much he may be injured thereby.
On the other hand, the contract of guaranty is the
guarantors own separate undertaking, in which the
principal does not join. It is usually entered into before or
after that of the principal, and is often supported on a
separate consideration from that supporting the contract of
the principal. The original contract of his principal is not
his contract, and he is not bound to take notice of its non
performance. He is often discharged by the mere
indulgence of the creditor to the principal, and is usually9
not liable unless notified of the default of the principal.
Simply put, a surety is distinguished from a guaranty in
that a guarantor is the insurer of the solvency of the debtor
and thus binds himself to pay if the principal is unable to
pay while a surety is the insurer of the debt, and 10
he
obligates himself to pay if the principal does not pay.
Based on the aforementioned definitions, it appears that
the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a Continuing
Guaranty, is a contract of surety. The terms of the
contract categorically obligates petitioner as surety to
induce SOLIDBANK to extend credit
_______________
8 Ibid. Shaw, C.J. Dole vs. Young, 24 Pick. (Mass.), 252.

9 Brandt, Surety and Guaranty cited in Bouviers Law Dictionary,
supra, p. 1386.
10 Machetti vs. Hospicio, 43 Phil. 297.

to respondent spouses. This can be seen in the following

stipulations:
For and in consideration of any existing indebtedness to you of

AGRO BROKERS, a single proprietorship owned by MR. RAUL P.
CLAVERIA, of legal age, married and with business address x x x
(hereinafter called the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make
any loans or advances evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other instruments or
evidences of indebtedness x x upon which the Borrower is or may
become liable as maker, endorser, acceptor, or otherwise, the
undersigned agrees to guarantee, and does hereby guarantee, the
punctual payment, at maturity or upon demand, to you of any and
all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become
due or owing to you by the Borrower, together with any and all
expenses which may be incurred by you in collecting all or any
such instruments or other indebtedness or obligations
hereinbefore referred to, and or in enforcing any rights hereunder,
and also to make or cause any and all such payments to be made
strictly in accordance with the terms and provisions of any
agreement (g), express or implied, which has (have) been or may
hereafter be made or entered into by the Borrower in reference
thereto, regardless of any law, regulation or decree, now or
hereafter in effect which might in any manner affect any of the
terms or provisions of any such agreement(s) or your right with
respect thereto as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner of payment
by the Borrower of any such instruments, obligations or
indebtedness x x x (Italics Ours)
One need not look too deeply at the contract to determine

the nature of the undertaking and the intention of the
parties. The contract clearly disclose that petitioner
assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor.
It bound itself jointly and severally to the obligation with
the respondent spouses.
9
VOL. 290, MAY 6, 1998 9
In fact, SOLIDBANK need not resort to all other legal

remedies or exhaust respondent spouses properties before
it can hold petitioner liable for the obligation. This can be
gleaned from a reading of the stipulations in the contract,
to wit:
x x x If default be made in the payment of any of the instruments,

indebtedness or other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the undersigned should die,
dissolve, fail in business or become insolvent, x x x, or if any funds
or other property of the Borrower, or of the undersigned which may
be or come into your possession or control or that of any third party
acting in your behalf as aforesaid should be attached or
distrained, or should be or become subject to any mandatory order
of court or other legal process, then, or any time after the
happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at your
option become (for the purpose of this guaranty) due and payable
by the undersigned forthwith without demand of notice, and full
power and authority are hereby given you, in your discretion, to
sell, assign and deliver all or any part of the property upon which
you may then have a lien hereunder at any brokers board, or at
public or private sale at your option, either for cash or for credit or
for future delivery without assumption by you of credit risk, and
without either the demand, advertisement or notice of any kind,
all of which are hereby expressly waived. At any sale hereunder,
you may, at your option, purchase the whole or any part of the
property so sold, free from any right of redemption on the part of
the undersigned, all such rights being also hereby waived and
released. In case of any sale and other disposition of any of the
property aforesaid, after deducting all costs and expenses of every
kind for care, safekeeping, collection, sale, delivery or otherwise,
you may apply the residue of the proceeds of the sale and other
disposition thereof, to the payment or reduction, either in whole or
in part, of any one or more of the obligations or liabilities
hereunder of the undersigned whether or not except for
disagreement such liabilities or obligations would then be due,
making proper allowance or interest on the obligations and
liabilities not otherwise then due, and returning the overplus, if
any, to the undersigned all without prejudice to your rights as
against the undersigned with respect to any and all amounts
which may be or remain unpaid on any of the obligations or
liabilities aforesaid at any time(s)
x x x x x x x x x
10

Should the Borrower at this or at any future time furnish, or

should be heretofore have furnished, another surety or sureties to
guarantee the payment of his obligations to you, the undersigned
hereby expressly waives all benefits to which the undersigned
might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under
any and all circumstances being joint and several (Italics Ours)
The use of the term guarantee does not ipso facto mean
that the contract is one of guaranty. Authorities recognize
that the word guarantee is frequently employed in
business transactions to describe not the security of the
debt but an intention11 to be bound by a primary or
independent obligation. As aptly observed by the trial
court, the interpretation of a contract is not limited to the
title alone but to the contents and intention of the parties.
Having thus established that petitioner is a surety,
Article 2080 of the Civil Code, relied upon by petitioner,
finds no application to the case at bar.
12
In Bicol Savings and
Loan Association vs. Guinhawa, we have ruled that
Article 2080 of the New Civil Code does not apply where
the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable,
SOLIDBANKs failure to register the chattel mortgage did
not release petitioner from the obligation. In the
Continuing Guaranty executed in favor of SOLIDBANK,
petitioner bound itself to the contract irrespective of the
existence of any collateral. It even released SOLIDBANK
from any fault or negligence that may impair the contract.
The pertinent portions of the contract so provides:
x x x the undersigned (petitioner) who hereby agrees to be and

remain bound upon this guaranty, irrespective of he existence,
value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release,
sale, applica
_______________
11 24 Am. Jur. 876 cited in De Leon, Credit Transactions, 1984 Ed., p. 187.
12 188 SCRA 647.
11
VOL. 290, MAY 6, 1998 11
tion, renewal or extension, and notwithstanding also that all

obligations of the Borrower to you outstanding and unpaid at any
time(s) may exceed the aggregate principal sum herein above
prescribed.
This is a Continuing Guaranty and shall remain in full force
and effect until written notice shall have been received by you
that it has been revoked by the undersigned, but any such notice
shall not be released the undersigned from any liability as to any
instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have
any interest, at the time of the receipt of such notice. No act or
omission of any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall same be affected by
any change which may arise by reason of the death of the
undersigned, of any partner(s) of the undersigned, or of the
Borrower, or of the accession to any such partnership of any one
or more new partners. (Italics supplied)
In fine, we find the petition to be without merit as no

reversible error was committed by respondent Court of
Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of
Appeals is hereby AFFIRMED. Costs against the
petitioner.
SO ORDERED.
Regalado (Chairman), Melo and Puno, JJ., concur.

Mendoza, J., No part, having concurred in the decision
of the Court of Appeals when I was a member of that court.
Judgment affirmed.
Notes.Where obligee has accepted the surety bond, it

becomes valid and enforceable irrespective of whether or
not the premium has been paid by the obligor to the surety.
(Philippine Pryce Assurance Corporation vs. Court of
Appeals, 230 SCRA 164 [1994])
The consideration necessary to support a surety
obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient
a guarantor or surety is bound by the same consideration
that makes the contract
12

Dagsaan vs. Conag
effective between the principal parties thereto. (Willex

Plastic Industries Corporation vs. Court of Appeals, 256
SCRA 478 [1996])
o0o
VOL. 138, SEPTEMBER 10, 1985 489

Duran vs. Intermediate Appellate Court
No. L64159. September 10, 1985.*
CIRCE S. DURAN and ANTERO S. GASPAR, petitioners,

vs. INTERMEDIATE APPELLATE COURT, ERLINDA B.
MARCELOTIANGCO and RESTITUTO TIANGCO,
respondents.
Civil Law Land Titles Mortgages Public Documents,

Presumption of regularity of public documents Fraudulent and
forged document of sale may become the root of a valid title if the
certificate of title had already been transferred from the name of
the true owner to the name indicated in the forger.With respect
to the issue as to whether the signature of petitioner Circe S.
Duran in the Deed of Sale is a forgery or not, respondent
appellate court held the same to be genuine because there is the
presumption of regularity in the case of a public document and
the fact that Circe has not been able to satisfactorily prove that
she was in the United States at the time the deed was executed in
1963. Her return in 1966 does not prove she was not here also in
1963, and that she did not leave shortly after 1963. She should
have presented her old passport, not her new one. But even if the
signatures were a forgery, and the sale would be regarded as void,
still it is Our opinion that the Deed of Mortgage is VALID, with
respect to the mortgagees, the defendantsappellants. While it is
true that under Art. 2085 of the Civil Code, it is essential that the
mortgagor be the absolute owner of the property mortgaged, and
while as between the daughter and the mother, it was the
daughter who still owned the lots, STILL insofar as innocent third
persons are concerned the owner was already the mother (Fe S.
Duran) inasmuch as she had already become the registered owner
(Transfer Certificates of Title Nos. 2418 and 2419). The
mortgagee had the right to rely upon what appeared in the
certificate of title, and did not have to inquire further. If the rule
were otherwise, the efficacy and conclusiveness of Torrens
Certificate of Titles would be futile and nugatory. Thus the rule is
simple: the fraudulent and forged document of sale may become
the root of a valid title if the certificate has already been
transferred from the name of the true owner to the name
http://central.com.ph/sfsreader/session/0000015cda3c3931d521bdb0003600fb002c009e/t/?o=False 1/9
indicated by the forger (See De la Cruz v. Fabie, 35 Phil. 144

Blondeau, et al. v. Nano et al., 61 Phil. 625 Fule et al. v. Legare
et al., 7 SCRA 351 see also Sec. 55 of Act No. 496, the Land
Registration Act). The fact that at the time of the foreclosure sale
proceedings
_________________
* FIRST DIVISION.
490
(197072) the mortgagees may have already known of the

plaintiffs claim is immaterial. What is important is that at the
time the mortgage was executed, the mortgagees in good faith
actually believed Fe S. Duran to be the owner, as evidenced by the
registration of the property in the name of said Fe S. Duran (pp.
146147, Rollo).
Same Same Same Same Same Same Good faith, concept
of Proof of good faith Reliance on certificate of title sufficient,
even if the sale was void, as the functionings of the Torrens system
of registration is involved.Guided by previous decisions of this
Court, good faith consists in the possessors belief that the person
from whom he received the thing was the owner of the same and
could convey his title (Arriola vs. Gomez dela Serna, 14 Phil. 627).
Good faith, while it is always to be presumed in the absence of
proof to the contrary, requires a wellfounded belief that the
person from whom title was received was himself the owner of the
land, with the right to convey it (Santiago vs. Cruz, 19 Phil. 148).
There is good faith where there is an honest intention to abstain
from taking any unconscientious advantage from another (Fule
vs. Legare, 7 SCRA 351). Otherwise stated, good faith is the
opposite of fraud and it refers to the state of mind which is
manifested by the acts of the individual concerned. In the case at
bar, private respondents, in good faith relied on the certificate of
title in the name of Fe S. Duran and as aptly stated by respondent
appellate court [e]ven on the supposition that the sale was void,
the general rule that the direct result of a previous illegal contract
cannot be valid (on the theory that the spring cannot rise higher
than its source) cannot apply here for We are confronted with the
functionings of the Torrens System of Registration. The doctrine
to follow is simple enough: a fraudulent or forged document of sale

may become the ROOT of a valid title if the certificate of title has
already been transferred from the name of the true owner to the
name of the forger or the name indicated by the forger.
Same Same Same Where innocent third persons like
mortgagees relying on the certificate of title acquire rights over the
property, their rights cannot be disregarded.Thus, where
innocent third persons relying on the correctness of the certificate
of title issued, acquire rights over the property, the court cannot
disregard such rights and order the total cancellation of the
certificate for that would impair public confidence in the
certificate of title otherwise everyone dealing with property
registered under the torrens system would have to inquire in
every instance as to whether the title had been regularly or
irregularly issued by the court. Indeed, this is con
491
VOL. 138, SEPTEMBER 10, 1985 491
trary to the evident purpose of the law. Every person dealing with
registered land may safely rely on the correctness of the
certificate of title issued therefor and the law will in no way oblige
him to go behind the certificate to determine the condition of the
property. Stated differently, an innocent purchaser for value
relying on a torrens title issued is protected. A mortgagee has the
right to rely on what appears in the certificate of title and, in the
absence of anything to excite suspicion, he is under no obligation
to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate.
Same Same Same Estoppel by laches Failure of petitioners
in not promptly bringing a suit to question the deed of sale of the
properties because the signature of the vendee was allegedly a
forgery, fatal to their cause.Likewise, We take note of the
finding and observation of respondent appellate court in that
petitioners were guilty of estoppel by laches in not bringing the
case to court within a reasonable period. Antero Gaspar, husband
of Circe, was in the Philippines in 1964 to construct the
apartment on the disputed lots. This was testified to by Circe
herself (tsn., p. 41, Nov. 27, 1973). In the process of construction,
specifically in the matter of obtaining a building permit, he could
have discovered that the deed of sale sought to be set aside had
been executed on May 13, 1963 (the building permit needed an
application by the apparent owner of the land, namely, Circes
mother, Fe S. Duran). And then again both plaintiffs could have

intervened in the foreclosure suit but they did not. They kept
silent until almost the last moment when they finally decided
shortly before the sheriffs sale, to file a thirdparty claim. Clearly,
the plaintiffs can be faulted for their estoppel by laches.
PETITION to review the decision of the Intermediate

Appellate Court.
RELOVA, J.:
The respondent then Court of Appeals rendered judgment,

modifying the decision of the then Court of First Instance
of Rizal, which reads as follows:
(1) the complaint of the plaintiffs (herein petitioners) is

hereby DISMISSED
492

(2) the defendantsappellants spouses Erlinda B.

Marcelo Tiangco and Restitute Tiangco (herein
private respondents) are hereby declared the lawful
owners of the two (2) parcels of land and all the
improvements thereon including the 12door
apartment thereon described in the complaint, in
the counterclaim, in the crossclaim, and in the
Sheriffs Certificate of Sale
(3) the plaintiffsappellants and the defendantappellee
Fe S. Duran are hereby ordered to deliver to (the
Tiangcos) the two parcels of land and all the
improvements thereon including the 12door
apartment thereon, subject matter of the complaint,
counterclaim, and crossclaim, and in the Sheriffs
Certificate of Sale
(4) the plaintiffsappellants and the defendantappellee
Fe S. Duran are hereby ordered to pay solidarily to
the Tiangcos the sum of Two Thousand Four
Hundred Pesos (P2,400) a month from May 16,
1972 until delivery of possession of the properties in
question to said Tiangco spouses, representing
rentals collected by plaintiffsappellants and
defendantappellee Fe S. Duran
(5) the plaintiffsappellants and defendantappellee Fe

S. Duran are hereby ordered to pay solidarily to the
spouses Tiangco the sum of Twenty Thousand Pesos
(P20,000) as damages for attorneys fees, and the
sum of TwentyFive Thousand Pesos (P25,000) for
moral damages, and the costs. (pp. 149150, Rollo)
The antecedent facts showed that petitioner Circe S. Duran

owned two (2) parcels of land (Lots 5 and 6, Block A, Psd
32780) covered by Transfer Certificate of Title No. 1647 of
the Register of Deeds of Caloocan City which she had
purchased from the Moja Estate. She left the Philippines in
June 1954 and returned in May 1966.
On May 13, 1963, a Deed of Sale of the two lots
mentioned above was made in favor of Circes mother, Fe S.
Duran who, on December 3, 1965, mortgaged the same
property to private respondent Erlinda B. MarceloTiangco.
When petitioner Circe S. Duran came to know about the
mortgage made by her mother, she wrote the Register of
Deeds of Caloocan City informing the latter that she had
not given her mother any authority to sell or mortgage any
of her properties in the Philippines. Failing to get an
answer from the registrar, she returned to the Philippines.
Meanwhile, when her mother, Fe S. Duran, failed to
redeem the mortgage properties, foreclosure proceedings
were initiated by private respondent Erlinda B. Marcelo
493
VOL. 138, SEPTEMBER 10, 1985 493

Tiangco and, ultimately, the sale by the sheriff and the

issuance of Certificate of Sale in favor of the latter.
Petitioner Circe S. Duran claims that the Deed of Sale in
favor of her mother Fe S. Duran is a forgery, saying that at
the time of its execution in 1963 she was in the United
States. On the other hand, the adverse party alleges that
the signatures of Circe S. Duran in the said Deed are
genuine and, consequently, the mortgage made by Fe S.
Duran in favor of private respondent is valid.
With respect to the issue as to whether the signature of
petitioner Circe S. Duran in the Deed of Sale is a forgery or
not, respondent appellate court held the same to be
genuine because there is the presumption of regularity in
the case of a public document and the fact that Circe has
not been able to satisfactorily prove that she was in the
United States at the time the deed was executed in 1963.
Her return in 1966 does not prove she was not here also in
1963, and that she did not leave shortly after 1963. She
should have presented her old passport, not her new one.
But even if the signatures were a forgery, and the sale
would be regarded as void, still it is Our opinion that the
Deed of Mortgage is VALID, with respect to the
mortgagees, the defendantsappellants. While it is true
that under Art. 2085 of the Civil Code, it is essential that
the mortgagor be the absolute owner of the property
mortgaged, and while as between the daughter and the
mother, it was the daughter who still owned the lots,
STILL insofar as innocent third persons are concerned the
owner was already the mother (Fe S. Duran) inasmuch as
she had already become the registered owner (Transfer
Certificates of Title Nos. 2418 and 2419). The mortgagee
had the right to rely upon what appeared in the certificate
of title, and did not have to inquire further. If the rule were
otherwise, the efficacy and conclusiveness of Torrens
Certificate of Titles would be futile and nugatory. Thus the
rule is simple: the fraudulent and forged document of sale
may become the root of a valid title if the certificate has
already been transferred from the name of the true owner
to the name indicated by the forger (See De la Cruz v.
Fabie, 35 Phil. 144 Blondeau, et al. v. Nano et al., 61 Phil.
625 Fule et al. v. Legare et al., 7 SCRA 351 see also Sec.
55 of Act No. 496,
494

the Land Registration Act). The fact that at the time of the
foreclosure sale proceedings (197072) the mortgagees may
have already known of the plaintiffs claim is immaterial.
What is important is that at the time the mortgage was
executed, the mortgagees in good faith actually believed Fe
S. Duran to be the owner, as evidenced by the registration
of the property in the name of said Fe S. Duran (pp. 146
147, Rollo).
In elevating the judgment of the respondent appellate
court to Us for review, petitioners discussed questions of
law which, in effect and substance, raised only one issue
and that is whether private respondent Erlinda B. Marcelo
Tiangco was a buyer in good faith and for value.
Guided by previous decisions of this Court, good faith
consists in the possessors belief that the person from whom
he received the thing was the owner of the same and could
convey his title (Arriola vs. Gomez dela Serna, 14 Phil.

627). Good faith, while it is always to be presumed in the
absence of proof to the contrary, requires a wellfounded
belief that the person from whom title was received was
himself the owner of the land, with the right to convey it
(Santiago vs. Cruz, 19 Phil. 148). There is good faith where
there is an honest intention to abstain from taking any
unconscientious advantage from another (Fule vs. Legare,
7 SCRA 351). Otherwise stated, good faith is the opposite of
fraud and it refers to the state of mind which is manifested
by the acts of the individual concerned. In the case at bar,
private respondents, in good faith relied on the certificate
of title in the name of Fe S. Duran and as aptly stated by
respondent appellate court [e]ven on the supposition that
the sale was void, the general rule that the direct result of
a previous illegal contract cannot be valid (on the theory
that the spring cannot rise higher than its source) cannot
apply here for We are confronted with the functionings of
the Torrens System of Registration. The doctrine to follow
is simple enough: a fraudulent or forged document of sale
may become the ROOT of a valid title if the certificate of
title has already been transferred from the name of the
true owner to the name of the forger or the name indicated
by the forger. (p. 147, Rollo)
Thus, where innocent third persons relying on the
correct
495
VOL. 138, SEPTEMBER 10, 1985 495

ness of the certificate of title issued, acquire rights over the

property, the court cannot disregard such rights and order
the total cancellation of the certificate for that would
impair public confidence in the certificate of title otherwise
everyone dealing with property registered under the
torrens system would have to inquire in every instance as
to whether the title had been regularly or irregularly
issued by the court. Indeed, this is contrary to the evident
purpose of the law. Every person dealing with registered
land may safely rely on the correctness of the certificate of
title issued therefor and the law will in no way oblige him
to go behind the certificate to determine the condition of
the property. Stated differently, an innocent purchaser for
value relying on a torrens title issued is protected. A
mortgagee has the right to rely on what appears in the
certificate of title and, in the absence of anything to excite
suspicion, he is under no obligation to look beyond the

certificate and investigate the title of the mortgagor
appearing on the face of said certificate.
Likewise, We take note of the finding and observation of
respondent appellate court in that petitioners were guilty
of estoppel by laches in not bringing the case to court
within a reasonable period. Antero Gaspar, husband of
Circe, was in the Philippines in 1964 to construct the
apartment on the disputed lots. This was testified to by
Circe herself (tsn., p. 41, Nov. 27, 1973). In the process of
construction, specifically in the matter of obtaining a
building permit, he could have discovered that the deed of
sale sought to be set aside had been executed on May 13,
1963 (the building permit needed an application by the
apparent owner of the land, namely, Circes mother, Fe S.
Duran). And then again both plaintiffs could have
intervened in the foreclosure suit but they did not. They
kept silent until almost the last moment when they finally
decided, shortly before the sheriffs sale, to file a third
party claim. Clearly, the plaintiffs can be faulted for their
estoppel by laches. (p. 148, Rollo)
IN VIEW OF THE FOREGOING, We find the petition
without merit and hereby AFFIRMED in toto the decision
of respondent appellate court promulgated on August 12,
1981.
496

Philippine Ports Authority vs. Mendoza
SO ORDERED.

Gutierrez, Jr., De la Fuente and Patajo, JJ., concur.
Decision affirmed.
o0o
[No. 5741. March 13, 1911.]
ESTANISLAUA ARENAS ET AL., plaintiffs and appellees,

vs. FAUSTO O. RAYMUNDO, defendant and appellant.
1. CRIMES AGAINST PROPERTY CIVIL AND CRIMINAL

LIABILITY.The legal doctrines contained in the syllabi
of the decisions Nos. 3889 and 3890, rendered in the cases
of Varela vs. Matute and Varela vs. Finnick (9 Phil. Rep.,
479 and 482) are reproduced in this decision.
2. PLEDGE OF PROPERTY BELONGING TO ANOTHER

RIGHTS OF' THE PARTIES.He who is not the owner or
proprietor of the property pledged or mortgaged to
guarantee the fulfillment of a principal obligation, can not
legally constitute such a guaranty as may validly bind the
property in favor of his creditor, inasmuch as the creation
of a pledge or mortgage amounts to an actual transfer of
ownership, on the part of the pledgor or mortgagor, of the
property pledged or mortgaged, or of the rights concerned
in the guaranty.

Manila. Araullo, J.
A. D. Gibbs, for appellant.
Gabriel La O, for appellees.
47
VOL. 19, MARCH 13, 1911. 47

Arenas vs. Raymundo.
TORRES, J.:
This is an appeal filed by the defendant from a judgment of

conviction rendered by the Hon. Judge Araullo.
On the date of August 31, 1908, the attorneys for the
plaintiffs, Estanislaua Arenas and Julian La O, brought
suit against Fausto O. Raymundo, alleging, as a cause of
action, that Estanislaua Arenas was the owner and
http://central.com.ph/sfsreader/session/0000015cda3d5b0f89b5bd70003600fb002c009e/t/?o=False 1/11
proprietor of the jewelry described below with the

respective value thereof:
Two gold tamborin rosaries, without bow or P80

reliquary at P40 each ...........................................
One lady's comb for fastening the hair, made of gold 80
and silver, adorned with pearls of ordinary size and
many small pearls, one of which is missing
...........................................
One gold ring set with a diamond of ordinary size 1,000
...........................................
One gold bracelet with five small diamonds and 700
eight brillantitos de almendras
...........................................
One pair of gold picaporte earrings with two 1,100
diamonds of ordinary size and two small ones
...........................................
The plaintiffs alleged that the said jewelry, during the last
part of April or the beginning of May, 1908, was delivered
to Elena de Vega to sell on commission, and that the latter,
in turn, delivered it to Concepcion Perello, likewise to sell
on commission, but that Perello, instead of fulfilling her
trust, pledged the jewelry in the defendant's pawnshop,
situated at No. 33 Calle de Ilaya, Tondo, and appropriated
to her own use the money thereby obtained that on July
30, 1908, Concepcion Perello was prosecuted for estafa,
convicted, and the judgment became final that the said
jewelry was then under the control and in the possession of
the defendant, as a result of the pledge by Perello, and that
the former refused to deliver it to the plaintiffs, the owners
thereof, wherefore counsel for the plaintiffs asked that
judgment be rendered sentencing the defendant to make
restitution of the said jewelry and to pay the costs.
In the affidavit presented by the attorney for the
plaintiffs, dated September 2, 1908, after a statement and
description of the jewelry mentioned, it is set forth that the
48

defendant was retaining it for the reason given in the

complaint, and that it was not sequestrated for the purpose
of satisfying any tax or fine or by reason of any attachment
issued in compliance with any judgment rendered against

the plaintiffs' property.
In discharge of the writ of seizure issued for the said
jewelry on the 2d of September, 1908, aforementioned, the
sheriff of this city made the return that he had, on the
same date, delivered one copy of the bond and another of
the said writ to the defendant personally and, on the
petition and designation of the attorney for the plaintiffs,
proceeded to seize the jewelry described in the writ, taking
it out of the defendant's control, and held it in his
possession during the five days prescribed by law.
On the 15th of the same month and year, five days
having elapsed without the defendant's having given bond
before the court, the sheriff made delivery of all the jewelry
described in the said order to the attorney for the plaintiff,
to the latter's entire satisfaction, who with the sheriff
signed the return of the writ.
After the demurrer to the complaint had been overruled,
the defendant answered, forth that he d en ied ea ch and
all of the allegations thereof which were not specifically
admitted, explained, or qualified, and as a special defense
alleged that the jewelry, the subject matter of the
complaint, was pledged in his pawnshop by Concepcion
Perello, the widow of Pazos, as security for a loan of P1,524,
with the knowledge, consent, and mediation of Gabriel La
O, a son of the plaintiffs, as their agent, and that, in
consequence thereof, the said plaintiffs were estopped from
disavowing the action of the said Perello the defendant
therefore prayed that the complaint be dismissed and that
the jewelry seized at the instance 01 the plaintiffs, or the
amount of the loan made thereon, together with the
interest due, be returned to the defendant, with the costs of
the suit against the plaintiffs.
The case carne up for hearing on March 17, 1909, and,
after the presentation of oral testimony by both parties,
49
VOL. 19, MARCH 13, 1911. 49

the court, on June 23 of the same year, rendered judgment

sentencing the defendant to restore to the plaintiff spouses
the jewelry described in the complaint, the right being
reserved to the defendant to institute his action against the
proper party. The counsel for the defendant excepted to
this judgment, asked that the same be set aside, and a new
trial granted. This motion was denied, exception was taken
by the appellant, and the proper bill of exceptions was duly

approved, certified to, and forwarded to the clerk of this
court.
This is an action for the replevin of certain jewelry
delivered by its owner for sale on commission, and pledged
without his knowledge by Concepcion Perello in the
pawnshop of the defendant, Fausto O. Raymundo, who
refuses to deliver the said jewelry unless first redeemed.
The said Concepcion Perello, who appropriated to herself
the money derived from the pledging of the jewels before
mentioned, together with others, to the prejudice of their
owner Estanislaua Arenas, was prosecuted in the Court of
First Instance of this city in cause No. 3955 and sentenced
on July 30, 1908, to the penalty of one year eight months
and twentyone days of prisin correccional, to restore to
the offended party the jewelry specified in the complaint, or
to pay the value thereof, amounting to P8,660, or, in case of
insolvency, to suffer the corresponding subsidiary
imprisonment, and to pay the costs. This judgment is
attested by the certified copy attached under letter D to f
folio 26 of the record of the proceedings in the case of the
same plaintiff against Antonio Matutethe pledgee of the
other jewelry also appropriated by the said Concepcion
Perellowhich record forms a part of the evidence in this
cause.
Perello having pledged the jewelry in question to the
defendant Raymundo, and not having redeemed it by
paying him the amount "received, it follows that the
convicted woman, now serving the sentence imposed upon
her, could not restore the jewelry as ordered in that
judgment, which has become final by the defendant's
acquiescence.
50

Article 120 of the Penal Code prescribes:

"The restitution of the thing itself must be made, if
possible, with payment for deterioration or diminution of
value, to be appraised by the court.
"Restitution shall be made, even though the thing may
be in the possession of a third person, who had acquired it
in a legal manner, reserving, however, his action against
the proper person.
"This provision is not applicable to a case in which the
third person has acquired the thing in the manner and
with the requisites established by law to make it

unrecoverable."
The provisions contained in the first two paragraphs of
the preinserted article are based on the uncontrovertible
principle of justice that the party injured through a crime
has, as against all others, a preferential right to be
indemnified, or to have restored to him the thing of which
he was unduly deprived by criminal means.
In view of the harmonious relation between the different
codes in force in these Islands, it is natural and logical that
the aforementioned provision of the Penal Code, based on
the rule established in article 17 of the same, to wit, that
every person criminally liable for a crime or misdemeanor
is also civilly liable, should be in agreement and accordance
with the provisions of article 464 of the Civil Code which
prescribes:
"The possession of personal property, acquired in good
faith, is equivalent to a title thereto. However, the person
who has lost personal property or has been illegally
deprived thereof may recover it from whoever possesses it.
"If the possessor of personal property, lost or stolen, has
acquired it in good faith at a public sale, the owner can not
recover it without reimbursing the price paid therefor.
"Neither can the owner of things pledged in pawnshops,
established with the authorization of the Government,
recover them, whosoever may be the person who pledged
them, without previously refunding to the institution the
amount of the pledge and the interest due.
51
VOL. 19, MARCH 13, 1911. 51

"With regard to things acquired on exchange, or at fairs or

markets or from a merchant legally established and
usually employed in similar dealings, the provisions of the
Code of Commerce shall be observed."
On January 2, 1908, this court had occasion to decide,
among other cases, two which were entirely analogous to
the present one. They were No. 3889, Varela vs. Matute,
and No. 3890, Varela vs. Finnick (9 Phil. Rep., 479, 482).
In the decisions in both cases it appears that Nicolasa
Pascual received various jewels from Josefa Varela to sell
on commission and that, instead of fulfilling the trust or
returning the jewels to their owner, she pledged some of
them in the pawnshop of Antonio Matute and others in
that of H. J. Finnick and appropriated to herself the
amounts that she received, to the detriment of the owner of

the jewelry.
Tried for estafa in cause No. 2429, the said Pascual was
convicted and sentenced to the penalty of one year and
eleven months of prisin correccional, to restore to Varela.
the jewelry appropriated, or to pay the value thereof, and,
in case of insolvency, to subsidiary imprisonment this
judgment became final, whereupon the defendant began to
serve her sentence. The case just cited is identical to that of
Concepcion Perello.
Josefa Varela, in separate incidental proceedings,
demanded the restitution or delivery of possession of the
said jewelry the pledgees, the pawnbrokers, refused to
comply with her demand, alleging, among other reasons,
that they were entitled to possession. The two cases were
duly tried, and the Court of First Instance pronounced
judgment, supporting the plaintiff 's claims in each. Both
cases were appealed by the defendants, Matute and
Finnick, and this court affirmed the judgments on the same
grounds, with costs, and the decisions on appeal
established the following. legal doctrines:
"1. Crimes against property criminal and civil liability.
Where, in a proceeding instituted by reason of a crime
committed against property, the criminal liability of the
accused
52

has been declared. it follows that he shall also be held

civilly liable therefor, because every person who is
criminally responsible on account of a crime or midemeanor
is also civilly liable.
"2. Id. Recovery of property unlawfully in possession.
Whoever may have been deprived of his property in
consequence of a crime is entitled to the recovery thereof,
even if such property is in the possession of a third party
who acquired it by legal means other than those expressly
stated in article 464 of the Civil Code.
"3. Personal property title by possession.ln order that
the possession of personal property may be considered as a
title thereto it is indispensable that the same shall have
been acquired in good faith,
"4. Id. Ownership prescription.The ownership of
personal property prescribes in the manner and within the
time fixed by articles 1955 and 1962, in connection with

article 464, of the Civil Code."
In the cause prosecuted against Perello, as also in the
present suit, it was not proven that Estanislaua Arenas
authorized the former to pawn the jewelry given to her by
Arenas to sell on commission. Because of the mere f fact of
Perello's having been convicted and sentenced for estafa,
and for the very reason that she is now serving her
sentence, the rest of the dispositive part of the said
sentence must be complied with, that is, the jewelry
misappropriated must be restored to its owner, inasmuch
as it exists and has not disappeared this restitution must
be made, although the jewelry is found in the pawnshop of
Fausto O. Raymundo and the latter had acquired it by legal
means. Raymundo however retains his right to collect the
amounts delivered upon the pledge, by bringing action
against the proper party. This finding is in accord with the
provisions of the above article 120 of the Penal Code and
the first paragraph of article 464 of the Civil Code.
The aforementioned decision, No. 3890, Varela vs.
Finnick, recites, among other considerations, the following:
"The exception contained in paragraph 3 of said article
is
53
VOL. 19, MARCH 13 1911. 53

not applicable to the present case because a pawnshop does

not enjoy the privilege established by article 464 of the
Civil Code, The owner of the loan office of Finnick
Brothers, notwithstanding the fact that he acted in good
faith, did not acquire the jewels at a public sale it is not a
question of public property. securities, or other such effects,
the transfer, sale, or disposal of which is subject to the
provisions of the Code of Commerce. Neither does a
pawnshop enjoy the privilege granted to a monte de piedad
therefore, Josefa Varela, who lost said jewels and was
deprived of the same in consequence of a crime, is entitled
to the recovery thereof from the pawnshop of Finnick
Brothers, where they were pledged the latter can not
lawfully refuse to comply with the provisions of article 120
of the Penal Code, as it is a question of jewels which have
been misappropriated by the commission of the crime of
estafa, and the execution of the sentence which orders the
restitution of the jewels can not be avoided because of the
good faith with which the owner of the pawnshop acquired
them, inasmuch as they were delivered to the accused, who

was not the owner nor authorized to dispose of the same."
Even supposing that the defendant Raymundo had acted
in .good faith in accepting the pledge of the jewelry in
litigation, even then he would not be entitled to retain it
until the owner thereof reimburse him for the amount
loaned to the embezzler, since the said owner of the
jewelry, the plaintiff, did not make any contract with the
pledgee, that would obligate him to pay the amount loaned
to Perello, and the trial record does not disclose any
evidence, even circumstantial, that the plaintiff Arenas
consented to or had knowledge of the pledging of her
jewelry in the pawnshop of the defendant.
For this reason, and because Concepcion Perello was not
the legitimate owner of the jewelry which she pledged to
the defendant Raymundo, for a certain sum that she
received from the latter as a loan, the contract of pledge
entered into by both is, of course, null and void, and,
consequently the jewelry so pawned can not serve as
security for the
54

payment of the sum loaned, nor can the latter be collected

out of the value of the said jewelry.
Article 1857 of the Civil Code prescribes as one of the
essential requisites of the contracts of pledge and of
mortgage, that the thing pledged or mortgaged must belong
to the person who pledges or mortgages it. This essential
requisite for the contract of pledge between Perello and the
defendant being absent as the former was not the owner of
the jewelry given in pledge, the contract is as devoid of
value and force as if it had not been made, and as it was
executed with marked violation of an express provision of
the law, it can not confer upon the defendant any rights in
the pledged jewelry, nor impose any obligation toward him
on the part of the owner thereof, since the latter was
deprived of her possession by means of the illegal pledging
of the said jewelry, a criminal act.
Between the supposed good faith of the defendant
Raymundo and the undisputed good faith of the plaintiff
Arenas, the owner of the jewelry, neither law nor justice
permit that the latter, after being the victim of
embezzlement, should have to choose one of the two
extremes of a dilemma, both of which, without legal ground
or reason, are injurious and prejudicial to her interests and

rights, that is, she must either lose her jewelry or pay a
large sum received by the embezzler as a loan from the
defendant, when the plaintiff Arenas is not related to the
latter by any legal or contractual bond out of which legal
obligations arise.
Is it true that the plaintiffs' son, attorney Gabriel La O,
intervened and gave his consent when Concepcion Perello
pawned the jewelry in litigation with Fausto Raymundo for
P1,524? In view of the evidence offered by the trial record,
the answer is, of course, in the negative.
The parents of the attorney Gabriel La O being
surprised by the disagreeable news of the disappearance of
various jewels, amounting in value to more than P8,600,
delivered to Elena Vega for sale on commission and
misappropriated by Concepcion Perello, who received them
from Vega for
55
VOL. 19, MARCH 13, 1911. 55

the same purpose, it is natural that the said attorney,

acting in representation of his parents and as an interested
party, should have proceeded to ascertain the whereabouts
of the embezzled jewelry and to enter into negotiations
with the pawnshop of Fausto O. Raymundo, in whose
possession he had finally learned were to be found a part of
the embezzled jewels, as he had been informed by the said
Perello herself and although, at first, at the
commencement of his investigations, he met with
opposition on the part of the pledgee Raymundo, who
objected to showing him the jewels that he desired to see in
order to ascertain whether they were those embezzled and
belonging to his mother, the plaintiff Arenas, thanks to the
intervention of attorney Chicote and to the fact that they
succeeded in obtaining from the embezzler, among other
papers, the pawn ticket issued by Raymundo's pawnshop,
Exhibit E, of the date of May 4, 1908, folio 19 of the record
in the case against Matute, Gabriel La O succeeded in
getting the defendant to show him the jewelry described in
the said ticket together with other jewels that did not
belong to La O's mother, that had been given the defendant
by Ambrosia Capistrano, Perello's agent, in pledge or
security for a loan of P170.
Gabriel La O, continuing the search f or the other
missing jewelry belonging to his mother, found, that Fausto
O. Raymundo was in possession of it and had received it

from the same embezzler as security for a debt, although
the defendant Raymundo would not exhibit it until he
issued the pawn tickets corresponding to such jewels
therefore, at Raymundo's request, Perello, by means of the
document Exhibit C, signed by herself and bearing date of
June 10, 1908, folio 28 of the record, authorized her son
Ramon to get from the defendant, in her name, the pawn
tickets of the said other jewelry, for which such tickets had
not yet been issued Raymundo then wrote out the tickets
Exhibits L, LL, and M, all dated June 22, 1908, and found
on folios 20, 21, and 22 of the record of the aforesaid pro
56

Arenas vs. Raymundo,
ceedings against Matutein the presence of the attorney

Gabriel La O, who kept the said three pawn tickets, after
he had made sure that the jewels described therein and
which Raymundo, taking them out of his cabinet, exhibited
to him at the time, were among those embezzled from his
mother.
So that, when the three aforementioned pawn tickets,
Exhibits L, LL, and M, from the pawnshop of the
defendant, were made out, the latter already, and for some
time previous, had had in his possession as a pledge the
jewelry described in them, and the plaintiffs' son, naturally
desiring to recover his parents' jewelry, was satisfied for
the time being with keeping the three pawn tickets
certifying that such jewelry was pawned to the defendant.
Moreover, the record discloses no proof that the attorney
Gabriel La O consented to or took any part in the delivery
of the jewelry in question to the defendant as a pledge, and
both the said defendant, Raymundo, and the embezzler
Perello, averred in their respective testimony that the said
attorney La O had no knowledge of and took no part in the
pledging of the jewelry, and Perello further stated that she
had received all the money loaned to her by the defendant
Raymundo. (Folios 13 to 14, and 76 to 80 of the record in
the case against Matute.)
The business of pawnshops, in exchange for the high and
onerous interest which constitutes its enormous profits, is
always exposed to the contingency of receiving in pledge or
security for the loans, jewels and other articles that have
been robbed, stolen, or embezzled from their legitimate
owners and as the owner of the pawnshop accepts the
pledging of jewelry from the first bearer who offers the

same and asks for money on it, without assuring himself
whether such bearer is or is not the owner thereof, he can
not, by such procedure, expect from the law better and
more preferential protection than the owner of the jewels or
other articles, who was deprived thereof by means of a
crime and is entitled to be excused by thecourts.
57
VOL. 19, MARCH 16, 1911. 57

Lee Liong vs. Hizola.
Antonio Matute, the owner of another pawnshop, being

convinced that he was wrong, refrained from appealing
from the judgment wherein he was sentenced to return,
without redemption, to the plaintiffs, another jewel of great
value which had been pledged to him by the same Perello.
He undoubtedly had in mind some of the previous decisions
of this court, one of which was against himself.
For the foregoing reasons, whereby the errors attributed
to the judgment of the Court of First Instance have been
discussed and decided upon, and the said judgment being
in harmony with the law, the evidence and the merits of
the case, it is proper, in our opinion, to affirm the same, as
we hereby do, with the costs against the appellant. So
ordered.
Arellano, C. J., and Mapa, J., concur.

Carson, Moreland, and Trent, JJ., concur in the result.
Judgment affirmed.
_____________
[No. 3227. March 22, 1907.]
PEDRO ALCANTARA, plaintiff and appellee, vs.

AMBROSIO ALINEA ET AL., defendants and appellants.
1. CONTRACT LOAN.The fact of having entered into a

contract covering a loan, and at the same time agreeing to
sell a piece of property, the value of which is fixed as the
amount of money loaned, if, within a fixed time, such
amount loaned be not paid, does not produce any change
in the nature and legal terms of either of the contracts,
nor any essential defect which would tend 'to nullify the
same, inasmuch as the property is not thereby mortgaged,
nor has it been delivered by virtue of a contract of
antichresis, or of pledge, which is, as is known, made with
respect to and covers movable or personal property only.
112
Alcantara vs. Alinea Et Al.
2. "PACTUM COMMISSORIUM" LOAN.Neither does the

said loan coincide with the pactum commissorium referred
to in Law 41, title 5, and Law 12, title 12, of the fifth
Partida, and perhaps included in the prohibition and
declaration of nullity expressed in articles 1859 and 1884
of the Civil Code, inasmuch as said pactum presumes the
existence of the contracts of mortgage or pledge or that of
antichresis, none of which have concurred in the loan of
which mention is made herein.
3. OBLIGATIONS OF PARTIES TO CONTRACT.It is an

established doctrine of law and sustained by the settled
practice of the courts, that a man obligates himself to do
that to which he promises to be bound, because that which
is agreed to in a contract is the law between such
contracting parties.
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La Laguna.
S. D. Reyes, for appellants.
J. Gerona, for appellee.
TORRES, J.:
On the 13th day of March, 1905, the plaintiff filed a

complaint in the Court. of First Instance of La Laguna,
praying that judgment be rendered in his behalf ordering
the defendants to deliver to him the house and lot claimed,
and to pay him in addition thereto as rent the sum of 8
pesos per month from February of that year, and to pay the
costs of the action and the plaintiff alleged in effect that on
the 29th day of February, 1904, the defendants, Ambrosio
Alinea and Eudosia Belarmino, borrowed from him the sum
of 480 pesos, payable in January of said year 1905 under
the agreement that if, at the expiration of the said period,
said amount should not be paid it would be understood that
the house and lot, the house being constructed of strong
materials, owned by the said defendants and located in the
town of San Pablo on the street of the same name, Province
of La Laguna, be considered as absolutely sold to the
plaintiff for the said sum that the superficial extent and
boundaries of said property are described in the complaint
and that, notwithstanding that the time for the payment of
said sum has expired and
113
VOL. 8, MARCH 22, 1907 113

no payment has been made, the defendants refuse to

deliver to plaintiff the said property, openly violating that
which they contracted to do and depriving him to his loss of
the rents which plaintiff should receive, the same counting
from February, 1905.
The defendants, after the overruling of a demurrer to
the complaint herein, answered denying generally and
specifically all the allegations contained in the complaint,
except those which were expressly admitted, and alleged
that the amount claimed included the interest and that
'the principal borrowed was only 200 pesos and that the
interest was 280 pesos, although in drawing the document
by mutual consent of the parties thereto the amount of
indebtedness was made to appear in the sum of 480 pesos
and that as their special defense defendants alleged that

they offered to pay the plaintiff the sum of 480 pesos, but
the plaintiff had refused to accept the same, therefore they
persisted in making said offer and tender of payment,
placing at the disposal of the plaintiff the said 480 pesos
first tendered and .defendants asked for the costs of action.
After having taken the evidence of both parties and
attaching the documents presented in evidence to the
record, the judge on November 27, 1905, rendered a
judgment ordering the defendants to deliver to the plaintiff
the house and lot, the object of this litigation, and to pay
the costs of the action, not making any finding upon the
question of loss or damages by reason of the absence of
proof on these points. The defendants duly took exception
to this decision, and asked for a new trial of the case on the
ground that the findings of the court below in its decision
were plainly contrary to law, which motion was overruled
and from which ruling defendants also excepted.
We have in this case a contract of loan and a promise of
sale of a house and lot, the price of which should be the
amount loaned, if within a fixed period of time such
amount should not be paid by the debtorvendor of the
property to the creditorvendee of same.
Either one of the contracts are perfectly legal and both
114

are authorized respectively by articles 1451, 1740, and

1753, and those following, of the Civil Code. The fact that
the parties have agreed at the same time, in such a manner
that the fulfillment of the promise of sale would depend
upon the nonpayment or return of the amount loaned, has
not.produced any change in the nature and legal conditions
of either contract, or any essential defect which would tend
to nullify the same.
If the promise of sale is not vitiated because, according
to the agreement between the parties thereto, the price of
the same is to be the amount loaned and not repaid,
neither would the loan be null or illegal, for the reason that
the added agreement provides that in the event of failure of
payment the sale of the property as agreed will take effect,
the consideration being the amount loaned and not paid.
No article of the Civil Code, under the rules or regulations
of which such double contract was executed, prohibits
expressly, or by inference from any of its provisions, that
an agreement could not be made in the form in which the

same has been executed on the contrary, article 1278 of
the aforesaid code provides that "contracts shall be binding,
whatever may be the form in which they may have been
executed, provided the essential conditions required for
their validity exist." This legal prescription appears firmly
sustained by the settled practice of the courts.
The property, the sale of which was agreed to by the
debtors, does not appear mortgaged in favor of the creditor,
because in order to constitute a valid mortgage it is
indispensable that the instrument be registered in the
Register of Property, in accordance with article 1875 of the
Civil Code, and the document of contract, Exhibit A, does
not constitute a mortgage, nor could it possibly be a
mortgage, f or the reason that said document is not vested
with the character and conditions of a public instrument.
By the aforesaid document, Exhibit A, said property
could not be pledged, not being personal property, and
notwithstanding the said double contract the debtor
continued in possession thereof and the said property has
never been occupied by the creditor.
115
VOL. 8, MARCH 22, 1907 115

Neither was there ever any contract of antichresis by

reason of the said contract of loan, as is provided in articles
1881 and those following of the Civil Code, inasmuch as the
creditorplaintiff has never been in possession thereof, nor
has he enjoyed the said property, nor for one moment ever
received its rents therefore, there are no proper terms in
law, taking into consideration the terms of the conditions
contained in the aforesaid contract, whereby this court can
find that the contract was null, and under no consideration
whatever would it be just to apply to the plaintiff articles
1859 and 1884 of the same code,
The contract (pactum commissorium) referred to in Law
41, title 5, and Law 12, title 12, of the fifth Partida, and
perhaps included in the prohibition and declaration of
nullity expressed in articles 1859 and 1884 of the Civil
Code, indicates the existence of the contracts of mortgage
or of pledge or that of antichresis, none of which have
coincided in the loan indicated herein.
It is a principle in law, invariably applied by the courts
in the decisions of actions instituted in the matter of
compliance with obligations, that the will of the contracting
parties is the law of contracts and that a man obligates

himself to that to which be promises to be bound, a
principle in accordance with Law 1, title 1, book 10 of the
Novsima, Recopilacin, and article 1091 of the Civil Code.
That which is agreed to in a contract is law between the
parties, a doctrine established, among others, in judgments
of the supreme court of Spain of February 20, 1897, and
February 13, 1904.
It was agreed between plaintiff and defendants herein
that if defendants should not pay the loan of 480 pesos in
January, 1905, the property belonging to the defendants
and described in the contract should remain sold for the
aforesaid sum, and such agreement must be complied with,
inasmuch as there is no ground in law to oppose the
compliance with that which' has been agreed upon, having
been so acknowledged by the obligated parties.
" The supreme court of Spain, applying' the
aforementioned
116

laws of Spanish origin to a similar case, establishes in its

decision of January 16, 1872, the following legal doctrine
"Basing the complaint upon the obligation signed by the debtor,

who judicially recognized his signature and after confessing to
have received from the plaintiff a certain amount, binding himself
to return same to the satisfaction of the plaintiff within the term
of four years, or in case of default to transfer direct domain of the
properties described in the obligation and to execute the
necessary sale and the term having expired and the aforesaid
amount not having been paid, said plaintiff has his right free from
impediment to claim same against the heirs of the debtor."
The document of contract 'has been recognized by the

defendant Alinea and by the witnesses who signed same
with him, being therefore an authentic and efficacious
document, in accordance with article 1225 of the Civil
Code and as the amount loaned has not been paid and
continues in possession of the debtor, it is only just that the
promise of sale be carried into effect, and the necessary
instrument be executed by the vendees.
Therefore, by virtue of the reasons given above and
accepting the findings given in the judgment appealed
from, we affirm the said judgment herein, with the costs

against the appellants.
After the expiration of twenty days from the date of the
notification of this decision let judgment be entered in
accordance herewith and ten days thereafter let the case be
remanded to the court from whence it came for proper
action. So ordered.
Arellano, C. J., Mapa, Johnson, and Tracey, JJ.,

concur.
WILLARD, J., dissenting:
This contract violates the fundamental principle of the

Spanish law, which does not permit a debtor, at the time he
secures a loan of money, to make an agreement whereby
the mere failure to pay the loan at maturity shall divest
him irrevocably of .all his interest in the specific property
mentioned in the agreement without any right on .his part
117
VOL. 8, MARCH 22, 1907 117

United States vs. Goyenechea
to redeem or to have the property sold to pay the debt.

(Civil Code, arts. 1859, 1872, and 1884.) I therefore dissent,
Judgment affirmed.
_______________
VOL. 161, MAY 21, 1988 383

Uy Tong vs. Court of Appeals
*
No. L77465. May 21, 1988.
SPOUSES UY TONG & KHO PO GIOK, petitioners, vs.

HONORABLE COURT OF APPEALS, HONORABLE
BIENVENIDO C. EJERCITO, Judge of the Court of First
Instance of Manila, Branch XXXVII and BAYANIHAN
AUTOMOTIVE CORPORATION, respondents.
Civil Law Elements of Pactum Commissorium.The afore

quoted provision furnishes the two elements for pactum
commissorium to exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of
security for the payment of the principal obligation and (2) that
there should be a stipulation for an automatic appropriation by
the creditor of the thing pledged or mortgaged in the event of non
payment of the principal obligation within the stipulated period.
Same Same A perusal of the terms of the questioned

agreement evinces no basis for the application of the Pactum
Commissorium provision provided for by Art 2088 of the Civil
Code Reasons.A perusal of the terms of the questioned
agreement evinces no basis for the application of the pactum
commissorium provision. First, there is no indication of any
contract of mortgage entered into by the parties. It is a fact that
the parties agreed on the sale and purchase of trucks. Second,
there is no case of automatic appropriation of the property by
BAYANIHAN. When the SPOUSES defaulted in their payments
of the second and third installments of the trucks they purchased,
BAYANIHAN filed an action in court for specific performance.
The trial court rendered favorable judgment for BAYANIHAN
and ordered
_______________
* THIRD DIVISION.
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384
the SPOUSES to pay the balance of their obligation and in case of

failure to do so, to execute a deed of assignment over the property
involved in this case. The SPOUSES elected to execute the deed of
assignment pursuant to said judgment.
Same Same Same No automatic vesting of title on

Bayanihan because it took the intervention of the trial court to
exact fulfillment of the obligation.Clearly, there was no
automatic vesting of title on BAYANIHAN because it took the
intervention of the trial court to exact fulfillment of the obligation,
which, by its very nature is "... anathema to the concept of pacto
commissorio [Northern Motors, Inc. v. Herrera, G.R. No. L
32674, February 22, 1973, 49 SCRA 392]. And even granting that
the original agreement between the parties had the badges of
pactum commissorium, the deed of assignment does not suffer the
same fate as this was executed pursuant to a valid judgment in
Civil Case No. 80420 as can be gleaned from its very terms and
conditions.
PETITION to review the decision of the Court of Appeals.

Platon A. Baysa for petitioner.
Manuel T. Ubarra for respondents.
CORTS, J.:
In the present petition, petitioners assail the validity of a

deed of assignment over an apartment unit and the
leasehold rights over the land on which the building
housing the said apartment stands for allegedly being in
the nature of a pactum commissorium.
The facts are not disputed.
Petitioners Uy Tong (also known as Henry Uy) and Kho
Po Giok (SPOUSES) used to be the owners of Apartment
No. 307 of the Ligaya Building, together with the leasehold
right for ninetynine (99) years over the land on which the
building stands. The land is registered in the name of
Ligaya Investments, Inc. as evidenced by Transfer
Certificate of Title No. 79420 of the Registry of Deeds of the
City of Manila. It appears that Ligaya Investments, Inc.
owned the building which houses the apartment units but

sold Apartment No. 307 and leased a portion of the land in
which the building stands to the SPOUSES.
In February, 1969, the SPOUSES purchased from
private re
385
VOL. 161, MAY 21, 1988 385

spondent Bayanihan Automotive, Inc. (BAYANIHAN)

seven (7) units of motor vehicles for a total amount of
P47,700.00 payable in three (3) installments. The
transaction was evidenced by a written Agreement
wherein the terms of payment had been specified as
follows:
That immediately upon signing of this Agreement, the VENDEE

shall pay unto the VENDOR the amount of Seven Thousand
Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the
amount of Fifteen Thousand (P15,000.00) Pesos shall be paid on
or before March 30, 1969 and the balance of Twenty Five
Thousand (P25,000.00) Pesos shall be paid on or before April 30,
1969, the said amount again to be secured by another postdated
check with maturity on April 30, 1969 to be drawn by the
VENDEE
That it is fully understood that should the two (2)
aforementioned checks be not honored on their respective
maturity dates, herein VENDOR will give VENDEE another sixty
(60) days from maturity dates, within which to pay or redeem the
value of the said checks
That if for any reason the VENDEE should fail to pay her
aforementioned obligation to the VENDOR, the latter shall
become automatically the owner of the formers apartment which is
located at No. 307, Ligaya Building, Alvarado St., Binondo,
Manila, with the only obligation on its part to pay unto the
VENDEE the amount of Three Thousand Five Hundred Thirty
Five (P3,535.00) Pesos, Philippine Currency and in such event the
VENDEE shall execute the corresponding Deed of Absolute Sale in
favor of the VENDOR and/or Assignment of Leasehold Rights.
[Italics supplied]. (Quoted in Decision in Civil Case No. 80420,
Exhibit A" of Civil Case No. 131532].
After making a downpayment of P7,700.00, the SPOUSES

failed to pay the balance of P40,000.00. Due to these
unpaid balances, BAYANIHAN filed an action for specific
performance against the SPOUSES docketed as Civil Case

No. 80420 with the Court of First Instance of Manila.
On October 28, 1978, after hearing, judgment was
rendered in favor of BAYANIHAN in a decision the
WHEREFORE, judgment is hereby rendered, ordering the

defendants, jointly and severally, to pay the plaintiffs, the sum of
P40,000.00, with interest at the legal rate from July 1, 1970 until
full payment. In the event of their failure to do so within thirty
(30) days from notice of this judgment, they are hereby ordered to
execute the corresponding deed of absolute sale in favor of the
plaintiff and /or the
386

assignment of leasehold rights over the defendants apartment

located at 307 Ligaya Building, Alvarado Street, Binondo, Manila,
upon the payment by the plaintiff to the defendants of the sum of
P3,535.00. [Italics supplied].
Pursuant to said judgment, an order for execution pending

appeal was issued by the trial court and a deed of
assignment dated May 27, 1972, was executed by the
SPOUSES [Exhibit B", CFI Records, p. 127] over
Apartment No. 307 of the Ligaya Building together with
the leasehold right over the land on which the building
stands. The SPOUSES acknowledged receipt of the sum of
P3,000.00 more or less, paid by BAYANIHAN pursuant to
the said judgment.
Notwithstanding the execution of the deed of
assignment, the SPOUSES remained in possession of the
premises. Subsequently, they were allowed to remain in
the premises as lessees for a stipulated monthly rental
until November 30, 1972.
Despite the expiration of the said period, the SPOUSES
failed to surrender possession of the premises in favor of
BAYANIHAN. This prompted BAYANIHAN to file an
ejectment case against them in the City Court of Manila
docketed as Civil Case No. 240019. This action was
however dismissed on the ground that BAYANIHAN was
not the real party in interest, not being the owner of the
building.
On February 7, 1979, after demands to vacate the
subject apartment made by BAYANIHANs counsel was
again ignored by the SPOUSES, an action for recovery of

possession with damages was filed with the Court of First
Instance of Manila, docketed as Civil Case No. 121532
against the SPOUSES and impleading Ligaya Investments,
Inc. as party defendant. On March 17, 1981, decision in
said case was rendered in favor of BAYANIHAN ordering
the following:

plaintiff and against the defendants spouses UY TONG and KHO
PO GIOK and defendant Ligaya Investment, Inc., dismissing
defendants counterclaim and ordering:
1. The defendants spouses UY TONG and KHO PO GIOK

and any and/or persons claiming right under them, to
vacate, surrender and deliver possession of Apartment
307, Ligaya Building, located at 64 Alvarado Street,
Binondo, Manila to the plaintiff
2. Ordering defendant Ligaya Investment, Inc. to recognize
the
387
VOL. 161, MAY 21, 1988 387

right of ownership and possession of the plaintiff

over Apartment No. 307, Ligaya Building
3. Ordering Ligaya Investment, Inc. to acknowledge
plaintiff as assigneelessee in lieu of defendants
spouses Uy Tong and Kho Po Giok over the lot on
which the building was constructed
4. Ordering the defendants spouses Uy Tong and Kho
Po Giok to pay to the plaintiff the sum of P200.00
commencing from June, 1971 to November 30,
1972, or a total amount of P3,400.00 as rental for
the apartment, and the sum of P200.00 from
December 1, 1972 until the premises are finally
vacated and surrendered to the plaintiff, as
reasonable compensation for the use of the
apartment and
5. Ordering the defendants spouses Uy Tong and Kho
Po Giok to pay P3,000.00 as and for attorneys fees
to the plaintiff, and the costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to

the Court of Appeals. On October 2,1984, the respondent
Court of Appeals affirmed in toto the decision appealed

from [Petition, Annex A", Rollo, pp. 1520], A motion for
reconsideration of the said decision was denied by the
respondent Court in a resolution dated February 11, 1987
[Petition, Annex C", Rollo, pp. 3134].
PetitionersSPOUSES in seeking a reversal of the
decision of the Court of Appeals rely on the following
reasons:
I. The deed of assignment is null and void because it

is in the nature of a pactum commissorium and/or
was borne out of the same.
II. The genuineness and due execution of the deed of
assignment was not deemed admitted by petitioner.
III. The deed of assignment is unenforceable because
the condition for its execution was not complied
with.
IV. The refusal of petitioners to vacate and surrender
the premises in question to private respondent is
justified and warranted by the circumstances
obtaining in the instant case.
I. In support of the first argument, petitioners bring to the

fore the contract entered into by the parties whereby
petitioner Kho Po Giok agreed that the apartment in
question will automatically become the property of private
respondent BAYANIHAN upon her mere failure to pay her
obligation. This agreement, according to the petitioners is
in the nature of a pactum commissorium which is null and
void, hence, the deed of assignment which was borne out of
the same agreement
388

suffers the same fate.

The prohibition on pactum commissorium stipulations is
provided for by Article 2088 of the Civil Code:
Art 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of the same. Any stipulation to
the contrary is null and void.
The aforequoted provision furnishes the two elements for

pactum commissorium to exist: (1) that there should be a
pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the

principal obligation and (2) that there should be a
stipulation for an automatic appropriation by the creditor
of the thing pledged or mortgaged in the event of non
payment of the principal obligation within the stipulated
period.
A perusal of the terms of the questioned agreement
evinces no basis for the application of the pactum
commissorium provision. First, there is no indication of any
contract of mortgage entered into by the parties. It is a fact
that the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of
the property by BAYANIHAN. When the SPOUSES
defaulted in their payments of the second and third
installments of the trucks they purchased, BAYANIHAN
filed an action in court for specific performance. The trial
court rendered favorable judgment for BAYANIHAN and
ordered the SPOUSES to pay the balance of their
obligation and in case of failure to do so, to execute a deed
of assignment over the property involved in this case. The
SPOUSES elected to execute the deed of assignment
pursuant to said judgment.
Clearly, there was no automatic vesting of title on
BAYANIHAN because it took the intervention of the trial
court to exact fulfillment of the obligation, which, by its
very nature is ". . . anathema to the concept of pacto
commissorio [Northern Motors, Inc. v. Herrera, G.R. No.
L32674, February 22, 1973, 49 SCRA 392]. And even
granting that the original agreement between the parties
had the badges of pactum commissorium, the deed of
assignment does not suffer the same fate as this was
executed pursuant to a valid judgment in Civil Case No.
80420 as can be gleaned from its very terms and conditions:
389
VOL. 161, MAY 21, 1988 339

DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as

Henry Uy and Kho Po Giok, both of legal age, husband and wife,
respectively, and presently residing at 307 Ligaya Bldg., Alvarado
St., Binondo, Manila, and hereinafter to be known and called as
the ASSIGNORS, in favor of Bayanihan Automotive Corporation,
an entity duly organized and existing under the laws of the

Philippines, with principal business address at 1690 Otis St.,
Paco, Manila and hereinafter to be known and called the
ASSIGNEE
w i t n e s s e t h
WHEREAS, the ASSIGNEE has filed a civil complaint for

Specific Performance with Damages against the ASSIGNORS in
the Court of First Instance of Manila, Branch V, said case having
been docketed as Civil Case No. 80420
WHEREAS, the ASSIGNEE was able to obtain a judgment
against the ASSIGNOR wherein the latter was ordered by the
court as follows, to wit:
WHEREFORE, judgment is hereby rendered ordering the defendants,

jointly and severally to pay the plaintiff the sum of P40,000.00, with
interest at the legal rate from July 31, 1970 until full payment. In the
event of their failure to do so within thirty (30) days from notice of this
judgment, they are hereby ordered to execute the corresponding deed of
absolute sale in favor of the plaintiff and/or the assignment of leasehold,
rights over the defendants apartment located at No. 307 Ligaya
Building, Alvarado Street, Binondo, Manila, upon the payment by the
plaintiff to the defendants the sum of P3,535.00.
The defendants shall pay the costs.
WHEREAS, the court, upon petition by herein ASSIGNEE and

its deposit of sufficient bond, has ordered for the immediate
execution of the said decision even pending appeal of the aforesaid
decision
WHEREAS, the ASSIGNORS have elected to just execute the
necessary deed of sale and/or assignment of leasehold rights over
the apartment mentioned in the decision in favor of the herein
ASSIGNEE
NOW, THEREFORE, for and in consideration of the foregoing
premises, the ASSIGNORS have transferred assigned and ceded,
and by these presents do hereby transfer, assign and cede all their
rights and interests over that place known as Apartment No. 307
at the Ligaya Building which is located at No. 864 Alvarado St.,
Binondo, Manila, together with the corresponding leasehold
rights over the lot on which the said building is constructed, in
favor of the herein
390

ASSIGNEE, its heirs or assigns.

IN WITNESS WHEREOF, We have hereunto signed our

names this 27th day of May, 1971 at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK

Assignor Assignor
ACR2151166 Manila 1/13/51 ACRC001620 Manila
March 3, 1965
This being the case, there is no reason to impugn the

validity of the said deed of assignment.
II. The SPOUSES take exception to the ruling of the
Court of Appeals that their failure to deny the genuineness
and due execution of the deed of assignment was deemed
an admission thereof. The basis for this exception is the
SPOUSES' insistence that the deed of assignment having
been borne out of pactum commissorium is not subject to
ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the
abovementioned ruling of the appellate court. Considering
this Courts above conclusion that the deed of assignment is
not invalid, it follows that when an action founded on this
written instrument is filed, the rule on contesting its
genuineness and due execution must be followed.
That facts reveal that the action in Civil Case No.
121532 was founded on the deed of assignment. However,
the SPOUSES, in their answer to the complaint, failed to
deny under oath and specifically the genuineness and due
execution of the said deed. Perforce, under Section 8, Rule
8 of the Revised Rules of Court, the SPOUSES are deemed
to have admitted the deeds genuineness and due
execution. Besides, they themselves admit that".. . the
contract was duly executed and that the same is genuine
[SurRejoinder, Rollo, p. 67]. They cannot now claim
otherwise.
III. The SPOUSES also question the enforceability of the
deed of assignment. They contend that the deed is
unenforceable because the condition for its execution was
not complied with. What petitioners SPOUSES refer to is
that portion of the disposition in Civil Case No. 80420
requiring BAYANIHAN to pay the former the sum of
P3,535.00. To buttress their claim of noncompliance, they
invoke the following receipt issued by the
391
VOL. 161, MAY 21, 1988 391

SPOUSES to show that BAYANIHAN was P535.00 short of

the complete payment.
RECEIPT
This is to acknowledge the fact that the amount of THREE

THOUSAND (P3,000.00) PESOS, more or less as indicated in the
judgment of the Hon. Conrado Vasquez, Presiding Judge of the
Court of First Instance of Manila, Branch V, in Civil Case entitled
Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc. and
docketed as Civil Case No. 80420 has been applied for the
payment of the previous rentals of the property which is the
subject matter of the aforesaid judgment. [Italics supplied.]
(Sgd.) Pho (sic) Po Giok
(Sgd.) Henry Uy
August 21, 1971
The issue presented involves a question of fact which is not

within this Courts competence to look into. Suffice it to say
that this Court is of the view that findings and conclusion
of the trial court and the Court of Appeals on the question
of whether there was compliance by BAYANIHAN of its
obligation under the decision in Civil Case No. 80420 to
pay the SPOUSES the sum of P3,535.00 is borne by the
evidence on record. The Court finds merit in the following
findings of the trial court:
"... Defendants contention that the P3,535.00 required in the

decision in Civil Case No. 80420 as a condition for the execution of
the deed of assignment was not paid by the plaintiff to the
defendants is belied by the fact that the defendants acknowledged
payment of P3,000.00, more or less, in a receipt dated August 21,
1971. This amount was expressly mentioned in this receipt as
indicated in the judgment of the Honorable Conrado Vasquez,
presiding Judge of the CFI of Manila, Branch V, in Civil Case
entitled Bayanihan Automotive Corp. versus Kho Po Giok,
docketed as Civil Case No. 80420, and also expressly mentioned
as having been applied for the payment of the previous rentals of
the property subject matter of the said judgment. Nothing could
be more explicit. The contention that there is still a difference of
P535.00 is hard to believe because the spouses Kho Po Giok and
Uy Tong executed the deed of assignment without first
demanding from the plaintiff the payment of P535.00. Indeed, as
contended by the plaintiff, for it to refuse to pay this small
amount and thus gave defendants a reason not to execute the
Deed of Assignment.
392

is hard to believe. Defendants further confirm by the joint

manifestation of plaintiff and defendants, duly assisted by
counsel, Puerto and Associates, dated September, 1971, Exhibit
O", wherein it was stated that plaintiff has fully complied with its
obligation to the defendants caused upon it (sic) by the
pronouncement of the judgment as a condition for the execution of
their (sic) leasehold rights of defendants, as evidenced by the
receipt duly executed by the defendants, and which was already
submitted in open court for the consideration of the sum of
P3,535.00. [Italics supplied], [Decision, Civil Case No. 121532, pp.
34],
This Court agrees with private respondent BAYANIHANs

reasoning that inasmuch as the decision in Civil Case No.
80420 imposed upon the parties correlative obligations
which were simultaneously demandable so much so that if
private respondent refused to comply with its obligation
under the judgment to pay the sum of P3,535.00 then it
could not compel petitioners to comply with their own
obligation to execute the deed of assignment over the
subject premises. The fact that petitioners executed the
deed of assignment with the assistance of their counsel
leads to no other conclusion that private respondent itself
had paid the full amount.
IV. Petitioners attempt to justify their continued refusal
to vacate the premises subject of this litigation on the
following grounds:
(a) The deed of assignment is in the nature of a pactum

commissorium and, therefore, null and void.
(b) There was no full compliance by private respondent
of the condition imposed in the deed of assignment.
(c) Proof that petitioners have been allowed to stay in
the premises, is the very admission of private
respondent who declared that petitioners were
allowed to stay in the premises until November 20,
1972. This admission is very significant. Private
respondent merely stated that there was a term
until November 30, 1972in order to give a
semblance of validity to its attempt to dispossess
herein petitioners of the subject premises. In short,
this is one way of rendering seemingly illegal
petitioners possession of the premises after
November 30, 1972.
The first two classifications are mere reiterations of the

arguments presented by the petitioners and which had
been passed upon already in this decision. As regards the
third ground, it is
393
VOL. 161, MAY 21, 1988 393

Heirs of Ricardo Olivas vs. Flor
enough to state that the deed of assignment has vested in

the private respondent the rights and interests of the
SPOUSES over the apartment unit in question including
the leasehold rights over the land on which the building
stands. BAYANIHAN is therefore entitled to the possession
thereof. These are the clear terms of the deed of
assignment which cannot be superseded by bare allegations
of fact that find no support in the record.
WHEREFORE, the petition is hereby DENIED for lack
of merit and the decision of the Court of Appeals is
AFFIRMED in toto.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr. and Feliciano,

JJ., concur.
Bidin, J., no part. Appurtenanted in the appealed
decision of respondent Court of Appeals.
Petition denied. Decision affirmed.
Note.A mortgage being contrary to good morals and

public policy, a pactum commissorium stipulation is void.
(Reyes vs. Sierra, 93 SCRA 472).
oOo

Development Bank of the Philippines vs. Court of Appeals
*
G.R. No. 118342. January 5, 1998.
DEVELOPMENT BANK OF THE PHILIPPINES,

petitioner, vs. COURT OF APPEALS and LYDIA CUBA,
respondents.
*
G.R. No. 118367. January 5, 1998.
LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS,

DEVELOPMENT BANK OF THE PHILIPPINES and
AGRIPINA P. CAPERAL, respondents.
Contracts Loans Mortgages Assignments An assignment to

guarantee an obligation is in effect a mortgage.In Peoples Bank
& Trust Co. vs. Odom, this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.
Same Same Same Same Novations There is no novation
where the obligation to pay a sum of money remained, and the
assignment merely served as security for the loans covered by the
promissory notes.We find no merit in DBPs contention that the
assignment novated the promissory notes in that the obligation to
pay a sum of money the loans (under the promissory notes) was
substituted by the assignment of the rights over the fishpond
(under the deed of assignment). As correctly pointed out by
CUBA, the said assignment merely complemented or
supplemented the notes both could stand together. The former
was only an accessory to the latter. Contrary to DBPs
submission, the obligation to pay a sum of money remained, and
the assignment merely served as security for the loans covered by
the promissory notes. Significantly, both the deeds of assignment
and the promissory notes were executed on the same dates the
loans were granted. Also, the last paragraph of the assignment
stated: The assignor further reiterates and states all terms,
covenants, and conditions stipulated in the promissory note or
notes covering the proceeds of this loan, making said promissory
note or notes, to all intent and purposes, an integral part hereof.
http://central.com.ph/sfsreader/session/0000015cda421ad295021a95003600fb002c009e/t/?o=False 1/20
Same Same Same Same Cession There is no payment by

cession under Article 1255 of the Civil Code where there is only one
creditor.Neither did the assignment amount to payment by
cession
______________________
* FIRST DIVISION.
15
VOL. 284, JANUARY 5, 1998 15
under Article 1255 of the Civil Code for the plain and simple
reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves
the assignment of all the debtors property.
Same Same Same Same Dation An assignment which is
essentially a mortgage cannot constitute dation in payment under
Article 1245 of the Civil Code.Nor did the assignment constitute
dation in payment under Article 1245 of the Civil Code, which
reads: Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by
the law on sales. It bears stressing that the assignment, being in
its essence a mortgage, was but a security and not a satisfaction
of indebtedness.
Same Same Same Same Pactum Commissorium Elements.
The elements of pactum commissorium are as follows: (1) there
should be a property mortgaged by way of security for the
payment of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of nonpayment of the principal
obligation within the stipulated period.
Same Same Same Same Same A condition in a deed of
assignment providing for the appointment of the assignee as
attorneyinfact with authority, among other things, to sell or
otherwise dispose of real rights, in case of default by the assignor,
and to apply the proceeds to the payment of the loan does not
constitute pactum commissorium.Condition No. 12 did not
provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBAs failure to pay the loan
on time. It merely provided for the appointment of DBP as
attorneyinfact with authority, among other things, to sell or

otherwise dispose of the said real rights, in case of default by
CUBA, and to apply the proceeds to the payment of the loan. This
provision is a standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which authorizes
the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.
Same Same Same Same An assignment to guarantee an
obligation is virtually a mortgage and not an absolute conveyance
of title which confers ownership on the assignee.DBP cannot
take refuge in condition No. 12 of the deed of assignment to justify
its act
16
of appropriating the leasehold rights. As stated earlier, condition

No. 12 did not provide that CUBAs default would operate to vest
in DBP ownership of the said rights. Besides, an assignment to
guarantee an obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title which confers
ownership on the assignee.
Same Same Same Same Estoppel Estoppel cannot give
validity to an act that is prohibited by law or against public policy.
The fact that CUBA offered and agreed to repurchase her
leasehold rights from DBP did not estop her from questioning
DBPs act of appropriation. Estoppel is unavailing in this case. As
held by this Court in some cases, estoppel cannot give validity to
an act that is prohibited by law or against public policy. Hence,
the appropriation of the leasehold rights, being contrary to Article
2088 of the Civil Code and to public policy, cannot be deemed
validated by estoppel.
Damages A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend
upon competent proof that they have been suffered by the injured
party and on the best obtainable evidence of the actual amount
thereof.Actual or compensatory damages cannot be presumed,
but must be proved with reasonable degree of certainty. A court
cannot rely on speculations, conjectures, or guesswork as to the
fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the
best obtainable evidence of the actual amount thereof. It must
point out specific facts which could afford a basis for measuring
PETITIONS for review of a decision of the Court of

Appeals.

Office of the Legal Counsel for petitioner DBP.
J.C. Calida & Associates for petitioner Lydia P.
Cuba.
Virgilio C. Leynes for Agripina Caperal.
17
VOL. 284, JANUARY 5, 1998 17

DAVIDE, JR., J.:

1
These two consolidated cases stemmed from a complaint
filed against the Development Bank of the Philippines
(hereafter DBP) and Agripina Caperal filed by Lydia Cuba
(hereafter CUBA) on 21 May 1985 with the Regional Trial
Court of Pangasinan, Branch 54. The said complaint
sought (1) the declaration of nullity of DBPs appropriation
of CUBAs rights, title, and interests over a 44hectare
fishpond located in Bolinao, Pangasinan, for being violative
of Article 2088 of the Civil Code (2) the annulment of the
Deed of Conditional Sale executed in her favor by DBP (3)
the annulment of DBPs sale of the subject fishpond to
Caperal (4) the restoration of her rights, title, and
interests over the fishpond and (5) the recovery of
damages, attorneys fees, and expenses of litigation.
After the joinder of issues following the filing by the
parties of their respective pleadings, the trial court
conducted a pretrial where CUBA and DBP agreed on the2
following facts, which were embodied in the pretrial order:
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond

Lease Agreement No. 2083 (new) dated May 13,
1974 from the Government
2. Plaintiff Lydia P. Cuba obtained loans from the
Development Bank of the Philippines in the
amounts of P109,000.00 P109,000.00 and
P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974 August
11, 1975 and April 4, 1977
3. As security for said loans, plaintiff Lydia P. Cuba

executed two Deeds of Assignment of her Leasehold
Rights
4. Plaintiff failed to pay her loan on the scheduled dates
thereof in accordance with the terms of the Promissory
Notes
_____________________
1 Original Record (OR), 17.

2 OR, 168170.
18

5. Without foreclosure proceedings, whether judicial

or extrajudicial, defendant DBP appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the
fishpond in question
6. After defendant DBP has appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the
fishpond in question, defendant DBP, in turn,
executed a Deed of Conditional Sale of the
Leasehold Rights in favor of plaintiff Lydia Cuba
over the same fishpond in question
7. In the negotiation for repurchase, plaintiff Lydia
Cuba addressed two letters to the Manager DBP,
Dagupan City dated November 6, 1979 and
December 20, 1979. DBP thereafter accepted the
offer to repurchase in a letter addressed to plaintiff
dated February 1, 1982
8. After the Deed of Conditional Sale was executed in
favor of plaintiff Lydia Cuba, a new Fishpond Lease
Agreement No. 2083A dated March 24, 1980 was
issued by the Ministry of Agriculture and Food in
favor of plaintiff Lydia Cuba only, excluding her
husband
9. Plaintiff Lydia Cuba failed to pay the amortizations
stipulated in the Deed of Conditional Sale
10. After plaintiff Lydia Cuba failed to pay the
amortization as stated in Deed of Conditional Sale,
she entered with the DBP a temporary
arrangement whereby in consideration for the
deferment of the Notarial Rescission of Deed of
Conditional Sale, plaintiff Lydia Cuba promised to
make certain payments as stated in Temporary

Arrangement dated February 23, 1982
11. Defendant DBP thereafter sent a Notice of
Rescission thru Notarial Act dated March 13, 1984,
and which was received by plaintiff Lydia Cuba
12. After the Notice of Rescission, defendant DBP took
possession of the Leasehold Rights of the fishpond
in question
13. That after defendant DBP took possession of the
Leasehold Rights over the fishpond in question,
DBP advertised in the SUNDAY PUNCH the public
bidding dated June 24, 1984, to dispose of the
property
14. That the DBP thereafter executed a Deed of
Conditional Sale in favor of defendant Agripina
Caperal on August 16, 1984
15. Thereafter, defendant Caperal was awarded
Fishpond Lease Agreement No. 2083A on
December 28, 1984 by the Ministry of Agriculture
and Food.
19
VOL. 284, JANUARY 5, 1998 19

Defendant Caperal admitted only the facts 3

stated in
paragraphs 14 and 15 of the pretrial order.
Trial was thereafter had on other matters.
The principal issue presented was whether the act of
DBP in appropriating to itself CUBAs leasehold rights
over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code
and, therefore, invalid. CUBA insisted on an affirmative
resolution. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold
Rights, which was not a contract of mortgage. Defendant
Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by
declaring that DBPs taking possession and ownership of
the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by

way of pledge or mortgage, or dispose of them. Any stipulation to
It disagreed with DBPs stand that the Assignments of

Leasehold Rights were not contracts of mortgage because
(1) they were given as security for loans, (2) although the
fishpond land in question is still a public land, CUBAs
leasehold rights and interest thereon are alienable rights
which can be the proper subject of a mortgage and (3) the
intention of the contracting parties to treat the Assignment
of Leasehold Rights as a mortgage was obvious and
unmistakable hence, upon CUBAs default, DBPs only
right was to foreclose the Assignment in accordance with
law.
The trial court also declared invalid condition No. 12 of
the Assignment of Leasehold Rights for being a clear case
of pactum commissorium expressly prohibited and declared
null and void by Article 2088 of the Civil Code. It then
concluded that since DBP never acquired lawful ownership
of CUBAs
___________________
3 See OR, 169.
20

leasehold rights, all acts of ownership and possession by

the said bank were void. Accordingly, the Deed of
Conditional Sale in favor of CUBA, the notarial rescission
of such sale, and the Deed of Conditional Sale in favor of
defendant Caperal, as well as the Assignment of Leasehold
Rights executed by Caperal in favor of DBP, were also void
and ineffective.
As to damages, the trial court found ample evidence on
record that in 1984 the representatives of DBP ejected
CUBA and her caretakers not only from the fishpond area
but also from the adjoining big house and that when
CUBAs son and caretaker went there on 15 September
1985, they found the said house unoccupied and destroyed
and CUBAs personal belongings, machineries, equipment,
tools, and other articles used in fishpond operation which
were kept in the house were missing. The missing items
were valued at about P550,000. It further found that when
CUBA and her men were ejected by DBP for the first time
in 1979, CUBA had stocked the fishpond with 250,000
pieces of bangus fish (milkfish), all of which died because
the DBP representatives prevented CUBAs men from
feeding the fish. At the conservative price of P3.00 per fish,

the gross value would have been P690,000, and after
deducting 25% of said value as reasonable allowance for
the cost of feeds, CUBA suffered a loss of P517,500. It then
set the aggregate of the actual damages sustained by
CUBA at P1,067,500.
The trial court further found that DBP was guilty of
gross bad faith in falsely representing to the Bureau of
Fisheries that it had foreclosed its mortgage on CUBAs
leasehold rights. Such representation induced the said
Bureau to terminate CUBAs leasehold rights and to
approve the Deed of Conditional Sale in favor of CUBA.
And considering that by reason of her unlawful ejectment
by DBP, CUBA suffered moral shock, degradation, social
humiliation, and serious anxieties for which she became
sick and had to be hospitalized the trial court found her
entitled to moral and exemplary damages. The trial court
also held that CUBA was entitled to P100,000 attorneys
fees in view of the considerable
21
VOL. 284, JANUARY 5, 1998 21

expenses she incurred for lawyers fees and in view of the

finding that she was entitled to exemplary4 damages.
In its decision of 31 January 1990, the trial court
disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect

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

23) and the Assignment of Leasehold Rights dated
February 12, 1985 executed by defendant Agripina
Caperal in favor of the defendant Development Bank of
the Philippines (Exh. 24) as void ab initio
4. ORDERING defendant Development Bank of the
Philippines and defendant Agripina Caperal, jointly and
severally, to restore to plaintiff the latters leasehold
rights and interests and right of possession over the
fishpond land in question, without prejudice to the right of
defendant Development Bank of the Philippines to
foreclose the securities given by plaintiff
5. ORDERING defendant Development Bank of the
Philippines to pay to plaintiff the following amounts:
a) The sum of ONE MILLION SIXTYSEVEN THOUSAND

FIVE HUNDRED PESOS (P1,067,500.00), as and for
actual damages
___________________
4 Per Judge Artemio R. Corpus. OR, 686705.
22

b) The sum of ONE HUNDRED THOUSAND (P100,000.00)

PESOS as moral damages
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as
and for exemplary damages
d) And the sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS, as and for attorneys fees
6. And ORDERING defendant Development Bank of the

Philippines to reimburse and pay to defendant Agripina
Caperal the sum of ONE MILLION FIVE HUNDRED
THIRTYTWO THOUSAND SIX HUNDRED TEN PESOS
AND SEVENTYFIVE CENTAVOS (P1,532,610.75)
representing the amounts paid by defendant Agripina
Caperal to defendant Development Bank of the
Philippines under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the

decision to the Court of Appeals. The former sought an
increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
5
In its decision of 25 May 1994, the Court of Appeals
5
In its decision of 25 May 1994, the Court of Appeals
ruled that (1) the trial court erred in declaring that the
deed of assignment was null and void and that defendant
Caperal could not validly acquire the leasehold rights from
DBP (2) contrary to the claim of DBP, the assignment was
not a cession under Article 1255 of the Civil Code because
DBP appeared to be the sole creditor to CUBAcession
presupposes plurality of debts and creditors (3) the deeds
of assignment represented the voluntary act of CUBA in
assigning her property rights in payment of her debts,
which amounted to a novation of the promissory notes
executed by CUBA in favor of DBP (4) CUBA was estopped
from questioning the assignment of the leasehold rights,
since she agreed to repurchase the said rights under a deed
of conditional sale and (5) condition No. 12 of the deed of
assignment was an express authority from CUBA for DBP
to sell whatever right she had over
______________________
5 Per Manuel C. Herrera, J., with Artemon D. Luna and Alfredo J.

Lagamon, JJ., concurring. Rollo, G.R. No. 118342, 2141 Rollo, G.R. No.
118367, 3353.
23
VOL. 284, JANUARY 5, 1998 23

the fishpond. It also ruled that CUBA was not entitled to

loss of profits for lack of evidence, but agreed with the trial
court as to the actual damages of P1,067,500. It, however,
deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and
attorneys fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the
following: (1) the act of DBP in appropriating Cubas
leasehold rights and interest under Fishpond Lease
Agreement No. 2083 (2) the deeds of assignment executed
by Cuba in favor of DBP (3) the deed of conditional sale
between CUBA and DBP and (4) the deed of conditional
sale between DBP and Caperal, the Fishpond Lease
Agreement in favor of Caperal, and the assignment of
leasehold rights executed by Caperal in favor of DBP. It
then ordered DBP to turn over possession of the property to
Caperal as lawful holder of the leasehold rights and to pay
CUBA the following amounts: (a) P1,067,500 as actual
damages P50,000 as moral damages and P50,000 as

attorneys fees. 6
Since their motions for reconsideration were denied,
DBP and CUBA filed separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award
of actual and moral damages and attorneys fees in favor of
CUBA.
Upon the other hand, in her petition (G.R. No. 118367),
CUBA contends that the Court of Appeals erred (1) in not
holding that the questioned deed of assignment was a
pactum commissorium contrary to Article 2088 of the Civil
Code (b) in holding that the deed of assignment effected a
novation of the promissory notes (c) in holding that CUBA
was estopped from questioning the validity of the deed of
assignment when she agreed to repurchase her leasehold
rights under a deed of conditional sale and (d) in reducing
the amounts of moral damages and attorneys fees, in
deleting the award of exemplary damages, and in not
increasing the amount of damages.
____________________
6 Rollo, G.R. No. 118342, 43 Rollo, G.R. No. 118367f, 55.
24

We agree with CUBA that the assignment of leasehold

rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three
separate loans totalling P335,000, each of which was
covered by a promissory note. In all of these notes, there
was a provision that: In the event of foreclosure of the
mortgage securing this notes, I/We further bind
myself/ourselves, 7 jointly and severally, to pay the
deficiency, if any.
Simultaneous with the execution of the notes was 8
the
execution of Assignments of Leasehold Rights where
CUBA assigned her leasehold rights and interest on a 44
hectare fishpond, together with the improvements thereon.
As pointed out by CUBA, the deeds of assignment
constantly referred to the assignor (CUBA) as borrower
the assigned rights, as mortgaged properties and the
instrument itself, as mortgage contract. Moreover, under
condition No. 22 of the deed, it was provided that failure to
comply with the terms and condition of any of the loans
shall cause all other loans to become due and demandable

and all mortgages shall be foreclosed. And, condition No.
33 provided that if foreclosure is actually accomplished,
the usual 10% attorneys fees and 10% liquidated damages
of the total obligation shall be imposed. There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted
that the assignment was by way of security for the
payment of the loans thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two

Deeds of Assignment of her Leasehold Rights.
9
In Peoples Bank & Trust Co. vs. Odom, this Court had the
occasion to rule that an assignment to guarantee an
obligation is in effect a mortgage.
______________________
7 Exhibits B, C, and D OR, 3739.

8 Exhibits B1, C1, and D1.
9 64 Phil. 126, 132 [1937].
25
VOL. 284, JANUARY 5, 1998 25

We find no merit in DBPs contention that the assignment

novated the promissory notes in that the obligation to pay a
sum of money the loans (under the promissory notes) was
substituted by the assignment of the rights over the
fishpond (under the deed of assignment). As correctly
pointed out by CUBA, the said assignment merely
complemented or supplemented the notes both could stand
together. The former was only an accessory to the latter.
Contrary to DBPs submission, the obligation to pay a sum
of money remained, and the assignment merely served as
security for the loans covered by the promissory notes.
Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the
loans were granted. Also, the last paragraph of the
assignment stated: The assignor further reiterates and
states all terms, covenants, and conditions stipulated in the
promissory note or notes covering the proceeds of this loan,
making said promissory note or notes, to all intent and
purposes, an integral part hereof.
Neither did the assignment amount to payment by

cession under Article 1255 of the Civil Code for the plain
and simple reason that there was only one creditor, the
DBP. Article 1255 contemplates the existence of two or
more creditors and involves the assignment of all the
debtors property.
Nor did the assignment constitute dation in payment
under Article 1245 of the Civil Code, which reads: Dation
in payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the
law on sales. It bears stressing that the assignment, being
in its essence a mortgage, 10was but a security and not a
satisfaction of indebtedness.
We do not, however, buy CUBAs argument that
condition No. 12 of the deed of assignment constituted
pactum commissorium. Said condition reads:
______________________
10 Philippine Bank of Commerce v. De Vera, 6 SCRA 1026, 1029 [1962].
26

12. That effective upon the breach of any condition of this

assignment, the Assignor hereby appoints the Assignee his
Attorneyinfact with full power and authority to take actual
possession of the property abovedescribed, together with all
improvements thereon, subject to the approval of the Secretary of
Agriculture and Natural Resources, to lease the same or any
portion thereof and collect rentals, to make repairs or
improvements thereon and pay the same, to sell or otherwise
dispose of whatever rights the Assignor has or might have over
said property and/or its improvements and perform any other act
which the Assignee may deem convenient to protect its interest.
All expenses advanced by the Assignee in connection with purpose
above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any
amount received from rents, administration, sale or disposal of
said property may be supplied by the Assignee to the payment of
repairs, improvements, taxes, assessments and other incidental
expenses and obligations and the balance, if any, to the payment
of interest and then on the capital of the indebtedness secured
hereby. If after disposal or sale of said property and upon
application of total amounts received there shall remain a
deficiency, said Assignor hereby binds himself to pay the same to
the Assignee upon demand, together with all interest thereon

until fully paid. The power herein granted shall not be revoked as
long as the Assignor is indebted to the Assignee and all acts that
may be executed by the Assignee by virtue of said power are
hereby ratified.
The elements of pactum commissorium are as follows: (1)

there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there
should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of nonpayment11
of
the principal obligation within the stipulated period.
Condition No. 12 did not provide that the ownership
over the leasehold rights would automatically pass to DBP
upon CUBAs failure to pay the loan on time. It merely
provided for the appointment of DBP as attorneyinfact
with authority,
_____________________
11 V TOLENTINO, ARTURO M., COMMENTARIES &

JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, 536
537 [1992] citing Uy Tong v. Court of Appeals, 161 SCRA 383 [1988].
27
VOL. 284, JANUARY 5, 1998 27

among other things, to sell or otherwise dispose of the said

real rights, in case of default by CUBA, and to apply the
proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and
alienate the mortgaged property for the payment of the
principal obligation.
DBP, however, exceeded the authority vested by
condition No. 12 of the deed of assignment. As admitted by
it during the pretrial, it had [w]ithout foreclosure
proceedings, whether judicial or extrajudicial, . . .
appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba
over the fishpond in question. Its contention that it limited
itself to mere administration by posting caretakers is
further belied by the deed of conditional sale it executed in
favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment

executed in its favor by the herein vendees [Cuba spouses] the
former acquired all the rights and interest of the latter over the
abovedescribed property
...
The title to the real estate property [sic] and all improvements
thereon shall remain in the name of the Vendor until after the
purchase price, advances and interest shall have been fully paid.
(Emphasis supplied).
It is obvious from the abovequoted paragraphs that DBP

had appropriated and taken ownership of CUBAs
leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition No. 12 of the deed
of assignment to justify its act of appropriating the
leasehold rights. As stated earlier, condition No. 12 did not
provide that CUBAs default would operate to vest in DBP
ownership of the said rights. Besides, an assignment to
guarantee an obligation, as in the present case, is virtually
a mortgage and not an absolute conveyance
12
of title which
confers ownership on the assignee.
____________________
12 Philippine Bank of Commerce v. De Vera, supra note 10.
28

At any rate, DBPs act of appropriating CUBAs leasehold

rights was violative of Article 2088 of the Civil Code, which
forbids a creditor from appropriating, or disposing of, the
thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase
her leasehold rights from DBP did not estop her from
questioning DBPs act of appropriation. Estoppel is
unavailing
13
in this case. As held by this Court in some
cases, estoppel cannot give validity to an act that is
prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to
Article 2088 of the Civil Code and to public policy, cannot
be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights
upon default by CUBA, DBP should have foreclosed the
mortgage, as has been stipulated in condition No. 22 of the
deed of assignment. But, as admitted by DBP, there was no

such forclosure. Yet, in its letter dated 26 October 1979,
addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau
of Fisheries and Aquatic Resources, DBP declared that it
had foreclosed the mortgage and enforced the assignment
of leasehold rights on March 21, 1979 for failure of said 14
spouses [Cuba spouses] to pay their loan amortizations.
This only goes to show that DBP was aware of the necessity
of foreclosure proceedings.
In view of the false representation of DBP that it had
already foreclosed the mortgage, the Bureau of Fisheries
cancelled CUBAs original lease permit, approved the deed
of conditional sale, and issued a new permit in favor of
CUBA. Said acts which were predicated on such false
representation, as well as the subsequent acts emanating
from DBPs appropriation of the leasehold rights, should
therefore be set aside. To validate these acts would open
the floodgates to circumvention of Article 2088 of the Civil
Code.
____________________
13 Eugenio v. Perdido, 97 Phil. 41, 44 [1955] Republic v. Go Bon Lee, 1

SCRA 1166, 1170 [1961] Hian v. Court of Tax Appeals, 59 SCRA 110, 124
[1974].
14 Exhibit N1A OR, 454.
29
VOL. 284, JANUARY 5, 1998 29

Even in cases where foreclosure proceedings were had, this

Court had not hesitated to nullify the consequent auction
sale for failure to comply with the requirements
15
laid down
by law, such as Act No. 3135, as amended. With more
reason that the sale of property given as security for the
payment of a debt be set aside if there was no prior
foreclosure proceeding.
Hence, DBP should render an accounting of the income
derived from the operation of the fishpond in question and
apply the said income in accordance with condition No. 12
of the deed of assignment which provided: Any amount
received from rents, administration, . . . may be applied to
the payment of repairs, improvements, taxes, assessment,
and other incidental expenses and obligations and the
balance, if any, to the payment of interest and then on the

capital of the indebtedness . . . .
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an

adequate compensation only for such pecuniary loss suffered by
him as he has duly proved. Such compensation is referred to as
actual or compensatory damages.
Actual or compensatory damages cannot be presumed, 16but

must be proved with reasonable degree of certainty. A
court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must
depend upon competent proof that they have been suffered
by the injured party and on the best obtainable evidence of
the actual amount
__________________
15 Roxas v. Court of Appeals, 221 SCRA 729 [1993] Sempio v. Court of

Appeals, 263 SCRA 617 [1996].
16 Del Mundo v. Court of Appeals, 240 SCRA 348 [1995] Lufthansa
German Airlines v. Court of Appeals, 243 SCRA 600 [1995] Development
Bank of the Philippines v. Court of Appeals, 249 SCRA 331 [1995] Del
Rosario v. Court of Appeals, G.R. No. 118325, 29 January 1997.
30

17
thereof. It must point out specific facts which could afford
a basis for measuring
18
whatever compensatory or actual
damages are borne.
In the present case, the trial court awarded in favor of
CUBA P1,067,500 as actual damages consisting of
P550,000 which represented the value of the alleged lost
articles of CUBA and P517,500 which represented the
value of the 230,000 pieces of bangus allegedly stocked in
1979 when DBP first ejected CUBA from the fishpond and
the adjoining house. This award was affirmed by the Court
of Appeals.
We find that the alleged loss of personal belongings and
equipment was not proved by clear evidence. Other than
the testimony of CUBA and her caretaker, there was no
proof as to the existence of those items before DBP took
over the fishpond in question. As pointed out by DBP, there
was no inventory of the alleged lost items before the loss

which is normal in a project which sometimes, if not most
often, is left to the care of other persons. Neither was a
single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA
included losses of property as among the damages
resulting from DBPs takeover of the fishpond. Yet, it was
only in September 1985 when her son and a caretaker went
to the fishpond and the adjoining house that she came to
know of the alleged loss of several articles. Such claim for
losses of property, having been made before knowledge of
the alleged actual loss, was therefore speculative. The
alleged loss could have been a mere afterthought or
subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the
value of the alleged 230,000 pieces of bangus which died
when
_____________________
17 Lufthansa German Airlines v. Court of Appeals, supra note 16

People v. Rosario, 246 SCRA 658 [1995] Del Rosario v. Court of Appeals,
supra note 16 Sumalpong v. Court of Appeals, G.R. No. 123404, 26
February 1997.
18 Del Mundo v. Court of Appeals, supra note 16.
31
VOL. 284, JANUARY 5, 1998 31

DBP took possession of the fishpond in March 1979, the

same was not called for. Such loss was not duly proved
besides, the claim therefor was delayed unreasonably.
From 1979 until after the filing of her complaint in court in
May 1985, CUBA did not bring to the attention of DBP the 19
alleged loss. In fact, in her letter dated 24 October 1979,
she declared:
1. That from February to May 1978, I was then seriously ill in

Manila and within the same period I neglected the management
and supervision of the cultivation and harvest of the produce of
the aforesaid fishpond thereby resulting to the irreparable loss in
the produce of the same in the amount of about P500,000.00 to my
great damage and prejudice due to fraudulent acts of some of my
fishpond workers.
Nowhere in the said letter, which was written seven

months after DBP took possession of the fishpond, did
CUBA intimate that upon DBPs takeover there was a total
of 230,000 pieces of bangus, but all of which died because of
DBPs representatives prevented her men from feeding the
fish.
The award of actual damages should, therefore, be
struck down for lack of sufficient basis.
In view, however, of DBPs act of appropriating CUBAs
leasehold rights which was contrary to law and public
policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had
foreclosed the mortgage, an award of moral damages in
the amount of P50,000 is in order conformably with Article
2219(10), in relation to Article 21, of the Civil Code.
Exemplary or corrective damages in the amount of P25,000
should likewise be awarded
20
by way of example or correction
for the public good. There being an award 21of exemplary
damages, attorneys fees are also recoverable.
____________________
19 Exhibit 4, OR, 560.

21 Article 2208(1), Civil Code.
32

WHEREFORE, the 25 May 1994 Decision of the Court of

Appeals in CAG.R. CV No. 26535 is hereby REVERSED,
except as to the award of P50,000 as moral damages, which
is hereby sustained. The 31 January 1990 Decision of the
Regional Trial Court of Pangasinan, Branch 54, in Civil
Case No. A1574 is MODIFIED setting aside the finding
that condition No. 12 of the deed of assignment constituted
pactum commissorium and the award of actual damages
and by reducing the amounts of moral damages from
P100,000 to P50,000 the exemplary damages, from
P50,000 to P25,000 and the attorneys fees, from P100,000
to P20,000. The Development Bank of the Philippines is
hereby ordered to render an accounting of the income
derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the
reception of the income statement of DBP, as well as the
statement of the account of Lydia P. Cuba, and for the
determination of each partys financial obligation to one

another.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Decision in CAG.R. CV No. 26535 reversed Decision in

Civil Case No. A1574 modified.
Notes.The Government is never estopped by mistakes

or errors on the part of its agents. (People vs. Ventura, 4
SCRA 208 [1962])
There can be no novation unless two distinct and
successive binding contracts take place, with the latter one
designed to replace the preceding convention. Modifications
introduced before a bargain becomes obligatory can in no
sense constitute novation in law. (Montelibano vs. Bacolod
Murcia Co., Inc., 5 SCRA 36 [1962])
o0o
33
VOL. 319, NOVEMBER 29, 1999 413

Bustamante vs. Rosel
*
G.R. No. 126800. November 29, 1999.
NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES

RODITO F. ROSEL and NORMA A. ROSEL, respondents.
Civil Law Contracts Pactum Commissorium Article 1306 of

the Civil Code is one of the exceptions to the rule that contracts
have the force of law between the contracting parties and must be
complied with in good faith.Respondents argue that contracts
have the force of law between the contracting parties and must be
complied with in
_____________
* FIRST DIVISION.
414
good faith. There are, however, certain exceptions to the rule,

specifically Article 1306 of the Civil Code, which provides: Article
1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order, or public policy. A scrutiny of the stipulation of the
parties reveals a subtle intention of the creditor to acquire the
property given as security for the loan. This is embraced in the
concept of pactum commissorium, which is proscribed by law.
Same Same Same Elements of Pactum Commissorium.
The elements of pactum commissorium are as follows: (1) there
should be a property mortgaged by way of security for the
http://central.com.ph/sfsreader/session/0000015cda4322afec77b6c8003600fb002c009e/t/?o=False 1/9
payment of the principal obligation, and (2) there should be a

stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of nonpayment of the principal
obligation within the stipulated period.

Court of Appeals.
The facts are stated in the resolutions of the Court.

Emerico B. Lomibao for petitioner.
Julio C. Contreras for private respondents.
RESOLUTION
PARDO, J.:
The case1 before the Court is a petition for review on2

certiorari to annul the decision of the Court of Appeals,
reversing and 3
setting aside the decision of the Regional
Trial Court, Quezon City, Branch 84, in an action for
specific performance with consignation.
___________________
1 Under Rule 45, 1964 Revised Rules of Court.

2 In CAG.R. CV No. 40193, promulgated on July 8, 1996.
3 In Civil Case No. Q904813, dated November 10, 1992, Judge
Teodoro P. Regino.
415
VOL. 319, NOVEMBER 29, 1999 415

On March 8, 1987, at Quezon City, Norma Rosel entered

into a loan agreement with petitioner Natalia Bustamante
and her late husband Ismael C. Bustamante, under the
following terms and conditions:
1. That the borrowers are the registered owners of a

parcel of land, evidenced by TRANSFER
CERTIFICATE OF TITLE No. 80667, containing an
area of FOUR HUNDRED TWENTY THREE (423)
SQUARE Meters, more or less, situated along
Congressional Avenue.
2. That the borrowers were desirous to borrow the
sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS from the LENDER, for a

period of two (2) years, counted from March 1, 1987,
with an interest of EIGHTEEN (18%) PERCENT
per annum, and to guaranty the payment thereof,
they are putting as a collateral SEVENTY (70)
SQUARE METERS portion, inclusive of the
apartment therein, of the aforestated parcel of land,
however, in the event the borrowers fail to pay, the
lender has the option to buy or purchase the
collateral for a total consideration of TWO
HUNDRED THOUSAND (P200,000.00) PESOS,
inclusive of the borrowed amount and interest
therein
3. That the lender do hereby manifest her agreement
and conformity to the preceding paragraph, while
the borrowers do 4 hereby confess receipt of the
borrowed amount.
When the loan was about to mature on March 1, 1989,

respondents proposed to buy at the preset price of
P200,000.00, the seventy (70) square meters parcel of land
covered by TCT No. 80667, given as collateral to guarantee
payment of the loan. Petitioner, however, refused to sell
and requested for extension of time to pay the loan and
offered to sell to respondents another residential lot located
at Road 20, Project 8, Quezon City, with the principal loan
plus interest to be used as down payment. Respondents
refused to extend the payment of the loan and to accept the
lot in Road 20 as it was occupied by squatters and
petitioner and her husband were not the owners thereof
but were mere land developers entitled
________________
4 Exhibit A, RTC Record, p. 142.
416

to subdivision shares or commission if and when 5

they
developed at least one half of the subdivision area.
Hence, on March 1, 1989, petitioner tendered payment
of the loan to respondents which the latter refused to
accept, insisting on petitioners signing a prepared deed of
absolute sale of the collateral.
On February 28, 1990, respondents filed with the

Regional Trial Court, Quezon City, Branch 84, a complaint
for specific performance 6
with consignation against
petitioner and her spouse.
Nevertheless, on March 4, 1990, respondents sent a
demand letter asking petitioner to sell the collateral
pursuant to the option to buy embodied in the loan
agreement.
On the other hand, on March 5, 1990, petitioner filed in
the Regional Trial Court, Quezon City a petition for
consignation, and deposited the amount of P153,000.00
with 7the City Treasurer of Quezon City on August 10,
1990.
When petitioner refused to sell the collateral and
barangay conciliation failed, respondents 8 consigned the
amount of P47,500.00 with the trial court. In arriving at
the amount deposited, respondents considered the principal
loan of P100,000.00 and 18% interest
9
per annum thereon,
which amounted to P52,500.00. The principal loan and the
interest taken together10amounted to P152,500.00, leaving a
balance of P 47,500.00.
___________________
5 Regional Trial Court Decision, Rollo, p. 31.

6 Civil Case No. Q904813.
7 Exhibit 2, RTC Record, p. 182.
8 Under Official Receipt No. 0719847 dated February 28, 1990, issued
by the City Treasurer, Quezon City, with the Clerk of Court, Regional
Trial Court, National Capitol Judicial Region, Quezon City, as payee, RTC
Record, p. 162.
9 (P100,000.00 x 18%) 2 years and 11 months (March 8, 1987 up to
February 9, 1990) P18,000 x 2 years and 11 months = P 52,500.
10 Comment, Rollo, pp. 4145.
417
VOL. 319, NOVEMBER 29, 1999 417

After due trial, on November 10, 1992, the trial court

rendered decision holding:

rendered as follows:
1. Denying the plaintiffs prayer for the defendants

execution of the Deed of Sale to Convey the collateral in
plaintiffs favor
2. Ordering the defendants to pay the loan of P100,000.00
with interest thereon at 18% per annum commencing on
March 2, 1989, up to and until August 10, 1990, when
defendants deposited the amount with the Office of the
City Treasurer under Official Receipt No. 0116548
(Exhibit 2) and
3. To pay Attorneys Fees in the amount of P 5,000.00, plus
costs of suit.
SO ORDERED.
Quezon City, Philippines, November 10, 1992.
TEODORO P. REGINO11
Judge
On November 16, 1992, respondents 12

appealed from the
decision to the Court of Appeals. On July 8, 1996, the
Court of Appeals rendered decision reversing the ruling of
the Regional Trial Court. The dispositive portion of the
Court of Appeals decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from

is REVERSED and SET ASIDE and a new one entered in favor of
the plaintiffs ordering the defendants to accept the amount of
P47,000.00 deposited with the Clerk of Court of Regional Trial
Court of Quezon City under Official Receipt No. 0719847, and for
defendants to execute the necessary Deed of Sale in favor of the
plaintiffs over the 70 SQUARE METER portion and the
apartment standing thereon being occupied by the plaintiffs and
covered by TCT No. 80667 within fifteen (15) days from finality
hereof. Defendants, in turn, are allowed to withdraw the amount
of P153,000.00 deposited
________________
11 Decision, Regional Trial Court, Quezon City, Rollo, pp. 3039.

12 Docketed as CAG.R. CV No. 40193.
418

by them under Official Receipt No. 0116548 of the City

Treasurers Office of Quezon City. All other claims and
counterclaims are DISMISSED, for lack of sufficient basis. No
costs. 13
SO ORDERED.
14
Hence, this petition.
14
Hence, this petition.
On January 20, 1997, we required respondents to 15
comment on the petition within ten (10) days from notice.
16
On February 27, 1997, respondents filed their comment.
On February 9, 1998, we resolved to deny the petition on
the ground that there was no reversible error on the part of
respondent court in ordering the execution of the necessary
deed of sale in conformity with the parties stipulated
agreement. The contract is the law between the parties
thereof (Syjuco v. Court of Appeals, 172 SCRA 111, 118,
citing Phil. American General Insurance v. Mutuc, 61
SCRA 17
22 Herrera v. Petrophil Corporation, 146 SCRA
360).
On March 17, 1998, petitioner filed with this Court a
motion for reconsideration of the denial alleging that the
real intention of the parties to the loan was to put up the
collateral as guarantee similar to an equitable
18
mortgage
according to Article 1602 of the Civil Code.
On April 21, 1998, respondents filed an opposition to
petitioners motion for reconsideration. They contend that
the agreement between the parties was not a sale with
right of repurchase, but a loan with interest at 18% per
annum for a period of two years and if petitioner fails to
pay, the respondent was given the right to purchase the
property or apart
_________________
13 Court of Appeals Decision, Rollo, pp. 1926.

14 Petition, filed on November 29, 1996. Rollo, pp. 717. On November
27, 1996, the Court granted petitioner an extension of thirty days from the
expiration of the reglementary period within which to file a petition for
review on certiorari (Rollo, p. 14).
15 Rollo, p. 40.
16 Rollo, pp. 4145.
17 Rollo, p. 55.
18 Motion for Reconsideration, Rollo, pp. 5658.
419
VOL. 319, NOVEMBER 29, 1999 419

ment for P200,000.00, which is not contrary 19

to law, morals,
good customs, public order or public policy.
Upon due consideration of petitioners motion, we now
resolve to grant the motion for reconsideration.
The questions presented are whether petitioner failed to

pay the loan at its maturity date and whether the
stipulation in the loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On
said date, petitioner tendered payment to settle the loan
which respondents refused to accept, insisting that
petitioner sell to them the collateral of the loan.
When respondents refused to accept payment, petitioner
consigned the amount with the trial court.
We note the eagerness of respondents to acquire the
property given as collateral to guarantee the loan. The sale
of the collateral
20
is an obligation with a suspensive
condition. It is dependent upon the happening of an event,
without which the obligation to sell does not arise. Since
the event did not occur, respondents do not have the right
to demand fulfillment of petitioners obligation, especially
where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents
considering the inadequate consideration (P200,000.00) for
a 70 square meter property situated at Congressional
Avenue, Quezon City.
Respondents argue that contracts have the force of law
between the contracting
21
parties and must be complied with
in good faith. There are, however, certain exceptions to
the rule, specifically Article 1306 of the Civil Code, which
provides:
________________
19 Rollo, pp. 6065.

20 Article 1181, Civil Code. In conditional obligations, the acquisition of
the rights, as well as the extinguishment or loss of those already acquired,
shall depend upon the happening of the event which constitutes the
condition.
420

Article 1306. The contracting parties may establish such

stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
A scrutiny of the stipulation of the parties reveals a subtle

intention of the creditor to acquire the property given as
security for the loan. This is embraced in the concept
22
of
pactum commissorium, which is proscribed by law.
The elements of pactum commissorium are as follows:
(1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there
should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of nonpayment 23
of
the principal obligation within the stipulated period.
24
In Nakpil vs. Intermediate Appellate Court, we said:
The arrangement entered into between the parties, whereby

Pulong Maulap was to be considered sold to him (respondent) x x
x in case petitioner fails to reimburse Valdes, must then be
construed as tantamount to pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code. For, there was
to be automatic appropriation of the property by Valdes in the
event of failure of petitioner to pay the value of the advances.
Thus, contrary to respondents manifestation, all the elements of
a pactum commissorium were present: there was a creditordebtor
relationship between the parties the property was used as
security for the loan and there was automatic appropriation by
respondent of Pulong Maulap in case of default of petitioner.
_________________
22 Article 2088, Civil Code. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them. Any stipulation to
23 Development Bank of the Philippines vs. Court of Appeals, 284 SCRA
14, 26 (1998), citing Tolentino, Arturo M., Commentaries & Jurisprudence
on the Civil Code of the Philippines, Vol. V, pp. 536537 (1992), citing Uy
Tong vs. Court of Appeals, 161 SCRA 383 (1988).
24 225 SCRA 456, 467 (1993).
421
VOL. 319, NOVEMBER 29, 1999 421

A significant task in contract interpretation is the

ascertainment of the intention of the parties and looking
into the words used by the parties to project that intention.
In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for
the debtor is obliged to dispose of the collateral at the pre
agreed consideration amounting to practically the same
amount as the loan. In effect, the creditor acquires the

collateral in the event of nonpayment of the loan. This is
within the concept 25
of pactum commissorium. Such
stipulation is void.
All persons in need of money are liable to enter into
contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily. Hence,
courts are duty bound to exercise caution in the
interpretation and resolution of contracts lest the lenders
devour the borrowers like vultures do with their prey.
WHEREFORE, we GRANT petitioners motion for
reconsideration and SET ASIDE the Courts resolution of
February 9, 1998. We REVERSE the decision of the Court
of Appeals in CAG.R. CV No. 40193. In lieu thereof, we
hereby DISMISS the complaint in Civil Case No. Q90
4813.
No costs.
SO ORDERED.
Davide, Jr. (C.J.), Puno, Kapunan and Ynares

Santiago, JJ., concur.
Motion for reconsideration granted February 9, 1998

resolution set aside and reviewed decision reversed.
Note.In determining the nature of a contract, the

Court looks at the intent of the parties and not at the
nomenclature used to describe it. (Lao vs. Court of Appeals,
275 SCRA 237 [1997])
o0o
___________________
25 Article 2208, Civil Code, quoted above.
422
VOL. 177, SEPTEMBER 26, 1989 793

Yau Chu vs. Court of Appeals
*
G.R. No. 78519.September 26, 1989.
VICTORIA YAU CHU, assisted by her husband MICHAEL

CHU, petitioners, vs. HON. COURT OF APPEALS,
FAMILY SAVINGS BANK and/or CAMS TRADING
ENTERPRISES, INC., respondents.
Civil Law Credit Transactions Sales Pacto Commissorio

The prohibition against pacto commissorio does not apply when
the security for a debt is also money in the form of time deposit.
The encashment of the deposit certificates was not a pacto
commissorio which is prohibited under Art. 2088 of the Civil
Code. A pacto commissorio is a provision for the automaticap
propriation of the pledged or mortgaged property by the creditor
in payment of the loan upon its maturity. The prohibition against
a pacto commissorio is intended to protect the obligor, pledgor, or
mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than
the debt. Where, as in this case, the security for the debt is also
money deposited in a bank, the amount of which is even less than
the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtors overdue obligation, with
the latters consent.
_______________
* FIRST DIVISION.
794
794 SUPREME COURT REPORT ANNOTATED

PETITION for certiorari to review the decision of the Court

of Appeals.
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Francisco A. Lara, Jr. for petitioner.

D.T. Ramos and Associates for respondent Family
Savings Bank.
Romulo T. Santos for respondent CAMS Trading.
GRIOAQUINO, J.:
This is a petition for review on certiorari to annul and set

aside the Court of Appeals decision dated October 28, 1986
in CAG.R. CV No. 03269 which affirmed the decision of the
trial court in favor of the private respondents in an action
to recover the petitioners time deposits in the respondent
Family Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been
purchasing cement on credit from CAMS Trading
Enterprises, Inc. (hereafter Cams Trading for brevity). To
guaranty payment for her cement withdrawals, she
executed in favor of Cams Trading deeds of assignment of
her time deposits in the total sum of P320,000 in the
Family Savings Bank (hereafter the Bank). Except for the
serial numbers and the dates of the time deposit
certificates, the deeds of assignment, which were prepared
by her own lawyer, uniformly provided
x x x. That this assignment serves as a collateral or guarantee for

the payment of my obligation with the said CAMS TRADING
ENTERPRISES, INC. on account of my cement withdrawal from
said company, per separate contract executed between us.
On July 24, 1980, Cams Trading notified the Bank that

Mrs. Chu had an unpaid account with it in the sum of
P314,639.75. It asked that it be allowed to encash the time
deposit certificates which had been assigned to it by Mrs.
Chu. It submitted to the Bank a letter dated July 18, 1980
of Mrs. Chu admitting that her outstanding account with
Cams Trading was P404,500. After verbally advising Mrs.
Chu of the assignees request to encash her time deposit
certificates and obtaining her verbal conformity thereto,
the Bank agreed to encash the certificates.
795
VOL. 177, SEPTEMBER 26, 1989 795

It delivered to Cams Trading the sum of P283,737.75 only,

as one time deposit certificate (No. 0048120954) lacked the
proper signatures. Upon being informed of the encashment,
Mrs. Chu demanded from the Bank and Cams Trading that
her time deposit be restored. When neither complied, she

filed a complaint to recover the sum of P283,737.75 from
them. The case was docketed in the Regional Trial Court of
Makati, Metro Manila (then CFI of Rizal, Pasig Branch
XIX), as Civil Case No. 38861.
In a decision dated December 12, 1983, the trial court
dismissed the complaint for lack of merit. Chu appealed to
the Court of Appeals (CAG.R. CV No. 03269) which
affirmed the dismissal of her complaint.
In this petition for review, she alleges that the Court of
Appeals erred:
1. In not annulling the encashment of her time deposit

certificates as a pactum commissorium and
2. In not finding that the obligations secured by her
time deposits had already been paid.
We find no merit in the petition for review.

The Court of Appeals found that the deeds of
assignment were contracts of pledge, but, as the collateral
was also money or an exchange of peso for peso, the
provision in Article 2112 of the Civil Code for the sale of
the thing pledged at public auction to convert it into money
to satisfy the pledgors obligation, did not have to be
followed. All that had to be done to convert the pledgors
time deposit certificates into cash was to present them to
the bank for encashment after due notice to the debtor.
The encashment of the deposit certificates was not a
pacto commissoriowhich is prohibited under Art. 2088 of
the Civil Code. A pacto commissorio is a provision for the
automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its
maturity. The prohibition against a pacto commissorio is
intended to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much
more than the debt. Where, as in this case, the security for
the debt is also money deposited in a bank, the amount of
which is even less than the debt, it was not illegal for
796
796 SUPREME COURT REPORT ANNOTATED

Almine vs. Court of Appeals
the creditor to encash the time deposit certificates to pay

the debtors overdue obligation, with the latters consent.
Whether the debt had already been paid as now alleged

by the debtor, is a factual question which the Court of
Appeals found not to have been proven for the evidence
which the debtor sought to present on appeal, were receipts
for payments made prior to July 18, 1980. Since the
petitioner signed on July 18, 1980 a letter admitting her
indebtedness to be in the sum of P404,500, and there is no
proof of payment made by her thereafter to reduce or
extinguish her debt, the application of her time deposits,
which she had assigned to the creditor to secure the
payment of her debt, was proper. The Court of Appeals did
not commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs
against the appellant.
SO ORDERED.
Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., I inhibit.
Petition denied.
Note.Stipulation vesting sole ownership on mortgagee

in case of failure to redeem the property is pactum
commissorium which is null and void. (Hechanova vs. Adil,
144 SCRA 450.)
o0o
VOL. 22, FEBRUARY 17, 1968 585

Yuliongsiu vs. Philippine National Bank
No. L19227. February 17, 1968.
DIOSDADO YULIONGSIU, plaintiffappellant, vs.

PHILIPPINE NATIONAL BANK (Cebu Branch),
defendantappellee.
Evidence Pledges Judicial admission Its probative weight.

The parties stipulated as a fact that Exhibit "A" and "1Bank" is a
pledge contract. Necessarily, this judicial admission binds the
plaintiff. Without any showing that this was made thru palpable
mistake, no amount of rationalization can offset it.
Pledges Possession of pledged property by pledgor Possession
as trustee.The pledgee was therefore entitled to the actual
possession of the vessels. The plaintiff's continued operation of the
vessels after the pledge contract was entered into, places his
possession "subject to the order of the pledge". The pledgee can
temporarily entrust the physical possession of the chattels
pledged to the pledgor without invalidating the pledge. In this
case, the pledgor is regarded as holding the pledged property
merely as trustee for the pledgee.
Same Validity of pledges Constructive delivery sufficient.
Appellant would want this Court to rule that constructive delivery
is insufficient to make pledge effective. He points to a case (Betita
v. Ganzon, 49 Phil. 87) which ruled that there has to be actual
delivery of the chattels pledged. In Banco EspaolFilipino v.
Peterson (7 Phil. 409) where the goods therein were the objects of
the pledge, for purposes of showing the transfer of control to the
pledgee, delivery to him of the keys to the warehouse was
sufficient. In other words, the type of delivery will depend upon
the nature and the peculiar circumstances of each case. Since the
defendant bank was, pursuant to the terms of the pledge contract,
in full control of the vessels thru plaintiff, the former could take
actual possession at any time during the life of the pledge to make
more effective its security. Its taking of the vessels therefore was
not unlawful.
586
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Cebu.

Vicente Jaime, Regino Hermosisima & E. Lumontad,
Sr. for plaintiffappellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for
defendantappellee.
BENGZON, J.P., J.:

1
Plaintiffappellant Diosdado Yuliongsiu was the owner of
two (2) vessels, namely: The M/S Surigao, valued at
P109,925.78 and the M/S Don Dino, valued at P63,000.00,
and operated the FS203, valued at P210,672.24, which was
purchased by him from the Philippine Shipping
Commission, by installment or on account. As of January or
February, 1943, plaintiff had paid to the Philippine
Shipping Commission only the sum of P76,500 and the
balance of the purchase price was payable at P50,000 2
a
year, due on or before the end of the current year.
On June 30, 1947, plaintiff obtained a loan of P50,000
from the defendant Philippine National Bank, Cebu
Branch. To guarantee its payment, plaintiff pledged the
M/S Surigao, M/S Don Dino and its equity in the FS203 to
the defendant bank, as evidenced by the pledge contract,
Exhibit "A" & "1Bank", executed on the same day and duly
registered with
3
the office of the Collector of Customs for the
Port of Cebu.
Subsequently, plaintiff effected partial payment of the
loan in the sum of P20,000. The remaining balance was
renewed by the execution of two (2) promissory notes in the
bank's favor. The first note, dated December 18, 1947, for
P20,000, was due on April 16, 1948 while the second, dated
February 26, 1948, for P10,000, was due on
____________
1 Diosdado Yuliongsiu has, since December 6, 1962, died and been

subsequently substituted by his widow Emerenciana A. Yuliongsiu, for
herself, and as guardian ad litem of their daughter Rose Yuliongsiu.
2 Par. 1, PreTrial Order of Oct. 2, 1958 Record on Appeal, p. 39.
587
VOL. 22, FEBRUARY 17, 1968 587

June 25, 1948. These two notes were never paid at all by
plaintiff on their respective due dates.4
On April '6, 1948, the bank f iled criminal charges
against plaintiff and two other accused for estafa thru
falsification of commercial documents, because plaintiff
had, as last indorsee, deposited with defendant bank, from
March 11 to March 31,1948, seven Bank of the Philippine
Islands checks totalling P184,000. The drawer thereofone
of the coaccusedhad no f unds in the drawee bank.
However, in connivance with one employee of defendant
bank, plaintiff was able to withdraw the amount credited to
him before the discover y of the defrauda ti on on Ap 1948.
Plaintiff and his coaccused were convicted by the trial
court and sentenced to indemnify the defendant bank in the
sum of P184,000. On appeal, the conviction was affirmed by
the Court of Appeals on October 31, 1950. The
corresponding writ of execution issued to implement the
order for indemnification was returned unsatisfied as
plaintiff was totally insolvent.
Meanwhile, together with the institution of the criminal
action, defendant bank took physical possession of three
pledged vessels while they were at the Port of Cebu, and on
April 29, 1948, after the first note fell due and was not
paid, the Cebu Branch Manager of defendant bank, acting
as attorneyinfact of plaintiff pursuant to the terms of the
pledge contract, executed a document of sale, Exhibit "4",
transferring the two pledged vessels and plaintiff's
6
equity
in FS203, to defendant bank for P30,042.72.
The FS203 was subsequently surrendered by the
defendant bank to the Philippine Shipping Commission
which rescinded the sale to plaintiff on September 8, 1948,
for failure to pay the7 remaining installments on the
purchase price thereof. The other two boats, the M/S
Surigao
____________
4 Par. 4, PreTrial Order of Oct. 2, 1958 Record on Appeal, pp. 4043.

5 Pars. 89, PreTrial Order of Oct. 2, 1958 Record on Appeal, pp. 45
46.
7 Par. 5, PreTrial Order of Oct. 2, 1958 Record on Appeal, pp. 4344.
588

and the M/S Don Dino were sold by defendant bank to third
parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the
Court of First Instance of Cebu to recover the three vessels
or their value and damages from defendant bank. The
latter filed its answer, with a counterclaim for P202,000
plus P5,000 damages.. After issues were joined, a pretrial
was held resulting in a partial stipulation of facts dated
October 2, 1958, reciting most of the facts abovenarrated.
During the course of the trial, defendant amended8 its
answer reducing its claim from P202,000 to P8,846.01, but
increasing its alleged damages to P35,000. The lower court
rendered its decision on February 13, 1960 ruling: (a) that
the bank's taking of physical possession of the vessels on
April 6, 1948 was justified by the pledge contract, Exhibit
"A" & "1Bank" and the law (b) that the private sale of the
pledged vessels by defendant bank to itself without notice
to the plaintiffpledgor as stipulated in the pledge contract
was likewise valid and (c) that the defendant bank should
pay to plaintiff the sums of. P1,153.99 and P8,000, as his
remaining account balance, or setoff these sums against
the indemnity which plaintiff was ordered to pay to it in
the criminal cases.
When his motion for reconsideration and new trial was
denied, plaintiff brought the appeal to Us, the amount
involved being more than P200,000.00.
In support of the first assignment of error,
plaintiffappellant would have this Court hold that Exhibit
"A" & "1Bank" is a chattel mortgage contract so that the
creditor defendant could not take possession of the chattels
object thereof until after there has been default. The
submission is without merit. The parties stipulated as a
fact that Exhibit "A" & "1Bank" is a pledge contract
"3. That a credit line of P50,000.00 was extended to the plaintiff

by the defendant Bank, and the plaintiff obtained and
___________
8 There was an 8th check, for P18,000, deposited by plaintiff and for which the
drawer had no funds. This amount less plaintiff's actual balance of P9,153.99 in
his account gives the bank an P8,846.01 credit.
589
VOL. 22, FEBRUARY 17, 1968 589

Yuliongsiu vs. Philippin e Nation al Bank
received f rom the said Bank the sum of P50,000.00, and in order
to guarantee the payment of this loan, the pledge contract, Exhibit
"A" & Exhibit "1Bank", was executed and duly registered with the
Of f ice of the Collector of Customs f or the Port of Cebu on the
date appearing therein" (Italics supplied)
Necessarily, this judicial admission binds the plaintiff.

Without any showing that this was made thru 9palpable
mistake, no amount of rationalization can offset it.
The defendant bank as pledgee was therefore entitled to
the actual possession of the vessels. While it is true that
plaintiff continued operating the vessels after the pledge
contract was entered into, his possession10 was expressly
made "subject to the order of the pledgee."
11
The provision
of Art. 2110 of the present Civil Code being newcannot
apply to the pledge contract here which was entered into on
June 30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can
temporarily entrust the physical possession of the chattels
pledged to the pledgor without invalidating the pledge. In
such a case, the pledgor is regarded as holding
12
the pledged
property merely as trustee for the pledgee.
Plaintiffappellant would also urge Us to rule that
constructive delivery is insufficient to make pledge
effective. He points to Betita v. Ganzon, 49 Phil. 87 which
ruled that there has to be actual delivery of the chattels
pledged. But then there is also Banco EspaolFilipino v.
Peterson, 7 Phil . 409 rul ing that sym bolic de liver y would
An examination of the peculiar nature of the things
pledged in the two cases will readily dispel the apparent
contradiction between the two rulings. In Betita v. Ganzon,
the objects pledgedcarabaoswere easily capable of
actual, manual delivery unto the pledgee. In Banco
_____________
9 Sec. 2, Rule 129, Rules of Court.

10 Exh. "A" & "1Bank" recites in part:, " x x x t he Pled x x x here by gi
ves Posses si on o f such p rop ert y for t of this pledge to the Pledgor who
shall hold said property subject to the order of the Pledge." (Italics
supplied)
11 Providing that if after the perfection of the pledge, the thing is found
in the pledgor's possession, it is presumed that the same was returned by
the pledgee, thereby extinguishing the pledge.
12 72 C.J .S. 40
590

EspaolFilipino v. Peterson, the objects pledgedgoods

contained in a warehousewere hardly capable of actual,
manual delivery in the sense that it was impractical as a
whole for the particular transaction and would have been
an unreasonable requirement. Thus, for purposes of
showing the transfer of control to the pledgee, delivery to
him of the keys to the warehouse sufficed. In other words,
the type of delivery will depend upon the nature and the
peculiar circumstances of each case. The parties here
agreed that the vessels be delivered by the "pledgee to the
pledgor who shall hold said property subject to the order of
the pledgee." Considering the circumstances of this case
and the nature of the objects pledged, i.e., vessels used in
maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of
pledge contract, in full control of the vessels thru the
plaintiff, the former could take actual possession at any
time during the life of the pledge to make more effective its
security. Its taking of the vessels therefore on April 6,
1948, was not unlawful. Nor was it unjustified considering
that plaintiff had just defrauded the defendant bank in the
huge sum of P184,000.
The stand We have taken is not without precedent. The
Supreme Court of Spain, 13in a similar 14
case involving Art.
1863 of the old Civil Code, has ruled:
"Que si bien la naturaleza del contrato de prenda consiste en

pasar las cosas a poder del acreedor o de un tercero y no quedar
en la del deudor, como ha sucedido en el caso de autos, es lo cierto
que todas las partes interesadas, o sean acreedor, deudor y
Sociedad, convinieron que continuaran los coches en poder del
deudor para no suspender el trfico, y el derecho de no uso de la
prenda pertenece al deudor, y el de dejar la cosa bajo su
responsabilidad al acreedor, y ambos convinieron por creerlo til
para las partes contratantes, y stas no reclaman perjuicios, no se
infringio, entre otros, este articulo."
In the second assignment of error imputed to the lower
____________
13 Which provides: "In addition to the requisites mentioned in Article

1857, it shall be necessary, in order to constitute the contract of pledge,
that the pledged be placed in the possession of the creditor or of a third

person appointed by common consent."
14 Sentencia del 23 de Abril de 1929, cited in 29 Scaevola 346.
591
VOL. 22, FEBRUARY 17, 1968 591

court, plaintiffappellant attacks the validity of the private

sale of the pledged vessels in favor of the defendant bank
itself. It is contended first, that the cases holding that the
statutory requirements as to public sales with prior notice
in connection with foreclosure proceedings are waivable,
are no longer authoritative in view of the passage of Act
3135, as amended second, that the charter of defendant
bank does not allow it to buy the property object of
foreclosure in case of private sales and third, that the price
obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in
Philippine National Bank v. De Poli, 44 Phil. 763 and El
Hogar Filipino v. Paredes, 45 Phil. 178 are still
authoritative despite the passage of Act 3135. This law
refers only, 15
and is limited, to foreclosure of real estate
mortgages. S whatever formalities there are in Act 3135
do not apply to pledge. Regarding the bank's authority to
be the purchaser in the foreclosure sale, Sec. 33 of Act
2612, as amended by Acts 2747 and 2938 only states that if
the sale is public, the bank could purchase the whole or
part of the property sold "free from any right of redemption
on the part of the mortgagor or pledgor" This even argues
against plaintiff's case since the import thereof is that if
the sale were private and the bank became the purchaser,
the mortgagor or pledgor could redeem the property.
Hence, plaintiff could have recovered the vessels by
exercising this right of redemption. He is the only one to
blame for not doing so.
Regarding the third contention, on the assumption that
the purchase price was unconscionable, plaintiff's remedy
was to have set aside the sale. He did not avail of this.
Moreover, as pointed out by the lower court, plaintiff had
at the time an obligation to return the P184,000
fraudulently taken by him from defendant bank.
The last assignment of error has to do with the damages
allegedly suffered by plaintiffappellant by virtue of the
taking of the vessels. But in view of the results reached
above, there is no more need to discuss the same.
On the whole, We cannot say the lower court erred in
____________
15 Luna v. Encarnacion, 91 Phil. 531.
592

San Diego vs. Villagracia
disposing of the case as it did. Plaintiffappellant was not

alltooinnocent as he would have Us believe. He did
defraud the defendant bank first. If the latter countered
with the seizure and sale of the pledged vessels pursuant to
the pledge contract, it was only to protect its interests after
plaintiff had defaulted in the payment of the first
promissory note. Plaintiffappellant did not come to court
with clean hands.
WHEREFORE, the appealed judgment is, as it is
hereby, affirmed. Costs against plaintiffappellant. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,

Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
Judgment affirmed.
Note.Judicial admission made through palpable

mistake is illustrated in Irlanda vs. Pitargue, 22 Phil. 383,
and in Granada vs. Phil. National Bank, L20745, Sept. 2,
1966, 18 SCRA 1. See also the notes under the last cited
case.
____________

Estate ofGeorge Litton us. Mendoza
*
No. L49120. Junc 30,1988.
ESTATE OF GEORGE LITTON, petitioner, vs. CIRIACO

B. MENDOZA and COURT OF APPEALS, respondents.
Compromise Agreement Res Judicatci A compromise

agreement approved by final order of tlie Court has the force of rcs
judicata Exceptions: vices ofconse?it orforgery.The purpose of a
compromise being to replace and terminate controverted claims,
courts encourage the same. A compromise once approved by fmal
order of the court has the force ofj*esjudicata between parties and
should not be disturbed except for vices of consent or forgery.
SamePledgeMortgageArt. 1634 ofCivil Code cloes notgrant
an absolutc right to the assignor to indiscriminateiy dispose ofthe
thing
________________
* FIRST DIVISION.
247
VOL. 163, JUNE 30, 1988 247
Estate ofGeorge Litton vs. Mendoza
or the right given as security.We rule for the petitioner. The fact
that the deed of assignment was done by way of securing or
guaranteeing Tan's obligation in favor of George Litton, Sr., as
observed by the appellate court, will not in any way alter the
resolution on the matter. The validity of the guaranty or pledge in
favor of Litton has not been questioned. Our examination of the
deed of assignment shows that it fulfills the requisites of a valid
pledge or mortgage. Although it is true that Tan may validly
alienate the litigatious credit as ruled by the appellate court,
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citing Article 1634 of the Civil Code, said provision should not be
taken to mean as a grant of an absolute right on the part of the
assignor Tan to indiscriminately dispose of the thing or the right
given as security. The Court rules that the said provision should
be read in consonance with Article 2097 of the same code.
Although the pledges or the assignee, Litton, Sr. did not ipso facto
become the creditor of private respondent Mendoza, the pledge
being valid, the incorporeal right assigned by Tan in favor of the
former can only be alienated by the latter with due notice to and
consent of Litton, Sr. or his duly authorized representative. To
allow the assignor to dispose of or alienate the security without
notice and consent of the assignee will render nugatory the very
purpose of a pledge or an assignment of credit.
Same Same Deed of Assigmnent Obligation of the debtor to
reimburse the assignee for the price he paid for the value glven cis
consideration for the dee.d of assignment.Moreover, under
Article 1634, the debtor has a corresponding obligation to
reimburse the assignee, Litton, Sr. for the price he paid or for the
value given as consideration for the deed of assignment. Failing
in this, the alienation of the litigated credit made by Tan in favor
of private respondent by way of a compromise agreement does not
bind the assignee, petitioner herein.
Same Same Same Same Private respondent acted in bad
fcdth cuid in cQiinivance with assignor Tan as to defraud the
petitioner in cntering into the cojnp?*omise agreement.Indeed, a
painstaking review of the record of the case reveals that private
respondent has, from the very beginning, been fully aware of the
deed of assignment executed by Tan in favor of Litton, Sr. as said
deed was duly submitted to Branch XI of the then Court of First
Instance of Manila in Civil Case No. 56850 (in relation to Civil
Case No. Q8303) where C.B.M. Products is one of the defendants
and the parties were notified through their counsel. As earlier
mentioned, private respondent herein is the president of C.B.M.
Products, hence, his coiitention that he is not aware of the said
deed of assignment deserves scant
248
consideration from the Court. Petitioner pointed out at the same

time that private respondent together with his counsel were
served with a copy of the deed of assignment which allegation
remains uncontroverted. Having such knowledge thereof, private
respondent is estopped from entering into a compromise

agreement involving the same litigated credit without notice and
consent of the assignee, petitioner herein. More so, in the light of
the fact that no reimbursement has ever been made in favor of the
assignee as required under Article 1634. Private respondent acted
in bad faith and in connivance with assignor Tan so as to defraud
the petitioner in entering into the compromise agreement.
PETITION to review the resolution of the Court of Appeals.

Ruben G. Bala for respondent Mendoza.
GANCAYCO, J.:
This petition for review presents two (2) main issues, to

wit: (1) Can a plaintiff in a case, who had previously
assigned in favor of his creditor his litigated credit in said
case, by a deed of assignment which was duly submitted to
the court, validly enter into a compromise agreement
thereafter releasing the defendant therein from his claim
without notice to his assignee? and (2) Will such previous
knowledge on the part of the defendant of the assignment
made by the plaintiff estop said defendant from invokirig
said compromise as a ground for dismissal of the action
against him? 1
The present case stemmed from Civil Case No. Q8303
entitled "Alfonso Tan vs. Ciriaco B. Mendoza," an action
for the collection of a sum of money representing the value
of two (2) checks which plaintiff Tan claims to have been
delivered to him by defendant Mendoza, private
respondent herein, by way of guaranty with a commission. 2
The record discloses that the Bernal spouses are
engaged in the manufacture of embroidery, garments and
cotton materials.
3
Sometime in September 1963, C.B.M.
Products, with Mendoza as president, offered to sell to the
Bernals textile
_________________
1 Court of First Instance of Manila, Branch XI.

2 PlaintiffsInterpleader, Civil Case No. 56850.
3 Defendant in Civil Case Nos. 8303 & 56850.
249
VOL. 163, JUNE 30, 1988 249

Estate of George Litton vs. Mendoza
cotton materials and, for this purpose, Mendoza

introduced the Bernals to Alfonso Tan. Thus, the Bernals
purchased on credit from Tan some cotton materials worth
P80,796.62, payment of which was guaranteed by
Mendoza, Thereupon, Tan delivered the said cotton
materials to the Bernals. In view of the said arrangement,
on November 1963, C.B.M. Products, through Mendoza,
asked and received from the Bernals PBTC Check No.
626405 for P80,796.62 dated February 20, 1964 with the
understanding that the said check will remain in the
possession of Mendoza until the cotton materials are
finally manufactured into garments after which time
Mendoza will sell the finished products for the Bernals.
Meanwhile, the said check matured without having been
cashed4
and Mendoza demanded the issuance of another
check in the same amount without a date.
On the other hand, on February 28, 5
1964, defendant
Mendoza issued two (2) PNB checks in favor of Tan in
'the total amount of P80,796.62. He informed the Bernals of
the same and told them that they are indebted to him and
asked the latter to sign an instrument whereby Mendoza
assigned the said amount to Insular Products Inc. Tan had
the two checks issued by Mendoza discounted in a bank.
However, the said checks were later returned to Tan with
the words stamped "stop payment" which appears to have
been ordered by Mendoza for. failure of the Bernals to
deposit sufficient funds for
the check that the Bernals issued in favor of Mendoza.
Hence, as adverted to above, Tan brought an action
6
against
Mendoza docketed as Civil Case No. Q8303 while the
Bernals brought an action for interpleader docketed as
Civil Case No. 568507 for not knowing whom to pay. While
both actions were pending resolution by the trial court, on
March 20, 1966, Tan assigned
**
in favor of George Litton,
Sr. his litigatious credit in Civil Case No. 56850 against
Mendoza, duly submitted to
________________
4 PBTC Check No. 927581 C.

5 For P75,948.83 & P4,847.79, respectively.
6 Supra.
7 Ramon P. Bernal vs. C.B.M. Products, et al.
** This is now the subject of this petition.
250
8
the court, with notice to the parties. The deed of
assignment was framed in the following tenor:
"DEED OF ASSIGNMENT
I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA,

residing at No. 6 Kanlaon, Quezon City, doing business under the
name and style ALTA COMMERCIAL by way of securing or
guaranteeing my obligation to Mr. GEORGE LITTON, SK, do by
these presents CEDE, ASSIGN, TRANSFER AND CONVEY unto
the said Mr. GEORGE LITTON, SR., my claim against C.B.M.
Products, Inc., personally guaranteed by Mr. Ciriaco B.
Mendoza, in the amount of EightyThousand Seven Hundred
Ninety Six Pesos and Sixtytwo centavos (P80,796.62) the balance
of which, in principal, and excluding, interests, costs, damages
and attorney's fees riow stands at P76,000.00, P4,796.62, having
already been received by the assignor on December 23,1965,
pursuant to the order of the court in Civil Case No. 56850, C.F.I.,
Manila, authorizing Alfonso Tan to withdraw the amount of
P4,796.62 then on deposit with the court. All rights, and interests
in said net amount, plus interests and costs, and less attorney's
fees, in case the amount allowed therefor be less than the
amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila)
and Q8503 (C.F.I., Quezon City) are by these presents covered by
this assignment.
I further undertake to hold in trust any and all amounts which
may hereafter be realized from the aforementioned cases for the
ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn over to him
such amounts in application to my liability to him, as his interest
may then show, and I further undertake to cooperate towards the
successful prosecution of the aforementioned cases making
available myself, as witness or otherwise,
9
as well as any and all
documents thereto appertaining. x x x"
After due trial, the lower court ruled that the said PNB
checks were issued by Mendoza in favor of Tan for a
commission in the sum of P4,847.79 and held Mendoza
liable as a drawer whose liability is primary and not
merely as an indorser and thus dire'cted Mendoza to pay
Tan the sum of P76,000.00, the sum still due, plus damages
and attorney's
_________________
8 Page 92, Roll Manifestation filed by George Litton, Sr. dated

Septemberl,1966.
9 Pages 3132, Rollo.
251
VOL. 163, JUNE 30, 1988 251

10
fees.
Mendoza seasonably filed an appeal with the Court of
Appeals, dockted as C.A. G.R. No. 41900R, arguing in the
main that his liability is one of an accommodation party
and not as a drawer.
On January 27,1977, the Court of Appeals rendered 11
a
decision affirming in toto the decision of the lower eourt.
Meanwhile, on February 2, 1971, pending the resolution
of the said appeal, Mendoza entered into a compromise
agreement with Tan wherein the latter acknowledged that
all his claims against Mendoza had been settled and that
by reason of said settlement both parties mutually waive,
release and quit whatever claim, right or cause of action
one may have against the other, with a provision that the
said compromise agreement shall not in any way affect the
right of Tan to enforce by12 appropriate action his claims
against the Bernal spouses.
On February 25,1977, Mendoza filed a motion for
reconsideration praying that the decision of January 27,
1977 be set aside, principally anchored upon the ground
that a compromise agreement was entered into between
him and Tan which in effect released Mendoza from
liability. Tan filed an opposition to this motion claiming
that the compromise agreement is null and void as he was
not properly represented by his counsel of record Atty.
Quiogue, and was instead represented by a certain Atty.
Laberinto, and principally because of the deed of
assignment that he executed in favor of George Litton, Sr.
alleging that with such, he has no more right to alienate
said credit.
While the case v/as still pending reconsideration by the
respondent court, Tan, the assignor, died leaving no
properties whatever to satisfy the claim of the estate of the
late George Litton, Sr. 13
In its Resolution dated August 30, 1977, the
respondent court set aside its decision and approved the
compromise agree
________________
10 Decision of December 2,1967.

11 Penned by Justice Ramon C. Fernandez.
12 Pages 3031, Rollo,

13 Penned by Justice Ricardo C. Puno and concurred into by Justices
Pacifico P. de Castro and Delfin Fl. Batacan, pages 2936, Rollo.
252

ment.
As to the first ground invoked by Tan, now deceased, the
respondent court ruled that the nonintervention of Tan's
counsel of record in the compromise agreement does not
affect the validity of the settlement on the ground that the
client had an undoubted right to compromis^ a suit
without 14the intervention of his lawyer, citing Aro vs.
Nanawa.
As to the second ground, respondent court ruled as
follows:
"x x x it is relevant to note that Paragraph 1 of the deed of

assignment states that the cession, assignment, transfer, and
conveyance by Alfonso Tan was only by way of securing or
guaranteeing his obligation to GEORGE LITTON, SR.
"Hence, Alfonso Tan retained possession and dominion of the
credit (Par. 2, Art. 2085, Civil Code).
" 'Even considered as a litigatious credit,' which indeed
characterized the claims herein of Alfonso Tan, such credit may
be validly alienated by Tan (Art. 1634, Civil Code).
"Such alienation is subject to the remedies of Litton under
Article 6 of the Civil Code, whereby the waiver, release, or quit
claim made by plaintiffappellee Alfonso Tan in favor of
defendantappellant Ciriaco B. Mendoza, if proven prejudicial to
George Litton, Sr. as assignee under the deed of assignment, may
entitle Litton to pursue his remedies against Tan.
"The alienation of a litigatious credit is further subject to the
debtor's right of redemption under Article 1634 of the Civil Code."
As mentioned earlier, the assignor Tan died pending

resolution of the motion for reconsideration. The estate of
George Litton, Sr., petitioner herein, as represented by
James Litton, 15
son of George Litton, Sr. and
administrator of the former's estate, is now appealing the
said resolution to this Court as assignee of the amount
sued in Civil Case No. Q8303, in relation to Civil Case No.
56850.
Before resolving the main issues aforementioned, the
question of legal personality of herein petitioner to bring
the instant petition for review, must be resolved.
_________________
14 27 SCRA 1090 (1969).

15 He was appointed as administrator of the estate of the late George
Litton, Sr. on August 7,1978 in Special Proceedings No. 8833, letters of
administration of which was issued on August 10,1978.
253
VOL. 163, JUNE 30, 1988 253

As a rule, the parties in an appeal through a review 16

on
certiorari are the same original parties to the case. If after
the rendition of judgment the original party dies, he should
be substituted by his successorininterest. In this case, it
is not disputed that no proper substitution of parties was
done. This notwithstanding, the Court so holds that the
same cannot and will not materially affect the legal right of
herein petitioner in instituting the instant petition in view
of the tenor of the deed 17
of assignment, particularly
paragraph two thereof wherein the assignor, Tan,
assumed the responsibility to prosecute the case and to
turn over to the assignee whatever amounts may be
realized in the prosecution of the suit.
We note that private respondent moved for the dismissal
of the appeal without notifying the estate of George Litton,
Sr. whereas the former was fully aware of the fact that the
said estate
18
is an assignee of Tan's right in the case
litigated. Hence, if herein petitioner failed to observe the
proper substitution of parties when Alfonso Tan died
during the pendency of private respondent's motion for
reconsideration, no one is to blame but private respondent
himself. Moreover, the right of the petitioner to bring the
present petition is well within the concept of a real party
ininterest in the subject matter of the action. Wellsettled
is the rule that a real partyininterest is a party entitled to
the avails of the
19
suit or the party who would be injured by
the judgment. We see the petitioner well within the latter
category.
Hence, as the assignee and successorininterest of Tan,
petitioner has the personality to bring this petition in
substitution ofTan.
Now, the resolution of the main issues.
The purpose of a compromise 20
being to replace and
terminate controverted claims, courts encourage the
same. A compro
________________
16 Page 471, Volume 2, Moran, Comments on the Rules of Court,

1979ed.
17 Supra.
18 Infra.
19 Salonga vs. Warner Barnes & Co., Ltd.,'88 Phil. 125, 131 (1951).
20 Republic vs. Estenzo, 21 SCRA 122 (1968).
254

mise once approved by final order of the court has the force
of res judicata between parties and should
21
not be disturbed
except for vices of consent or forgery.
In this case, petitioner seeks to set aside the said
compromise on the ground that previous thereto, Tan
executed a deed of assignment in favor of George Litton,
Sr. involving the same litigated credit.
We rule for the petitioner. The fact that the deed of
assignment was done by way of securing or guaranteeing
Tan's obligation in favor of George Litton, Sr., as observed
by the appellate court, will not in any way alter the
resolution on the matter. The validity of the guaranty or
pledge in favor of Litton has not been questioned. Our
examination of the deed of assignment shows 22
that it fulfllls
the requisites of a valid pledge or mortgage. Although it is
true that Tan may validly alienate the litigatious credit as
ruled by the appellate court, citing Article 1634 of the Civil
Code, said provision should not be taken to mean as a
grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as
security. The Court rules that the said provision should be 23
read in consonance with Article 2097 of the same code.
Although the pledgee or the assignee, Litton, Sr. did not
ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be
alienated by the latter with due notice to and consent of
Litton, Sr. or his duly authorized representative. To allow
the assignor to dispose of or alienate the security without
riotice and consent of the assignee will render nugatory the
very purpose of a pledge or an assignment of credit.
_________________
21 Araneta vs. Perez, 7 SCRA 923 (1963) Republic vs. Estenzo, supra
Vda. de Corpuz vs. PhodacaAmbrosio, 32 SCRA 279 (1970).
23 Article 2097. With the consent of the pledgee, the thing pledged may
be alienated by the pledgor or owner, subject to the pledge. The ownership
of the thing pledged is transmitted to the vendee or transferee as soon as
the pledgee consents to the alienation, but the latter shall continue in
possession.
255
VOL. 163, JUNE 30, 1988 255

24
Moreover, under Article 1634, the debtor has a
corresponding obligation to reimburse the assignee,
Litton, Sr. for the price he paid or for the value given as
consideration for the deed of assignment. Failing in this,
the alienation of the litigated credit made by Tan in favor
of private respondent by way of a compromise agreement
does not bind the assignee, petitioner herein,
Indeed, a painstaking review of the record of the case
reveals that private respondent has, from the very
beginning, been fully aware of the deed of assignment
executed by Tan in favor of Litton, Sr. as said deed was
duly submitted to Branch XI of the then Court of First
Instance of Manila in Civil Case No. 56850 (in relation to
Civil Case No. Q8303) where C.B.M. Products is one of the
defendants
25
and the parties were notified through their
counsel. As earlier mentioned, private respondent herein
is the president of C.B.M. Products, hence, his contention
that he is not aware of the said deed of assignment
deserves scant consideration from the Court. Petitioner
pointed out at the same time that private respondent
together with his counsel were served with a copy of the
deed of assignment which allegation remains
uncontroverted. Having such knowledge thereof, private
respondent is estopped from entering into a compromise
agreement involving the same litigated credit without
notice to and consent of the assignee, petitioner herein.
More so, in the light of the fact that no reimbursement has
ever been made in favor of the assignee as required under
Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the
petitioner in entering into the compromise agreement.
_________________
24 Article 1634. When a credit or other incorporeal right in litigation is

sold, the debtor shall have a right to extinguish it by reimbursing the
assignee for the price the latter paid therefor, the judicial costs incurred
by him, and the interest on the price from the day on which the same was
paid. A credit or other incorporeal right shall be considered in litigation
from the time the complaint concerning the same is answered. The debtor
may exercise his right within thirty days from the date the assignee
demands payment from him.
25 Annex "Al" to compliance of counsel for petitioner page 92, Rollo.
256

Dayrit vs. Court ofAppeals
WHEREFORE, the petition is GRANTED. The assailed

resolution of the respondent court dated August 30,1977 is
hereby SET ASIDE, the said compromise agreement being
null and void, and a new one is hereby rendered reinstating
its decision dated January 27, 1977, affirming in toto the
decision of the lower court. This decision is immediately
executory. No motion for extension of time to file a motion
for reconsideration will be granted.
SO ORDERED.
Narvasa, Cruz and GrinoAquino, JJ, concur.

Medialdea, J., on leave.
Petition granted. Resolution set aside.
Notes.Courts as a rule may not impose upon the

parties a judgment different from their compromise
agreement. (Tacan Dano vs. CA, 137 SCRA 803).
A compromise agreement signed by a lawyer on behalf of
a party to the agreement without the authorization of said
party or client, not void, but merely unenforceable.
(Bumanlag vs. Alzate, 144 SCRA 480).
oOo
[No. 31018. November 6, 1929]
CORNELIO CRUZ and CIRIACA SERRANO, plaintiffs

and appellants, vs. CHUA A. H. LEE, def endant and
appellant.
1. PLEADING AND PRACTICE COUNTERCLAIM

ARISING AFTER COMMENCEMENT OF ACTION "RES
JUDICATA."Under section 97 of the Code of Civil
Procedure a defendant who has a counterclaim in
existence at the time of the commencement of the action
arising out of the transaction which serves as the basis of
the com
11
VOL. 54, NOVEMBER 6, 1929 11
Cruz and Serrano vs. Chua, A. H. Lee
plaint, must set up such. counterclaim in his answer and

if he does not do this, such counterclaim. will be barred as
res judicata, by the judgment entered in the case. This
rule does not extend to counterclaims arising after the
institution of the action.
2. PLEDGE SUBPLEDGE OF PAWN TICKETS DUTY OF

PLEDGEE TO KEEP PAWN TICKET IN FORCE.
Under article 1867 of the Civil Code, a person who takes
in pledge a pawn ticket representing jewelry already held
in pledge by a pawnbroker is bound, so long as he retains
custody of the ticket, to keep the original contract of
pledge alive by payment from time to time of the
premium, or interest, required by the pawnbroker, and if
he fails in this duty, he will be liable in damages to the
person pledging such pawn ticket to him,

Manila. Revilla, J.
Gibbs & McDonough for plaintiffappellants.
http://central.com.ph/sfsreader/session/0000015cda48e8d3d5e2f9ed003600fb002c009e/t/?o=False 1/8
Antonio Gonzalez for defendantappellant.

STREET, J.:
This action was instituted in the Court of First Instance
of the City of Manila by Cornelio Cruz and wife, for the
purpose of recovering a sum of money from the defendant
Chua A. H. Lee, representing the damages alleged to have
been sustained by them from the lapsing of certain pawn
tickets which they had pledged to the defendant under the
circumstances hereinafter stated. Upon hearing the cause
the trial court gave judgment in favor of the plaintiffs to
recover of the def endant the sum of P1,141, with legal
interest from December 16, 1927, and with costs. From this
judgment both plaintiffs and defendant appealed.
It appears that prior to June 10, 1926, the plaintiff
Cornelio Cruz had pledged valuable jewelry to two different
pawnshops in the City of Manila, namely, the Monte de
Piedad and Ildefonso Tambunting, receiving therefor
twelve pawn tickets showing the terms upon which the
articles pledged were held by the pledgees. On the date
12

Cruz and Serrano vs. Chua A. H. Lee
stated the plaintiff, being desirous of obtaining a further

loan upon the same and other jewels, presented himself to
the defendant Chua A. H. Lee and pledged to him six pawn
tickets of the Monte de Piedad and a bracelet set with
seventeen diamonds of different sizes. Upon receiving the
bracelet and the six tickets Lee delivered to the plaintiff a
sum of money, for which the plaintiff executed a receipt
containing words to the effect that the amount of P3,020,
therein stated, represented the value of the bracelet and
pawn tickets and that it was understood that Lee would
become the absolute owner of the articles pledged if Cruz
should not return said sum of money within the period of
sixty days. One week thereafter Cruz again presented
himself at the place of business of Lee and received the
further sum of P3,500, at the same time delivering two
pawn tickets of the house of Ildefonso Tambunting and four
pawn tickets of the Monte de Piedad. At the same time
Cruz signed a further receipt containing a stipulation that
the sale of the articles pledged would become absolute
unless the amount stated in the receipt should be returned
within sixty days.
The tickets which form the principal feature in these
two pledges represented a pair of diamond earrings
previously pledged to Ildefonso Tambunting for P7,000 and

several other pieces of jewelry previously pledged to the
Monte de Piedad for the aggregate amount of P2,020. All
of these tickets were renewable, according to the custom of
pawnbrokers, upon payment from time to time of the sums
of money representing the interest accruing upon the debts
for which the jewelry was pawned.
The right of repurchasing the jewelry, which was
conceded to Cruz in the two receipts above mentioned, was
never exercised by him and on September 25, 1926, Lee
filed a complaint against Cruz in the Court of First
Instance of Manila (case No. 30569), in, which it Was
alleged that the receipts above mentioned had been drawn
in the
13
VOL. 54, NOVEMBER 6, 1929 13

form of a sale with stipulation for repurchase in sixty days

but that it was understood between the parties that the
transaction was a loan and that the jewelry and pawn
tickets held by Lee constituted a mere security for the
money advanced by him to Cruz. As a consequence Lee
asked for judgment against Cruz in the amount of P6,520.
On March 31, 1927, judgment in said action was rendered
in the Court of First Instance favorably to the plaintiff and,
although an attempt was made to get the decision reviewed
in the Supreme Court, the judgment was affirmed for
failure of the appellants to cause a transcript
1
of the oral
testimony to be brought to said court. After affirmance of
the judgment in the Supreme Court the cause was returned
to the Court of First Instance for execution, but as a result
of certain proceedings not necessary to be here recounted,
execution in that case was suspended to await the result of
the judgment to be given in this case.
It appears that the defendant Lee on August 18, 1926,
renewed the ten pawn tickets issued by the Monte de
Piedad by paying the interest necessary to effect renewal,
but these tickets all expired on October 18, 1926, and were
never renewed. The pawn tickets issued by Tambunting's
pawnshop on the diamond earrings were dated May 12,
1926, and remained good for one year, having expired on
May 12, 1927. Although the pawn tickets issued by the
Monte de Piedad expired on October 18, 1926, it is
admitted that they could have been renewed or the jewelry
redeemed at any time prior to actual sale at public auction,
and these jewels were not sold by the Monte de Piedad

until in the year 1927, when they were, at different dates,
bought in by the appraiser of the Monte de Piedad f or the
amount then due upon the respective jewels. But the
jewelry represented by one of these pawn tickets was not
thus sold until August 10, 1928. From this it will be seen
that all of the
______________
1 Chua A. H. Lee vs. Cruz and Serrano de Cruz, G. R. No. 27985,

promulgated October 29, 1927, not reported.
14

pawned jewelry was still subject to redemption when civil

case No. 30569 was first called for trial on January 3, 1927,
and apparently the right of redemption on only one piece of
jewelry had been foreclosed by sale when the decision was
rendered in the same case at the end of March. The record
does not show whether or not the earrings pawned to
Ildefonso Tambunting were in fact sold after the tickets
lapsed on May 12, 1927, but it is proved that the jewelry
was not forthcoming when an inquiry was made therefor by
the present plaintiff with a view to redemption after
judgment had been rendered in the case instituted by Lee
against him.
The first two errors assigned in the brief of the
defendant as appellant raise a question of a preliminary
nature, which is, whether the present action can be
maintained in view of the fact that the cause of action set
out in the present complaint might have beenso the
defendant supposesused as a ground of def ense or
counterclaim in action No. 30569 of the Court of First
Instance of Manila instituted by the present defendant
against the present plaintiff. Upon this it is insisted that
the trial court should have sustained the plea of res
judicata interposed in this case by the defendant. This
contention is untenable for the reason that the facts which
serve as the basis of the present action were not in
existence at the time of commencement of action No. 30569.
Under section 97 of the Code of Civil Procedure the
defendant is required to set up his counterclaim as a
defense only in those cases where the right out of which the
counterclaim arises existed at the time of the

commencement of the action.
The principal question requiring decision in the case
before us is one of law, namely, whether a person who
takes a pawn ticket in pledge is bound to renew the ticket
from time to time, by the payment of interest, or premium,
as required by the pawnbroker, until the rights of the
pledgor are finally foreclosed. In this connection reliance is
placed
15
VOL. 54, NOVEMBER 6, 1929 15

by the attorney for the plaintiff upon article 1867 of the

Civil Code, which reads as follows:
"The creditor must take care of the thing given in pledge
with the diligence of a good father of a family he shall be
entitled to recover any expenses incurred for its
preservation and shall be liable for its loss or deterioration,
in accordance with the provisions of this Code."
In applying this provision to the situation before us it
must be borne in mind that the ordinary pawn ticket is a
document by virtue of which the property in the thing
pledged passes f rom hand to hand by mere delivery of the
ticket and the contract of the pledge is, therefore,
absolvable to bearer. It results that one who takes a pawn
ticket in pledge acquires domination over the pledge and it
is the holder who must renew the pledge, if it is to be kept
alive. Article 1867 contemplates that the pledgee may have
to undergo expenses in order to prevent the pledge from
being lost and these expenses the pledgee is entitled to
recover from the pledgor. From this it follows that where,
in a case like this, the pledge is lost by the failure of the
pledgee to renew the loan, he is liable for the resulting
damage. Nor, in this case, was the duty of the pledgee
destroyed by the fact that the pledgee had obtained a
judgment for the debt of the pledgor which was secured by
the pledge. The duty to use the diligence of a good father of
the family in caring for the pledge subsists as long as the
pledged article remains in the power of the pledgee. In this
connection we quote as follows from a monographic note
appended to Griggs vs. Day (32 Am. St. Rep., 718), in which
it is said:
"As the holder of collateral security is entitled to its
possession and to the extent of his interest is substantially
the owner thereof, he must, to a certain extent at least,
assume the duties of ownership, and furthermore must

protect the interests of his pledgor as well as his own,
because the latter, by giving the collateral security, has
parted with
16

the power to protect himself. The contract carries with it

the implication that the security shall be made available to
discharge the obligation': Wheeler vs. Newbould, 16 N. Y.,
396. We apprehend that it carries with it the further
implication that the property, no matter what its character,
shall not be lost through the negligence or inattention of
the pledgee."
In commenting upon article 1867 of the Civil Code, the
commentator Manresa points out that the predecessor
article in the Civil Code of 1851 limited itself to declaring
that the creditor should take such care of the pledged thing
as the good father of a family, and this led to a lively
controversy among the civilians concerning the
consequences of the duty of conservation or safekeeping
imposed upon the creditor. But this controversy, says the
learned author, has largely lost its interest because the
authors of the Code put an end to such discussions by
defining the responsibility of the creditor in a form so clear
and explicit as to leave no room for doubt (Manresa, Cdigo
Civil, 426, 427). In the treatise of Colin and Capitant on
the Civil Law, it is stated that the creditor who receives an
article in pledge must bear all the expenses necessary to
secure the conservation of the pledge and that the debtor is
bound to reimburse him for such expenses. As an
illustration of the duty of the pledgee to exercise diligence
in preserving the pledge, he states that a pledgee who fails
to renew at the proper time the inscription of a mortgage
guaranteeing a credit will be liable for the damage
resulting from its loss (opus citat, p. 77). To the same effect
is a passage found in the pages of the French commentator
Troplong, Droit Civil Expliqu, Du Gage, sec. 428.
The question of the extent of the duty of the pledgee in
caring for the property pledged has often been discussed in
connection with pledges of collateral security. In this
17
VOL. 54, NOVEMBER 6, 1929 17

case we find the following observation made by the author

of the title "Pledge" in 21 Ruling Case Law, to wit:
"The rights and duties of parties to a pledge of securities
for the payment of a debt may of course be fixed by
agreement as to the manner in which they are to be
collected, but as a general rule not only is it the right of the
holder of collateral security to collect the money thereon
and apply it to the principal debt but his duties in this
respect are active and he is bound to ordinary diligence to
preserve the legal validity and pecuniary value of the
pledge, and if by negligence, wrongful act or omission on
his part loss is sustained, it must be borne by him."
(Pledge, see. 30.)
The application of the doctrine above expounded to the
case in hand leads to the conclusion that the defendant
Chua A. H. Lee in the case before us is liable for the value
of the securities lost by his failure to keep the pledges alive
in the extent of their actual value over the amounts for
which the same were pledged and the trial court, in our
opinion, committed no error in so holding.
There remains to be considered the question of the
proper valuation of the jewelry sacrificed in the manner
above stated. Upon this point we are of the opinion that the
trial court was too conservative in its estimate and we
find, upon the testimony of Manuel Javier, appraiser of the
La Insular Pawnshop, and Francisco Ferrer, a jewelry
merchant of Manila, supplemented by that of the plaintiff,
Cornelio Cruz, that the two diamond earrings represented
by the tickets issued by Tambunting's pawnshop were
fairly worth P14,000. It is true that Cornelio Cruz testified
that these jewels cost him P11,000, but he at the same time
stated that they were at the time of the trial in the court
below worth at least P15,000. Again, we are of the opinion
that the jewels represented by the ten pawn tickets of
Monte de Piedad were worth, at a conservative estimate,
the sum of P4,040. In fixing these values it must be re
18

membered that it is not the practice of pawnshops to

advance more than from thirtyfive to fifty per cent of the
true value upon pledges of jewels.
From the values of the jewelry, as estimated above,

there is of course to be deducted the amounts which had
been advanced upon the pledges with interest thereon at
the stipulated rate of 18 per cent per annum until the date
when the offer was made by the plaintiff Cornelio Cruz in
writing to redeem the jewelry. But it should be noted that
the sum of P3,500 which the defendant advanced to Cruz
upon the pledge of the pawn tickets covering the earrings
must not be deducted, because the defendant, in the prior
action, has already recovered judgment for that amount.
Upon liquidation of the account between plaintiffs and
defendant in conformity with the suggestion above made, it
results that the plaintiffs herein were damaged by the
sacrifice of the jewelry in question in the total amount of
P6,687.56. Also, in order to clarify the appealed decision, it
is declared that the plaintiff is entitled to recover the
bracelet composed of seventeen diamonds, forming the
additional pledge made by the plaintiff to the defendant,
upon satisfaction of the judgment in civil case No. 30569.
The judgment appealed from is therefore modified to the
extent above indicated, namely, that the plaintiffs shall
recover of the defendant the sum of P6,687.56, with legal
interest from December 16, 1927, until the same shall be
paid, as well as the bracelet of seventeen diamonds upon
satisfaction of the judgment above mentioned. So ordered,
without costs.
Avancea, C. J., Villamor, Ostrand, Johns, Romualdez,

Judgment modified.
19
VOL. 54, NOVEMBER 6, 1929 19

Santos vs. Bernabe

Soriano vs. Bautista
No. L15752. December 29, 1962.
RUPERTO SORIANO, ET AL., plaintiffsappellees, vs.

BASILIO BAUTISTA, ET AL., defendants. BASILIO
BAUTISTA and SOFIA DE ROSAS, defendantsappellants.
No. L17457. December 29, 1962.
BASILIO BAUTISTA, ET AL., plaintiffs, BASILIO

BAUTISTA and SOFIA DE ROSAS, plaintiffsappellants,
vs. RUPERTO SORIANO, ET AL., defendantsappellees.
Mortgages Stipulation which renders mortgagors right to

redeem defeasible at mortgagees election Stipulation merely an
option to buy sanctioned by law.The stipulation in a deed of
mortgage which renders the mortgagors right to redeem
defeasible at the election of the mortgagee is not illegal or
immoral, being merely an option to buy sanctioned by Article
1479 of the Civil Code, when supported by a consideration distinct
from the purchase price.
APPEAL from a. judgment of the Court of First Instance of

Rizal.

Amado T. Garrovillas, Ananias C. Ona, Norberto A.
Ferrera and Pedro N. Belmi for appellants Basilio Bautista
and Sofia de Rosas.
Javier & Javier for appellees Ruperto Soriano, et al.
MAKALINTAL, J.:
The judgment appealed from, rendered on March 10, 1959

by the Court of First Instance of Rizal, after a joint trial of
both cases mentioned in the caption, orders the spouses
Basilio Bautista and Sofia de Rosas to execute a deed of
sale covering the property in question in favor of Ruperto
Soriano and Olimpia de Jesus upon payment by the latter
http://central.com.ph/sfsreader/session/0000015cda4a88f4d8b9f429003600fb002c009e/t/?o=False 1/6
of P1,650.00 which is the balance of the price agreed upon,

that is P3,900.00, and the amount previously received by
way of loan by the said spouses from the said Ruperto
Soriano and Olimpia de Jesus, to pay the sum of P500.00
by way of attorneys fees, and to pay the costs.
Appellants Basilio Bautista and Sofia de Rosas have
adopted in their appeal brief the following factual findings
of the trial court:
947
VOL. 6, DECEMBER 29, 1962 947

Spouses Basilio Bautista and Sofia de Rosas are the absolute and
registered owners of a parcel of land, situated in the municipality
of Teresa, province of Rizal, covered by Original Certificate of
Title No. 3905, of the Register of Deeds of Rizal and particularly
described as follows:
A parcel of land (Lot No. 4980) of the Cadastral Survey of Teresa

situated in the municipality of Teresa bounded on the NE. by Lot No.
5004 on the SE. by Lots Nos. 5003 and 4958 on the SW. by Lot 4949
and the W. and NW. by a creek x x x. Containing the area of THIRTY
THOUSAND TWO HUNDRED TWENTY TWO (30,222) square meters,
more or less. Date of Survey, December 1913June, 1914. (Full technical
description appears on Original Certificate of Title No. 3905.)
That, on May 30, 1956, the said spouses for and in

consideration of the sum of P1,800, signed a document entitled
Kasulatan Ng Sanglaan in favor of Ruperto Soriano and Olimpia
de Jesus, under the following terms and conditions:
1. Na, ang sanglaang ito ay magpapatuloy lamang hanggang

dalawang (2) taon pasimula sa araw na lagdaan ang
kasunduang ito, at magpapalampas ng dalawang pa
nahong ani o ani agricola.
2. Na, ang aanihin ng bukid na isinangla ay mapupunta sa
pinagsanglaan bilang pakinabang ng nabanggit na
halagang inutang.
3. Na, ang buwis sa pamahalaan ng lupang ito ay ang
magbabayad ay ang Nagsangla o mayari.
4. Na, ang lupang nasanglang ito ay hindi na maaaring
isangla pang muli sa ibang tao ng walang pahintulot ang
Unang Pinagsanglaan.
5. Na, pinagkasunduan din naman na sakaling magkaroon
ng kakayahan ang Pinagsanglaan ay maaaring bilhin ng
patuluyan ng lupang nasanglang ito kahit anong araw sa
loob ng taning na dalawang taon ng sanglaan sa halagang

Tatlong Libo at Siam na Raan Piso (P3,900.00), salaping
Pilipino na pinagkaisahan.
6. Na, sakaling ang pagkakataon na ipinagkaloob ng

Nagsangla sa sinundang talata ay hindi maisagawa ng
Pinagsanglaan sa Kawalan ng maibayad at gayon din naman ang
Nagsangla na hindi maibalik ang halagang inutang sa taning na
panahon, ang sanglaan ito ay lulutasin alinsunod sa
itinatagubilin ng batas sa bagaybagay ng sanglaan, na ito ay ang
tinatawag na (FORECLOSURE OF MORTGAGES, JUDICIAL
OR EXTRA JUDICIAL). Maaring makapili ng hakbang ang
Pinagsanglaan, alinsunod sa batas o kaya naman ay pagusapan
ng dalawang parte ang mabuting paraan ng paglutas ng bagay na
ito.
That simultaneously with the signing of the aforementioned
deed, the spouses Basilio Bautista and Sofia de Rosas
948

transferred the possession of the said land to Ruperto Soriano and

Olimpia de Jesus who have been and are still in possession of the
said property and have since that date been and are cultivating
the said land and have enjoyed and are still enjoying the produce
thereof to the exclusion of all other persons. Sometimes after May
30, 1956, the spouses Basilio Bautista and Sofia de Rosas received
from Ruperto Soriano and Olimpia de Jesus, the sum of P450.00
pursuant to the conditions agreed upon in the aforementioned
document for which no receipt was issued and which was
returned by the spouses sometime on May 31, 1958. On May 13,
1958, a certain Atty. Angel O. Ver wrote a letter to the spouses
Bautista whose letter has been marked Annex B of the
stipulation of facts informing the said spouses that his clients
Ruperto Soriano and Olimpia de Jesus have decided to buy the
parcel of land in question pursuant to paragraph 5 of the
document in question, Annex A.
The spouses inspite of the receipt of the letter refused to
comply with the demand contained therein. On May 31, 1958,
Ruperto Soriano and Olimpia de Jesus filed before this Court
Civil Case No. 5023, praying that plaintiffs be allowed to consign
or deposit with the Clerk of Court the sum of P1,650.00 as the
balance of the purchase price of the parcel of land in question and
that after due hearing, judgment be rendered ordering the
defendants to execute an absolute deed of sale of the said property
in their favor, plus damages.
On June 9, 1958, spouses Basilio Bautista and Sofia de Rosas,

filed a complaint against Ruperto Soriano and Olimpia de Jesus
marked as Annexed B of the Stipulation of Facts, which case
after hearing was dismissed for lack of jurisdiction. On August 5,
1959, the spouses Bautista and De Rosas again filed a case in the
Court of First Instance against Soriano and De Jesus asking this
Court to order the defendants to accept the payment of the
principal obligation and release the mortgage and to make an
accounting of the harvest for the two harvest seasons (19561957).
The two cases, were by agreement of the parties assigned to one
branch so that they can be tried jointly.
The principal issue in this case is whether, having

seasonably advised appellants that they had decided to buy
the land in question pursuant to paragraph 5 of the
instrument of mortgage, appellees are entitled to specific
performance consisting of the execution by appellants of
the corresponding deed of sale. As translated, paragraph 5
states: That it has likewise been agreed that if the
financial condition of the mortgagees will permit, they may
purchase said land absolutely on any date within
949
VOL. 6, DECEMBER 29, 1962 949

the twoyear term of this mortgage at the agreed price of

P3,900.00.
Appellants contend that, being mortgagors, they can not
be deprived of the right to redeem the mortgaged property,
because such right is inherent in and inseparable from this
kind of contract. The premise of the contention is not
entirely accurate. While the transaction is undoubtedly a
mortgage and contains the customary stipulation
concerning redemption, it carries the added special
provision aforequoted, which renders the mortgagors right
to redeem defeasible at the election of the mortgagees.
There is nothing illegal or immoral in this. It is simply an
option to buy, sanctioned by Article 1479 of the Civil Code,
which states: A promise to buy and sell a determinate
thing for a price certain is reciprocally demandable. 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 a consideration distinct from
the price.
In this case the mortgagors promise to sell is supported
by the same consideration as that of the mortgage itself,
which is distinct from that which would support the sale,

an additional amount having been agreed upon to make up
the entire price of P3,900.00, should the option be
exercised. The mortgagors promise was in the nature of a
continuing offer, nonwithdrawable during a period of two
years, which upon acceptance by the mortgagees gave rise
to a perfected contract of purchase and sale. Appellants cite
the case of Iigo vs. Court of Appeals. L5572, O.G. No. 11,
5281, where we held that a stipulation in a contract of
mortgage to sell the property to the mortgagee does not
bind the same but creates only a personal obligation on the
part of the mortgagor. The ci tation, instead of sustaining
appellants position, confirms that of appellees, who are not
here enforcing any real right to the disputed land but are
rather seeking to obtain specific performance of a personal
obligation, namely, the execution of a deed of sale for the
price agreed upon, the corresponding amount to cover
which was duly deposited in court upon the filing of the
complaint.
Reference is made in appellants brief to the fact
950

Yu Tiong vs. Yu
that they tendered the sum of P1,800.00 to redeem the

mortgage before they filed their complaint in civil case No.
99 in the Justice of the Peace Court of Morong, Rizal. That
tender was ineffective for the purpose intended. In the first
place it must have been made after the option to purchase
had been exercised by appellees (Civil Case No. 99 was
filed on June 9, 1958, only to be dismissed for lack of
jurisdiction) and secondly, appellants offer to redeem
could be defeated by appellees preemptive right to
purchase within the period of two years from May 30, 1956.
As already noted, such right was availed of and appellants
were accordingly notified by letter dated May 13, 1958,
which was received by them on the following May 22. Offer
and acceptance converged and gave rise to a perfected and
binding contract of purchase and sale.
The judgment appealed from is affirmed, with costs.
Bengzon, C.J., Padilla, Bautista Angelo,

Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and
Regala, JJ., concur.
Judgment affirmed.
Note.In the broad sense of the term, property

includes, among other things, an option (Limjoco v.
Fragante, L770, April 27, 1948). An option as a unilateral
promise to sell must be supported by consideration distinct
from the price (Navarro v. Sugar Producers Marketing
Association, Inc., L12888, April 29, 1961, 1 SCRA 1180).
_______________
[No. L4008.January 15, 1953]

APOLONIA SANTIAGO, applicant and appellee, vs. ANGELA
DIONISIO, ET AL., oppositors ANGELA DIONISIO, oppositor
and appellant.
1.FORECLOSURE OF MORTGAGE NECESSARY PARTIES THEREIN EFFECT OF NON

INCLUSION AS PARTY OF A SUBORDINATE LIENHOLDER. All persons having
or claiming an interest in the mortgaged premises subordinate in
right to that of the holder of the mortgage should be made defendants
in the action for the foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case merely to oppose the
confirmation of the sale upon learning that such a sale had been
made, is not the same as being a party to the suit to the extent of
being bound by the judgment in the foreclosure suit.
2.ID. ID. ID.The above stated, rule applied not only to a subordinate
lienholder (Sun Life Assurance Co. of Canada vs. Gonzales Diez, 52
Phil., 271), but also to a purchaser of real property already mortgaged
to another (De la Paz et al. vs. Macondray fc Co., Inc., 66 Phil., 402).
The effect of the failure to implead a subordinate lienholder or
subsequent purchaser or both is to render the foreclosure ineffective
as against them, with the result that there remains in their favor the
unforeclosed equity of redemption. But the foreclosure is valid as
between the parties to the suit.
3.ID. ID. ID. LAND REGISTRATION.Where the purchaser at a
foreclosure sale applies, under Act 496, for the registration in his
name of the land sold, and a subordinate lienholder has not been
impleaded' in the foreclosure proceeding, the land may be registered
in the purchaser's name but subject to the lienholder's unforeclosed
equity of redemption.

Bulacan.Pecson, J.
Vicente J. Francisco for appellant.
Santos & Ignacio for appellee.
REYES,J.:
This is an appeal from a decision of the Court of First
Instance of Bulacan, decreeing the registration of a parcel
of land situated in Obando of said province in the name of
Apolonia Santiago. The appeal has been
496
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Santiago vs. Dionisio, et al.
indorsed to this court by the Court of Appeals cm the

ground that the questions raised are purely legal.
The application for registration was filed on January 9,
1936, and it was opposed by various persons, among them
the appellant Angela Dionisio, who claimed title to the land
as purchaser in a foreclosure sale. But the claim of the
other oppositors need not be discussed since they have not
appealed.
The evidenae shews that the land in question was
bought by the applicant in 1935 from its former owner,
Roman San Diego, and the sale was recorded in the office of
the register of deeds of Bulacan in accordance with section
194 of the Revised Administrative Code, as amended. It
turned out, however, that prior to the sale Roman San
Diego had already mortgaged the land to one Eulalia
Resurreccion, and as the mortgage was also registered in
accordance with the Administrative Code, it had
precedence over the sale. As the mortgage debt was not
paid, Eulalia Resurreccion had the mortgage foreclosed
(civil case No. 5769, Court of First Instance of Bulacan) and
the land was sold at public auction to satisfy the judgment
and adjudicated to Angela Dionisio as the highest bidder.
On learning of the sale, Apolonia Santiago, who had not
been made a party to the foreclosure proceedings, brought
an action to annul the judgment rendered therein,
including the sale made in favor of Angela Dionisio, and
she also intervened in the proceeding for the confirmance of
the sale and filed her opposition thereto. Taking the view
that the oppositor's claim might well be determined in the
action for annulment which she had already filed, the court
(Judge Pastor Endencia. presiding)' confirmed the sale but
without prejudice to whatever rights the oppositor might
have. No appeal was taken from this resolution.
Thereafter the action for annulment was tried and
decided by another judge of the same court, the Hon.
Arsenio C. Roidan. The decision concludes:
497
VOL. 92, JANUARY 15, 1953 497

"In view of these considerations, the court finds that the

judicial proceedings held in Civil case No. 5769 cannot
affect the rights of Apolonia Santiago who was not a party

therein and, therefore, any sale of her property or the
property in question over which she has rights, in which
she has not been, a party litigant is null and void and
therefore the sale of this property in question made by the
sheriff is null and void in civil case No. 5769 with regards
to the right of Apolonia Santiago over the same the
ownership acquired by Apolonia Santiago over the land in
question in Exhibit A is subject Jo the mortgage in favor of
Eulalia Resurreccion (Exhibit 2). The defendants are
sentenced to pay the costs. So ordered."
No appeal appears to have been taken from this decision
and the decision must have attained finality because
counsel for the present appellant admitted in open court
that a bill of cost had already been filed by the winning
party.
Concurring in the opinion expressed in that decision
Judge Potenciano Pecson, who subsequently heard the
present case for registration, declared that the foreclosure
sale did not affect the rights of the applicant Apolonia
Santiago, who had not been made a party to the proceed
ings, and decreed the registration of the land in her favor.
It is this decision that is now before us on appeal
In the decision Judge Pecson makes the finding of fact
that Apolonia Santiago was not impleaded in the
foreclosure suit. And while it is true that her interest in the
land in question was subordinate to that of the mortgagee,
Eulalia Resurreccion, the rule of procedure in force at the
time the foreclosure suit was instituted, which was section
255 of Act 190, required that in an action for foreclosure
"all persons having or claiming an interest in the premises
subordinate in right to that of the holder of the mortgage *
* * be made defendants in the action." This rule applied not
only to a subordinate lienholder (Sun Life Assurance Co, of
Canada vs. Gonzales Diez, 52 PhiL, 271), but also to a
purchaser of real property already mortgaged to another
(De la Paz et al
6057532
498

vs. McCondray & Co., Inc., 66 Phil, 402), and the effect of
the failure to implead a subordinate lienholder or
subsequent. purchaser or both is to render the foreclosure
ineffective as against them, with the result that there
remains in their favor the "unforeclosed equity of

redemption." But the foreclosure is valid as between the
parties to the suit. (Ibid. 2 Moran's Rules of Court, 3rd ed.,
p. 239.)
It is argued that Apolonia Santiago did in fact intervene
in the foreoiosure^suit and was therefore bound by its
results. But it appears that her intervention consisted
merely in opposing the confirmation of the sale upon
learning that such a sale had been made. This is not the
same as being a party to the suit to the extent of being
bound by the judgment. That judgment had already been
rendered and was already in the process of execution when
the intervention took place. In any event, though the sale
was confirmed, the court took pains to specify that the
confirmance was to be without prejudice to the rights of
Apolonia Santiago.
There is much discussion in the briefs as to whether
Judge Roldan's decision in the annulment cas'e has been
duly proved with the presentation of what purports to be a
carbon copy thereof stamped as follows:
"ES COPIA
M. DE LOS SANTOS
Escribano del Juzgado
Por:
(Fdo.) JOSE A. SANTOS
Clerk"
It appears that the original of the decision is no longer in
the record, a great portion of this having been lost as a
result of the last war. There is also dispute as to whether
the decision, if there was one, has already become final,
although it was admitted at the trial that the bill of costs
had already been filed in court by the winning
499
VOL. 92, JANUARY 15, 1953 499

party. The appellee's apparent object in urging considera

tion of said decision is to give it the effect of res judicata on
the question of whether the foreclosure sale should be
regarded as void or not. But we see no useful purpose in
pursuing inquiry in that direction. As we understand it,
Judge Roldan did not declare the foreclosure sale entirely
void. He did say that it was null and void "with regards to
the rights of Apolonia Santiago," but this is only one way of
saying that the foreclosure was ineffective as against her
although it may be valid as between the parties to the suit.
Given this interpretation, the decision accords with the

pronouncements of this Court in the cases above cited and
does not have the effect of completely nullifying the
foreclosure sale in favor of Angela Dionisio. That sale is
valid with respect to the parties to the foreclosure suit,
though subject to Apolonia Santiago's unforeclosed equity
of redemption.
This unforeclosed equity, which Judge Endencia saw fit
to protect in his order confirming the foreclosure sale by
means of a proviso that the said sale was to be without
prejudice to the rights of Apolonia Santiago, still exists and
must be recognized.
It has been suggested that one way of giving it recog
nition is to allow the land to be registered in the name of
Apolonia Santiago but subject to the mortgage in favor of
Eulalia Resurreccion. Another way is to register the land in
the name of the oppositor Angela Dionisio subject to
redemption by Apolonia Santiago, To keep to the beaten
path, our preference is for the second method, which has
already received the sanction of this Court in the case of De
la Paz et al vs. McCondray & Co., Inc., supra. In that case
the purchaser of land sold at public auction to satisfy the
judgment in a foreclosure suit applied for the registration
of said land. The application for registration having been
opposed by a married couple who had previously purchased
the land from its owner but had not been impleaded in the
foreclosure suit, a situation was presented similar to the
one confronting us here.
500

Deciding the case, this Court granted the registration

applied for but subject to the prior purchasers equitable
right of redemption, for the exercise of which right they
were given a period of three months from the date the
decision should become final.
The only difference between that case and the present
one is that there the applicant for registration was the
purchaser at the foreclosure sale, whereas here the ap
plicant is the previous purchaser. But in principle the two
cases are identical and the same solution applies to both. It
is not an obstacle to this solution that it is the previous
purchaser, Apolonia Santiago, that has applied for the
registration of the land. Both by statute and by
jurisprudence, registration may be decreed in favor of an
oppositor whose ownership has been established (Section

37, Act 496, as amended by Section 2, Act 3621 Balme vs.
Sales, 43 Off. Gaz., 3191, 3194 Garchitorena vs. Sotto,* 44
Off. Gaz., 3783), and the more so in the present case where
the record shows that the opposition of Angela Dionisio in
effect prays for the registration of the land in her favor by
asking that she be substituted in place of Apolonia
Santiago in the application for registration. Registration of
the land in question in the name of Angela Dionisio, the
herein oppositor, is thus legally feasible, subject, of course,
to Apolonia Santiago's equitable right of redemption.
This, in fact, is the proper solution in the present case.
For registration of the land in the name of Apolonia
Santiago, who does not become its owner until she has
exercised her right to redeem, would be subject to the
objection that it is premature, if not altogether anomalous.
Her equity of redemption is, of course, registerable but only
as an incumbrance on a registered title of ownership.
Wherefore, it is our decision that the judgment appealed
from be revoked and another one entered decreeing the
registration of the land in the name of Angela Dionisio, but
subject to Apolonia Santiago's equitable right of re
_______________
*78 Phil., 432.
501
VOL. 92, JANUARY 23, 1953 501

Baquial vs. Amihan
demption, which right should be exercised by her within

three months from the date this decision becomes final,
without special pronouncement as to costs. So ordered.
Paras, C. J., Pablo, Bengzon, Tuason, Bautista

AngelaandLabrador, JJ.,concur.
Judgment revoked.
VOL. 104, APRIL 21, 1981 151

Rural Bank of Caloocan, Inc. vs. Court of Appeals
*
No. L32116. April 21, 1981.
RURAL BANK OF CALOOCAN, INC. and JOSE O.

DESIDERIO, JR., petitioners, vs. THE COURT OF
APPEALS and MAXIMA CASTRO, respondents.
Banks Contracts Mortgages The misrepresentation practised

by the Valencias on the bank in order to obtain a loan secured by
the property of Castro and the fraud done by the Valencias to
Castro
_____________
* FIRST DIVISION
152
who signed as comaker of the Valencia loan indicate that both the
bank and Castro committed a mistake in giving their consent.At
any rate, We observe that while the Valencias defrauded Castro
by making her sign the promissory note (Exhibit 2) and the
mortgage contract (Exhibit 6), they also misrepresented to the
bank Castros personal qualifications in order to secure its
consent to the loan. This must be the reason which prompted the
bank to contend that it was defrauded by the Valencias. But to
reiterate, We cannot agree with the contention for reasons above
mentioned. However, if the contention deserves any consideration
at all, it is in indicating the admission of petitioners that the bank
committed mistake in giving its consent to the contracts. Thus, as
a result of the fraud upon Castro and the misrepresentation to the
bank inflicted by the Valencias, both Castro and the bank
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committed mistake in giving their consents to the contracts. In

other words, substantial mistake vitiated their consents given.
For if Castro had been aware of what she signed and the bank of
the true qualifications of the loan applicants, it is evident that
they would not have given their consents to the contracts.
Same Same Same Although the bank did not participate in
the fraud done by the Valencias on Castro in extending Valencia a
loan which was secured by Castro as comaker and mortgagor, the
promissory note of the Valencia is not binding on Castro there
being a mistake committed by both the bank and Castro.We
cannot declare the promissory note (Exhibit 2) valid between the
bank and Castro and the mortgage contract (Exhibit 6) binding on
Castro beyond the amount of P3,000.00, for while the contracts
may not be invalidated insofar as they affect the bank and Castro
on the ground of fraud because the bank was not a participant
thereto, such may however be invalidated on the ground of
substantial mistake mutually committed by them as a
consequence of the fraud and misrepresentation inflicted by the
Valencias. Thus, in the case of Hill vs. Veloso, this Court declared
that a contract may be annulled on the ground of vitiated consent
if deceit by a third person, even without connivance or complicity
with one of the contracting parties, resulted in mutual error on
the part of the parties to the contract.
Same Same Same Action Practice and Pleadings, Averment
of mistake in the complaint is not essential where fraud was
alleged and the latter was found to be the cause of the mutual
mistake of both contracting parties, visavis, a third person who
committed the fraudulent act.Petitioners argued that the
amended complaint fails
153
VOL. 104, APRIL 21, 1981 153
to contain even a general averment of fraud or mistake, and its

mention in the prayer is definitely not a substantial compliance
with the requirement of Section 5, Rule 8 of the Rules of Court.
The records of the case, however, will show that the amended
complaint contained a particular averment of fraud against the
Valencias in full compliance with the provision of the Rules of
Court. Although, the amended complaint made no mention of
mistake being incurred in by the bank and Castro, such mention
is not essential in order that the promissory note (Exhibit 2) may
be declared of no binding effect between them and the mortgage
(Exhibit 6) valid up to the amount of P3,000.00 only. The reason is

that the mistake they mutually suffered was a mere consequence
of the fraud perpetrated by the Valencias against them. Thus, the
fraud particularly averred in the complaint, having been proven,
is deemed sufficient basis for the declaration of the promissory
note (Exhibit 2) invalid insofar as it affects Castro visavis the
bank, and the mortgage contract (Exhibit 6) valid only up to the
amount of P3,000.00.
Same Same Same The negligence of the bank likewise made
the fraud possible, not only the comakers.From the foregoing, it
is evident that the bank was as much guilty, as Castro was, of
negligence in giving its consent to the contracts. It apparently
relied on representations made by the Valencia spouses when it
should have directly obtained the needed data from Castro who
was the acknowledged owner of the property offered as collateral.
Moreover, considering Castros personal circumstancesher lack
of education, ignorance and old ageshe cannot be considered
utterly neglectful for having been defrauded. On the contrary, it is
demanded of petitioners to exercise the highest order of care and
prudence in its business dealings with the Valencias considering
that it is engaged in a banking businessa business affected with
public interest. It should have ascertained Castros awareness of
what she was signing or made her understand what obligations
she was assuming, considering that she was giving
accommodation to, without any consideration from, the Valencia
spouses.
Same Same Same Bank should require the execution of a
power of attorney in order that one may be understood to have
granted another the authority to borrow on behalf of the former.
The authority of the Valencias was only to followup Castros loan
application with the bank. They were not authorized to borrow for
her. This is apparent from the fact that Castro went to the Bank
to sign
154
the promissory note for her loan of P3,000 00. If her act had been
understood by the Bank to be a grant of an authority to the
Valencias to borrow in her behalf, it should have required a
special power of attorney executed by Castro in their favor. Since
the bank did not. We can rightly assume that it did not entertain
the notion, that the Valencia spouses were in any manner acting
as an agent of Castro.
Same Same Same, A bank is required to exercise extreme
care and proper inquiry where a person borrows money and
mortgages another personss property to secure it.Considering
however that for the loan in which the Valencias appeared as
principal borrowers, it was the property of Castro that was being
mortgaged to secure said loan, the Bank should have exercised
due care and prudence by making proper inquiry if Castros
consent to the mortgage was without any taint or defect. The
possibility of her not knowing that she signed the promissory note
(Exhibit 2) as comaker with the Valencias, and that her property
was mortgaged to secure the two loans instead of her own
personal loan only, in view of her personal circumstances
ignorance, lack of education and old ageshould have placed the
Bank on prudent inquiry to protect its interest and that of the
public it serves. With the recent occurrence of events that have
supposedly affected adversely our banking system, attributable to
laxity in the conduct of bank business by its officials, the need of
extreme caution and prudence by said officials and employees in
the discharge of their functions cannot be overemphasized.
Same, Same Same Same Obligations Consignation A
consignation may be held valid, for reasons of equity, even where
there was no prior tender of payment.Question is, likewise,
raised as to the propriety of respondent courts decision which
declared that Castros consignation in court of the amount of
P3,383.00 was validly made. It is contended that the consignation
was made without prior offer or tender of payment to the Bank,
and is therefore, not valid. In holding that there is a substantial
compliance with the provision of Article 1256 of the Civil Code,
respondent court considered the fact that the Bank was holding
Castro liable for the sum of P6,000.00 plus 12% interest per
annum, while the amount consigned was only P3,000.00 plus 12%
interest that at the time of consignation, the Bank had long
foreclosed the mortgage extrajudicially and the sale of the
mortgage property had already been scheduled for April 10, 1961
for nonpayment of the obligation, and that despite the fact that
the Bank already knew of the deposit made by Castro because the
155
VOL. 104, APRIL 21, 1981 155
receipt of the deposit was attached to the record of the case, said
Bank had not made any claim of such deposit, and that therefore
Castro was right in thinking that it was futile and useless for her
to make previous offer and tender of payment directly to the Bank
only in the aforesaid amount of P3,000.00 plus 12% interest.
Under the foregoing circumstances, the consignation made by
Castro was valid, if not under the strict provision of the law,
under the more liberal considerations of equity.
Same, Same, Same, Judgments Holidays Administrative
Law, Where the schedule of the sale at auction was subsequently
declared a holiday the Sheriff must again post notices of the
postponed auction date. The provision of the Administrative Code,
that where the last day to perform an act falls on a holiday the act
may be done on the next business day, does not apply to auction
sale.The pretermission of a holiday applies only where the day,
or the last day for doing any act required or permitted by law falls
on a holiday, or when the last day of a given period for doing an
act falls on a holiday. It does not apply to a day fixed by an office
or officer of the government for an act to be done, as distinguished
from a period of time within which an act should be done, which
may be on any day within that specified period. For example, if a
party is required by law to file his answer to a complaint within
fifteen (15) days from receipt of the summons and the last day
falls on a holiday, the last day is deemed moved to the next
succeeding business day. But, if the court fixes the trial of a case
on a certain day but the said date is subsequently declared a
public holiday, the trial thereof is not automatically transferred to
the next succeeding business day. Since April 10, 1961 was not
the day or the last day set by law for the extrajudicial foreclosure
sale, nor the last day of a given period, but a date fixed by the
deputy sheriff, the aforesaid sale cannot legally be made on the
next succeeding business day without the notices of the sale on
that day being posted as prescribed in Section 9 Act No. 3135.
PETITION for certiorari of the decision of the Court of

Appeals.
156

*
DE CASTRO, J.:
This is 1a petition for review by way of certiorari of the

decision of the Court of Appeals in CAG.R. No. 39760R
entitled Maxima Castro, plaintiffappellee, versus

Severino Valencia, et al., defendants Rural Bank of
Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes,
defendantsappellants, which affirmed in toto the decision
of the Court of First Instance of Manila in favor of plaintiff
appellee, the herein private respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro,
accompanied by Severino Valencia, went to the Rural Bank
of Caloocan to apply for an industrial loan. It was Severino
Valencia who arranged everything about the loan with the
bank and who supplied to the latter the personal data
required tor Castros loan application. On December 11,
1959, after the bank approved the loan for the amount of
P3,000.00, Castro, accompanied by the Valencia spouses,
signed a promissory note corresponding to her loan in favor
of the bank.
On the same day, December 11, 1959, the Valencia
spouses obtained from the bank an equal amount of loan
for of P3,000.00. They signed a promissory note (Exhibit
2) corresponding to their loan in favor of the bank and
had Castro affixed thereon her signature as comaker.
The two loans were secured by a realestate mortgage
(Exhibit 6) on Castros house and lot of 150 square
meters, covered by Transfer Certificate of Title No. 7419 of
the Office of the Register of Deeds of Manila.
On February 13, 1961, the sheriff of Manila, thru Acting
Chief Deputy Sheriff Basilio Magsambol, sent a notice of
sherrifs sale addressed to Castro, announcing that her
property covered by T.C.T No. 7419 would be sold at public
auction on March 10, 1961 to satisfy the obligation covering
the two promissory notes plus interest and attorneys fees.
Upon request by Castro and the Valencias and with
conformity of the bank, the auction sale that was scheduled
for
________________
* Mr. Justice de Castro was designated to sit with the First Division
under Special Order No. 225.
1 Rollo, pp 112133.
157
VOL. 104, APRIL 21, 1981 157

March 10, 1961 was postponed for April 10, 1961. But
when April 10, 1961 was subsequently declared a special
holiday, the sheriff of Manila sold the property covered by

T.C.T. No. 7419 at a public auction sale that was held on
April 11, 1961, which was the next succeeding business day
following the special holiday.
Castro alleged that it was only when she received the
letter from the Acting Deputy Sheriff on February 13, 1961,
when she learned for the first time that the mortgage
contract (Exhibit 6) which was an encumbrance on her
property was for P6,000.00 and not for P3,000.00 and that
she was made to sign as comaker of the promissory note
(Exhibit 2) without her being informed of this.
On April 4, 1961, Castro filed a suit denominated Re:
Sum of Money, against petitioners Bank and Desiderio,
the Spouses Valencia, Basilio Magsambol and Arsenio
Reyes as defendants in Civil Case No. 46698 before the
Court of First Instance of Manila upon the charge, amongst
others, that thru mistake on her part or fraud on the part
of Valencias she was induced to sign as comaker of a
promissory note (Exhibit 2) and to constitute a mortgage
on her house and lot to secure the questioned note. At the
time of filing her complaint, respondent Castro deposited
the amount of P3,383.00 with the court a quo in full
payment of her personal loan plus interest.
In her amended complaint, Castro prayed, amongst
others, for the annulment as far as she is concerned of the
promissory note (Exhibit 2) and mortgage (Exhibit 6)
insofar as it exceeds P3,000.00 for the discharge of her
personal obligation with the bank by reason of a deposit of
P3,383.00 with the court a quo upon the filing of her
complaint for the annulment of the foreclosure sale of her
property covered by T.C.T. No. 7419 in favor of Arsenio
Reyes and for the award in her favor of attorneys fees,
damages and cost.
In their answers, petitioners interposed counterclaims
and prayed for the dismissal of2 said complaint, with
damages, attorneys fees and costs.
_______________
2 Record on Appeal, pp. 8489.
158

The pertinent facts arrived from the stipulation of facts

entered into by the parties as stated by respondent Court of
Appeals are as follows:
Spawning the present litigation are the facts contained in the

following stipulation of facts submitted by the parties themselves:
1. That the capacity and addresses of all the parties in this

case are admitted
2. That the plaintiff was the registered owner of a residential
house and lot located at Nos. 12681270 Carola Street,
Sampaloc, Manila, containing an area of one hundred fifty
(150) square meters, more or less, covered by T.C.T. No.
7419 of the Office of the Register of Deeds of Manila
3. That the signatures of the plaintiff appearing on the
following documents are genuine:
a) Application for Industrial Loan with the Rural Bank of

Caloocan, dated December 7, 1959 in the amount of
P3,000.00 attached as Annex A of this partial stipulation
of facts
b) Promissory Note dated December 11, 1959 signed by the
plaintiff in favor of the Rural Bank of Caloocan for the
amount of P3,000.00 as per Annex B of this partial
stipulation of facts
c) Application for Industrial Loan with the Rural Bank of
Caloocan, dated December 11, 1959, signed only by the
defendants, Severino Valencia and Catalina Valencia,
attached as Annex C, of this partial stipulation of facts
d) Promissory note in favor of the Rural Bank of Caloocan,
dated December 11, 1959 for the amount of P3,000.00,
signed by the spouses Severino Valencia and Catalina
Valencia as borrowers, and plaintiff Maxima Castro, as a
comaker, attached as Annex D of this partial stipulation
of facts
e) Real estate mortgage dated December 11, 1959 executed
by plaintiff Maxima Castro, in favor of the Rural Bank of
Caloocan, to secure the obligation of P6,000.00 attached
herein as Annex E of this partial stipulation of facts
159
VOL. 104, APRIL 21, 1981 159

All the parties herein expressly reserved their right to present

any evidence they may desire on the circumstances regarding the
execution of the abovementioned documents.
4. That the sheriff of Manila, thru Acting Chief Deputy

Sheriff, Basilio Magsambol, sent a notice of sheriffs sale,
addressed to the plaintiff, dated February 13, 1961,
announcing that plaintiffs property covered by T.C.T. No.
7419 of the Register of Deeds of the City of Manila, would
be sold at public auction on March 10, 1961 to satisfy the
total obligation of P5,728.50, plus interest, attorneys fees,
etc., as evidenced by the Notice of Sheriffs Sale and Notice
of Extrajudicial Auction Sale of the Mortgaged property,
attached herewith as Annexes F and F1, respectively, of
this stipulation of facts
5. That upon the request of the plaintiff and
defendantsspouses Severino Valencia and Catalina
Valencia, and with the conformity of the Rural Bank of
Caloocan, the Sheriff of Manila postponed the auction sale
scheduled for March 10, 1961 for thirty (30) days and the
sheriff reset the auction sale for April 10, 1961
6. That April 10, 1961 was declared a special public holiday
(Note: No. 7 is omitted upon agreement of the parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at
public auction plaintiffs property covered by T.C.T, No.
7419 and defendant, Arsenio Reyes, was the highest
bidder and the corresponding certificate of sale was issued
to him as per Annex G of this partial stipulation of facts
9. That on April 16, 1962, the defendant Arsenio Reyes,
executed an Affidavit of Consolidation of Ownership, a
copy of which is hereto attached as Annex H of this partial
10. That on May 9, 1962, the Rural Bank of Caloocan
Incorporated executed the final deed of sale in favor of the
defendant, Arsenio Reyes, in the amount of P7,000.00, a
copy of which is attached as Annex I of this partial
11. That the Register of Deeds of the City of Manila issued the
Transfer Certificate of Title No. 67297 in favor of the
defendant, Arsenio Reyes, in lieu of Transfer Certificate of
Title No. 7419 which was in the name of plaintiff, Maxima
Castro, which was cancelled
12. That after defendant, Arsenio Reyes, had consolidated his
title to the property as per T.C.T. No. 67299, plaintiff filed
a notice of lis pendens with the Register of Deeds of
Manila and the
160

same was annotated in the back of T.C.T. No. 67299 as per

Annex J of this partial stipulation of facts and
13. That the parties hereby reserved their rights to present
additional evidence on matters not covered by this partial
stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing

partial stipulation of facts be approved and admitted by this
Honorable Court.
As for the evidence presented during the trial, We quote

from the decision of the Court of Appeals the statement
thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims

she is a 70year old widow who cannot read and write the English
language that she can speak the Pampango dialect only that she
has only finished second grade (t.s.n., p. 4, December 11, 1964)
that in December 1959, she needed money in the amount of
P3,000.00 to invest in the business of the defendant spouses
Valencia, who accompanied her to the defendant bank for the
purpose of securing a loan of P3,000.00 that while at the
defendant bank, an employee handed to her several forms already
prepared which she was asked to sign on the places indicated,
with no one explaining to her the nature and contents of the
documents that she did not even receive a copy thereof that she
was given a check in the amount of P2,882.85 which she delivered
to defendant spouses that sometime in February 1961, she
received a letter from the Acting Deputy Sheriff of Manila,
regarding the extrajudicial foreclosure sale of her property that it
was then when she learned for the first time that the mortgage
indebtedness secured by the mortgage on her property was
P6,000.00 and not P3,000.00 that upon investigation of her
lawyer, it was found that the papers she was made to sign were:
(a) Application for a loan of P3,000.00 dated December

7, 1959 (Exh. B1 and Exh. I)
(b) Promissory note dated December 11, 1959 for the
said loan of P3,000.00 (Exh. B2)
(c) Promissory note dated December 11, 1959 for
P3,000.00 with the defendants Valencia spouses as
borrowers and appellee as comaker (Exh. B4 or
Exh. 2).
161
VOL. 104, APRIL 21. 1981 161
The auction sale set for March 10, 1961 was postponed to April
10, 1961 upon the request of defendant spouses Valencia who
needed more time within which to pay their loan of P3,000.00 to
the defendant bank plaintiff claims that when she filed the
complaint she deposited with the Clerk of Court the sum of
P3,383.00 in full payment of her loan of P3,000.00 with the
defendant bank, plus interest at the rate of 12% per annum up to
April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager
declared that sometime in December, 1959, plaintiff was brought
to the Office of the Bank by an employee (t.s.n., p. 4, January 27,
1966). She went there to inquire if she could get a loan from the
bank. He claims he asked the amount and the purpose of the loan
and the security to be given and plaintiff said she would need
P3,000.00 to be invested in a drugstore in which she was a
partner (t.s.n., p. 8). She offered as security for the loan her lot
and house at Carola St., Sampaloc, Manila, which was promptly
investigated by the defendant banks inspector. Then a few days
later, plaintiff came back to the bank with the wife of defendant
Valencia. A date was allegedly set for plaintiff and the defendant
spouses for the processing of their application, but on the day
fixed, plaintiff came without the defendant spouses. She signed
the application and the other papers pertinent to the loan after
she was interviewed by the manager of the defendant. After the
application of plaintiff was made, defendant spouses had their
application for a loan also prepared and signed (see Exh. 13). In
his interview of plaintiff and defendant spouses, the manager of
the bank was able to gather that plaintiff was in joint venture
with the defendant spouses wherein she agreed to invest
P3,000.00 as additional capital
3
in the laboratory owned by said
spouses (t.s.n., pp. 1617).
The Court of Appeals, upon evaluation of the evidence,

affirmed in toto the decision of the Court of First Instance
of Manila, the dispositive portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court

renders judgment and:
(1) Declares that the promissory note, Exhibit 2, is invalid as

against plaintiff herein
_____________
3 Rollo, pp. 112117.
162

(2) Declares that the contract of mortgage, Exhibit 6, is null

and void, in so far as the amount thereof exceeds the sum
of P3,000.00 representing the principal obligation of
plaintiff, plus the interest thereon at 12% per annum
(3) Annuls the extrajudicial foreclosure sale at public auction
of the mortgaged property held on April 11, 1961, as well
as all the process and actuations made in pursuance of or
in implementation thereto
(4) Holds that the total unpaid obligation of plaintiff to
defendant Rural Bank of Caloocan, Inc., is only the
amount of P3,000.00, plus the interest thereon at 12% per
annum, as of April 3, 1961, and orders that plaintiffs
deposit of P3,383.00 in the Office of the Clerk of Court be
applied to the payment thereof
(5) Orders defendant Rural Bank of Caloocan, Inc. to return
to defendant Arsenio Reyes the purchase price the latter
paid for the mortgaged property at the public auction, as
well as reimburse him of all the expenses he has incurred
relative to the sale thereof
(6) Orders defendants spouses Severino D. Valencia and
Catalina Valencia to pay defendant Rural Bank of
Caloocan, Inc. the amount of P3,000.00 plus the
corresponding 12% interest thereon per annum from
December 11, 1960 until fully paid and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio,

Jr. and spouses Severino D. Valencia and Catalina Valencia to
pay plaintiff, jointly and severally, the sum of P600.00 by way of
attorneys fees, as well as costs.
In view of the conclusion that the court has thus reached, the
counterclaims of defendant Rural Bank of Caloocan, Inc., Jose
Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a
corollary.
The Court further denies the motion of defendant Arsenio
Reyes for an Order requiring Maxima Castro to deposit rentals
filed on November 16, 1963, resolution of which was held in
abeyance pending final determination of the case4 on the merits,
also as a consequence of the conclusion aforesaid.
_______________
4 Rollo, pp. 117118.
163
VOL. 104, APRIL 21, 1981 163

Petitioners Bank5
and Jose Desiderio moved for the
reconsideration of respondent
6
courts decision. The motion
having been denied, they now come before this Court in
the instant petition, with the following Assignment of
Errors, to wit:
THE COURT OF APPEALS ERRED IN UPHOLDING THE

PARTIAL ANNULMENT OF THE PROMISSORY NOTE,
EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS
THEY AFFECT RESPONDENT MAXIMA CASTRO VISAVIS
PETITIONER BANK DESPITE THE TOTAL ABSENCE OF
EITHER ALLEGATION IN THE COMPLAINT OR
COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR
OTHER UNLAWFUL CONDUCT COMMITTED OR
PARTICIPATED IN BY PETITIONERS IN PROCURING THE
EXECUTION OF SAID CONTRACTS FROM RESPONDENT
CASTRO.
II
THE COURT OF APPEALS ERRED IN IMPUTING UPON

AND CONSIDERING PREJUDICIALLY AGAINST
PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT
OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD
PERPETRATED BY THE VALENCIA SPOUSES UPON
RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES
INTER ALIOS ACTA RULE.
III
THE COURT OF APPEAL ERRED IN NOT HOLDING

THAT, UNDER THE FACTS FOUND BY IT, RESPONDENT
CASTRO IS UNDER ESTOPPEL TO IMPUGN THE
REGULARITY AND VALIDITY OF HER QUESTIONED
TRANSACTION WITH PETITIONER BANK.
_____________
5 Motion for Reconsideration, Rollo, pp. 134167.

6 Resolution of the Court of Appeals, dated May 25, 1970, Rollo, p. 168.
164
IV
THE COURT OF APPEALS ERRED IN NOT FINDING THAT,

BETWEEN PETITIONERS AND RESPONDENT CASTRO, THE
LATTER SHOULD SUFFER THE CONSEQUENCES OF THE
FRAUD PERPETRATED BY THE VALENCIA SPOUSES,
INASMUCH AS IT WAS THRU RESPONDENT CASTROS
NEGLIGENCE OR ACQUIESCENCE. IF NOT ACTUAL
CONNIVANCE, THAT THE PERPETRATION OF SAID FRAUD
WAS MADE POSSIBLE.
THE COURT OF APPEALS ERRED IN UPHOLDING THE

VALIDITY OF THE DEPOSIT BY RESPONDENT CASTRO OF
P3,383.00 WITH THE COURT BELOW AS A TENDER AND
CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE
SAID RESPONDENT FROM HER OBLIGATION WITH
PETITIONER BANK.
VI
THE COURT OF APPEALS ERRED IN NOT DECLARING

AS VALID AND BINDING UPON RESPONDENT CASTRO THE
HOLDING OF THE SALE ON FORECLOSURE ON THE
BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY
SCHEDULED DATE THEREFOR WHICH WAS DECLARED A
HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE
THEREOF.
The issue raised in the first three (3) assignment of errors

is whether or not respondent court correctly affirmed the
lower court in declaring the promissory note (Exhibit 2)
invalid insofar as they affect respondent Castro visavis
petitioner bank, and the mortgage contract (Exhibit 6)
valid up to the amount of P3,000.00 only.
Respondent court declared that the consent of Castro to
the promissory note (Exhibit 2) where she signed as co
maker with the Valencias as principal borrowers and her
acquiescence to the mortgage contract (Exhibit 6) where
she encumbered her property to secure the amount of
P6,000.00 was obtained by
165
VOL. 104, APRIL 21, 1981 165

fraud perpetrated on her by the Valencias who had abused

her confidence, taking advantage of her old age and
ignorance of her financial need. Respondent court added
that the mandate of fair play decrees that she should be
relieved of 7 her obligation
8
under the contract pursuant to
Articles 24 and 1332 of the Civil Code.
The decision in effect relieved Castro of any liability to
the promissory note (Exhibit 2) and the mortgage contract
(Exhibit 6) was deemed valid up to the amount of P3,000.00
only which was equivalent to her personal loan to the bank.
Petitioners argued that since the Valencias were solely
declared in the decision to be responsible for the fraud
against Castro, in the light of the res inter alios acta rule, a
finding of fraud perpetrated by the spouses against Castro
cannot be taken to operate prejudicially against the bank.
Petitioners concluded that respondent court erred in not
giving effect to the promissory note (Exhibit 2) insofar as
they affect Castro and the bank and in declaring that the
mortgage contract (Exhibit 6) was valid only to the extent
of Castros personal loan of P3,000.00.
The records of the case reveal that respondent courts
findings of fraud against the Valencias is well supported by
evidence. Moreover, the findings9 of fact by respondent court
in the matter is deemed final. The decision declared the
Valencias solely responsible for the defraudation of Castro.
Petitioners contention that the decision was silent
regarding the participation of the bank in the fraud is,
therefore, correct.
_______________
7 Art. 24. In all contractual property or other relations, when one of the
parties is at a disadvantage on account of his moral dependence,
ignorance, indigence, mental weakness, tender age or other handicap, the
courts must be vigilant for his protection.
8 Art. 1332. When one of the parties is unable to read or if the contract
is in a language not understood by him, and mistake or fraud is alleged,
the person enforcing the contract must show that the terms thereof have
been fully explained to the former.
9 Guico vs. Mayuga, 63 Phil. 328 Velasco vs. Court of Appeals, 90 Phil.
688, Fonacier vs. Court of Appeals, 96 Phil. 417
166

We cannot agree with the contention of petitioners that the

bank was defrauded by the Valencias. For one, no claim
was made on this in the lower court. For another,
petitioners did not submit proof to support its contention.
At any rate, We observe that while the Valencias
defrauded Castro by making her sign the promissory note
(Exhibit 2) and the mortgage contract (Exhibit 6), they also
misrepresented to the bank Castros personal qualifications
in order to secure its consent to the loan. This must be the
reason which prompted the bank to contend that it was
defrauded by the Valencias. But to reiterate, We cannot
agree with the contention for reasons abovementioned.
However, if the contention deserves any consideration at
all, it is in indicating the admission of petitioners that the
bank committed mistake in giving its consent to the
contracts.
Thus, as a result of the fraud upon Castro and the
misrepresentation to the bank inflicted by the Valencias,
both Castro and the bank committed mistake in giving
their consents to the contracts. In other words, substantial
mistake vitiated their consents given. For if Castro had
been aware of what she signed and the bank of the true
qualifications of the loan applicants, it is evident that they
would not have given their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which
provides:
Art. 1342. Misrepresentation by a third person does not vitiate

consent, unless such misrepresentation has created substantial
mistake and the same is mutual.
We cannot declare the promissory note (Exhibit 2) valid

between the bank and Castro and the mortgage contract
(Exhibit 6) binding on Castro beyond the amount of
P3,000.00, for while the contracts may not be invalidated
insofar as they affect the bank and Castro on the ground of
fraud because the bank was not a participant thereto, such
may however be invalidated on the ground of substantial
mistake mutually committed by them as a consequence of
the fraud and misrepresentation inflicted by the Valencias.
Thus, in the case of Hill vs.
167
VOL. 104, APRIL 21, 1981 167

10
Veloso, this Court declared that a contract
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10
Veloso, this Court declared that a contract may be
annulled on the ground of vitiated consent if deceit by a
third person, even without connivance or complicity with
one of the contracting parties, resulted in mutual error on
the part of the parties to the contract.
Petitioners argued that the amended complaint fails to
contain even a general averment of fraud or mistake, and
its mention in the prayer is definitely not a substantial
compliance with the requirement of Section 5, Rule 8 of the
Rules of Court. The records of the case, however, will show
that the amended complaint contained a particular
averment of fraud against the Valencias in full compliance
with the provision of the Rules of Court. Although, the
amended complaint made no mention of mistake being
incurred in by the bank and Castro, such mention is not
essential in order that the promissory note (Exhibit 2) may
be declared of no binding effect between them and the
mortgage (Exhibit 6) valid up to the amount of P3,000.00
only. The reason is that the mistake they mutually suffered
was a mere consequence of the fraud perpetrated by the
Valencias against them. Thus, the fraud particularly
averred in the complaint, having been proven, is deemed
sufficient basis for the declaration of the promissory note
(Exhibit 2) invalid insofar as it affects Castro visavis the
bank, and the mortgage contract (Exhibit 6) valid only up
to the amount of P3,000.00.
The second issue raised in the fourth assignment of
errors is who between Castro and the bank should suffer
the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro all consequences of the loss,
petitioners argue that it was her negligence or
acquiescence if not her actual connivance that made the
fraud possible.
Petitioners argument utterly disregards the findings of
respondent Court of Appeals wherein petitioners
negligence in the contracts has been aptly demonstrated, to
wit:
A witness for the defendant bank, Rodolfo Desiderio claims he

had subjected the plaintiffappellee to several interviews. If this
were
_____________
10 31 Phil. 160.
168

true why is it that her age was placed at 61 instead of 70, why
was she described in the application (Exh. B19) as drug
manufacturer when in fact she was not why was it placed in the
application that she has an income of P20,000.00 when according
to plaintiffappellee, she has not even given such kind of
informationthe true fact being that she was being paid P1.20
per picul of the sugarcane production
11
in her hacienda and 500
cavans on the palay production.
From the foregoing, it is evident that the bank was as

much guilty, as Castro was, of negligence in giving its
consent to the contracts. It apparently relied on
representations made by the Valencia spouses when it
should have directly obtained the needed data from Castro
who was the acknowledged owner of the property offered as
collateral. Moreover, considering Castros personal
circumstancesher lack of education, ignorance and old
ageshe cannot be considered utterly neglectful for having
been defrauded. On the contrary, it is demanded of
petitioners to exercise the highest order of care and
prudence in its business dealings with the Valencias
considering that it is engaged in a banking businessa
business affected with public interest. It should have
ascertained Castros awareness of what she was signing or
made her understand what obligations she was assuming,
considering that she was giving accommodation to, without
any consideration from, the Valencia spouses.
Petitioners further argue that Castros act of holding the
Valencias as her agent led the bank to believe that they
were authorized to speak and bind her. She cannot now be
permitted to deny the authority of the Valencias to act as
her agent for one who clothes another with apparent
authority as her agent is not permitted to deny such
authority.
The authority of the Valencias was only to followup
Castros loan application with the bank. They were not
authorized to borrow for her. This is apparent from the fact
that Castro went to the Bank to sign the promissory note
for her loan of P3,000.00. If her act had been understood by
the
______________
11 pp. 1314, CA decision.
169
VOL. 104, APRIL 21, 1981 169

Bank to be a grant of an authority to the Valencias to

borrow in her behalf, it should have required a special
power of attorney executed by Castro in their favor. Since
the bank did not, We can rightly assume that it did not
entertain the notion, that the Valencia spouses were in any
manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal
loan of P3,000.00 evidenced by a promissory note (Exhibit
2) and mortgaged (Exhibit 6) Castros property to secure
said loan, the Valencias acted for their own behalf.
Considering however that for the loan in which the
Valencias appeared as principal borrowers, it was the
property of Castro that was being mortgaged to secure said
loan, the Bank should have exercised due care and
prudence by making proper inquiry if Castros consent to
the mortgage was without any taint or defect. The
possibility of her not knowing that she signed the
promissory note (Exhibit 2) as comaker with the
Valencias, and that her property was mortgaged to secure
the two loans instead of her own personal loan only, in view
of her personal circumstancesignorance, lack of education
and old ageshould have placed the Bank on prudent
inquiry to protect its interest and that of the public it
serves. With the recent occurrence of events that have
supposedly affected adversely our banking system,
attributable to laxity in the conduct of bank business by its
officials, the need of extreme caution and prudence by said
officials and employees in the discharge of their functions
cannot be overemphasized.
Question is, likewise, raised as to the propriety of
respondent courts decision which declared that Castros
consignation in court of the amount of P3,383.00 was
validly made. It is contended that the consignation was
made without prior offer or tender of payment to the Bank,
and it is therefore, not valid. In holding that there is a
substantial compliance with the provision of Article 1256 of
the Civil Code, respondent court considered the fact that
the Bank was holding Castro liable for the sum of
P6,000.00 plus 12% interest per annum, while the amount
consigned was only P3,000.00 plus 12% interest that at the
time of consignation, the Bank had long foreclosed the
170

mortgage extrajudicially and the sale of the mortgage

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

doing any act required or permitted by law falls on a holiday, the
act may be done on the next succeeding business day.
Respondent court ruled that the aforesaid sale is null and

void, it not having been carried out in accordance with
Section 9 of Act No. 3135, which provides:
Section 9.Notice shall be given by posting notices of the sale for

not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality or city.
171
VOL. 104, APRIL 21, 1981 171

We agree with respondent court. The pretermission of a

holiday applies only where the day, or the last day for
doing any act required or permitted by law falls on a

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

Guerrero and MelencioHerrera, JJ., concur.
Petition denied.
Notes.A bank is a moneyed institute founded to

facilitate the borrowing, lending, and safekeeping of money
and to deal in notes, bills of exchange and credits.
(Republic vs. Security Credit and Acceptance Corp., 19
SCRA 58).
A government entity, like the Development Bank of the
Philippines, may not be compelled to accept a debtors
backpay certificate in payment of obligations not subsisting
172

when Republic Act No. 897 was approved on June 20, 1953.
(Rodriguez vs. Development Bank of the Philippine, 10
SCRA 249).
The law requiring compliance with legal requirements

before anybody can engage in banking obviously seeks to
protect the public against actual and potential injury.
(Central Bank vs. Morfe, 20 SCRA 507).
Banks, in providing financing in international business
transactions, do not deal in the property to be exported or
shipped to the importer but deal only with documents.
(Bank of the Phil. Islands vs. De Reny Fabric Industries,
Inc., 35 SCRA 256).
A bank cannot be compelled to disclose the records of
account of a depositor who is under investigation for
unexplained wealth. (Phil. National Bank vs. Gancayco, 15
SCRA 91).
The purpose of Chattel Mortgage Law is to promote
business and trade and to give impetus to the countrys
economic development. (Northern Motors, Inc. vs. Coquia,
66 SCRA 415).
Mortgage is binding between parties even if instrument
is not recorded. (Tan vs. Valdehueza, 66 SCRA 61).
Creditor who extrajudicial foreclosed real estate
mortgage may sue for deficiency judgment. (Development
Bank of the Philippines vs. Mirang, 66 SCRA 141).
Petition for possession of property bought at foreclosure
sale becomes moot and academic after oneyear period of
redemption has expired. (Zaragoza vs. Diaz, 65 SCRA 315).
Redemptioner of foreclosed property is obliged to pay
only the purchase price with the interest not the amount of
deficiency of the indebtedness. (Gorospe vs. Santos, 69
SCRA 191).
For purposes of summary judgment, the answer for
formal parties, like the Register of Deeds or the sheriff,
need not be awaited where their respective responsive
pleading would be personal to them is not relevant to the
issue raised in the case on the merits. (Gorospe vs. Santos.
69 SCRA 191).
o0o
173
G.R. No. 174436. January 23, 2013.*
JUANITA ERMITAO, represented by her Attorneyin

Fact, ISABELO ERMITAO, petitioner, vs. LAILANIE M.
PAGLAS, respondent.
Remedial Law Special Civil Actions Unlawful Detainer In

an unlawful detainer case, the sole issue for resolution is the
physical or material possession of the property involved,
independent of any claim of ownership by any of the party
litigants. Where the issue of ownership is raised by any of the
parties, the courts may pass upon the same in order to determine
who has the right to possess the property. The adjudication is,
however, merely provisional.It bears to reiterate the settled rule
that the only question that the courts resolve in ejectment
proceedings is: who is entitled to the physical possession of the
premises, that is, to the possession de facto and not to the
possession de jure. It does not even matter if a partys title to the
property is questionable. In an unlawful detainer case, the sole
_______________
*THIRD DIVISION.
159
VOL. 689, JANUARY 23, 2013 159
Ermitao vs. Paglas
issue for resolution is the physical or material possession of the

property involved, independent of any claim of ownership by any
of the party litigants. Where the issue of ownership is raised by
any of the parties, the courts may pass upon the same in order to
determine who has the right to possess the property. The
adjudication is, however, merely provisional and would not bar or
prejudice an action between the same parties involving title to the
property.
Same Same Same In unlawful detainer, one unlawfully
withholds possession thereof after the expiration or termination of
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his right to hold possession under any contract, express or implied.

Going to the main issue in the instant petition, it is settled that
in unlawful detainer, one unlawfully withholds possession thereof
after the expiration or termination of his right to hold possession
under any contract, express or implied. In such case, the
possession was originally lawful but became unlawful by the
expiration or termination of the right to possess hence, the issue
of rightful possession is decisive for, in such action, the defendant
is in actual possession and the plaintiffs cause of action is the
termination of the defendants right to continue in possession.
Civil Law Lease What a tenant is estopped from denying is
the title of his landlord at the time of the commencement of the
landlordtenant relation. If the title asserted is one that is alleged
to have been acquired subsequent to the commencement of that
relation, the presumption will not apply.The conclusive
presumption found in Section 2 (b), Rule 131 of the Rules of
Court, known as estoppel against tenants, provides as follows:
Sec. 2. Conclusive presumptions.The following are instances
of conclusive presumptions: xxxx (b) The tenant is not permitted
to deny the title of his landlord at the time of the commencement of
the relation of landlord and tenant between them. (Emphasis
supplied). It is clear from the abovequoted provision that what a
tenant is estopped from denying is the title of his landlord at the
time of the commencement of the landlordtenant relation. If the
title asserted is one that is alleged to have been acquired
subsequent to the commencement of that relation, the
presumption will not apply. Hence, the tenant may show that the
landlords title has expired or been conveyed to another or
himself and he is not estopped to deny a claim for rent, if he has
been ousted or evicted by title paramount. In the present case,
what respondent is claiming is her supposed title to the subject
property
160
Ermitao vs. Paglas
which she acquired subsequent to the commencement of the

landlordtenant relation between her and petitioner. Hence, the
presumption under Section 2 (b), Rule 131 of the Rules of Court
does not apply.
Same Mortgages Foreclosure of Mortgage Redemption It is
settled that during the period of redemption, it cannot be said that
the mortgagor is no longer the owner of the foreclosed property,
since the rule up to now is that the right of a purchaser at a
foreclosure sale is merely inchoate until after the period of

redemption has expired without the right being exercised.There
is no dispute that at the time that respondent purchased Yaps
rights over the subject property, petitioners right of redemption
as a mortgagor has not yet expired. It is settled that during the
period of redemption, it cannot be said that the mortgagor is no
longer the owner of the foreclosed property, since the rule up to
now is that the right of a purchaser at a foreclosure sale is merely
inchoate until after the period of redemption has expired without
the right being exercised. The title to land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the
expiration of the redemption period and conveyance by the
masters deed. Indeed, the rule has always been that it is only
upon the expiration of the redemption period, without the
judgment debtor having made use of his right of redemption, that
the ownership of the land sold becomes consolidated in the
purchaser. Stated differently, under Act. No. 3135, the purchaser
in a foreclosure sale has, during the redemption period, only an
inchoate right and not the absolute right to the property with all
the accompanying incidents. He only becomes an absolute owner
of the property if it is not redeemed during the redemption period.
Same Same Same Same Act No. 3135 Act No. 3135, as
amended, allows the purchaser at the foreclosure sale to take
possession of the property only upon the filing of a bond, in an
amount equivalent to the use of the property for a period of twelve
(12) months, to indemnify the mortgagor in case it be shown that
the sale was made in violation of the mortgage or without
complying with the requirements of the law.As a consequence of
the inchoate character of the purchasers right during the
redemption period, Act. No. 3135, as amended, allows the
purchaser at the foreclosure sale to take possession of the
property only upon the filing of a bond, in an amount equivalent
to the use of the property for a period of twelve (12) months, to
indemnify the mortgagor in case it be shown that the
161
VOL. 689, JANUARY 23, 2013 161
Ermitao vs. Paglas
sale was made in violation of the mortgage or without complying

with the requirements of the law. In Cua Lai Chu v. Laqui, 612
SCRA 227 (2010), this Court reiterated the rule earlier
pronounced in Navarra v. Court of Appeals, 204 SCRA 850 (1991),
that the purchaser at an extrajudicial foreclosure sale has a right
to the possession of the property even during the oneyear
redemption period provided the purchaser files an

indemnity bond. That bond, nonetheless, is not required after
the purchaser has consolidated his title to the property following
the mortgagors failure to exercise his right of redemption for in
such a case, the former has become the absolute owner thereof. It,
thus, clearly follows from the foregoing that, during the period of
redemption, the mortgagor, being still the owner of the foreclosed
property, remains entitled to the physical possession thereof
subject to the purchasers right to petition the court to give him
possession and to file a bond pursuant to the provisions of Section
7 of Act No. 3135, as amended. The mere purchase and certificate
of sale alone do not confer any right to the possession or beneficial
use of the premises.

L & J Tan Law Firm counsel for petitioner.
Europa, Dacanay, Cubelo, Europa & Flores for
respondent.
PERALTA, J.:
Before the Court is a petition for review on certiorari
under Rule 45 of the Rules of Court seeking to reverse and
set aside the Decision1 and Resolution2 dated September 8,
2004 and
_______________
1Penned by Associate Justice Arturo G. Tayag, with Associate Justices
Estela M. PerlasBernabe (now a member of this Court) and Edgardo A.
Camello concurring Annex A to Petition, Rollo, pp. 3959.
2 Penned by Associate Justice Edgardo A. Camello, with Associate
Justices Ricardo R. Rosario and Mario V. Lopez concurring Annex B to
Petition, Rollo, pp. 6061.
162

Ermitao vs. Paglas
August 16, 2006, respectively, of the Court of Appeals (CA)

in CAG.R. SP No. 77617.
On November 5, 1999, herein respondent and petitioner,
through her representative, Isabelo R. Ermitao, executed
a Contract of Lease wherein petitioner leased in favor of
respondent a 336 square meter residential lot and a house
standing thereon located at No. 20 Columbia St., Phase 1,
Doa Vicenta Village, Davao City. The contract period is
one (1) year, which commenced on November 4, 1999, with

a monthly rental rate of P13,500.00. Pursuant to the
contract, respondent paid petitioner P27,000.00 as security
deposit to answer for unpaid rentals and damage that may
be caused to the leased unit.
Subsequent to the execution of the lease contract,
respondent received information that sometime in March
1999, petitioner mortgaged the subject property in favor of
a certain Charlie Yap (Yap) and that the same was already
foreclosed with Yap as the purchaser of the disputed lot in
an extrajudicial foreclosure sale which was registered on
February 22, 2000. Yaps brother later offered to sell the
subject property to respondent. Respondent entertained the
said offer and negotiations ensued. On June 1, 2000,
respondent bought the subject property from Yap for
P950,000.00. A Deed of Sale of Real Property was executed
by the parties as evidence of the contract. However, it was
made clear in the said Deed that the property was still
subject to petitioners right of redemption.
Prior to respondents purchase of the subject property,
petitioner filed a suit for the declaration of nullity of the
mortgage in favor of Yap as well as the sheriffs provisional
certificate of sale which was issued after the disputed
house and lot were sold on foreclosure.
Meanwhile, on May 25, 2000, petitioner sent a letter
demanding respondent to pay the rentals which are due
and to vacate the leased premises. A second demand letter
was sent on March 25, 2001. Respondent ignored both
letters.
163
VOL. 689, JANUARY 23, 2013 163

Ermitao vs. Paglas
On August 13, 2001, petitioner filed with the Municipal

Trial Court in Cities (MTCC), Davao City, a case of
unlawful detainer against respondent.
In its Decision dated November 26, 2001, the MTCC,
Branch 6, Davao City dismissed the case filed by petitioner
and awarded respondent the amounts of P25,000.00 as
attorneys fees and P2,000.00 as appearance fee.
Petitioner filed an appeal with the Regional Trial Court
(RTC) of Davao City.
On February 14, 2003, the RTC rendered its Decision,
the dispositive portion of which reads as follows:
WHEREFORE, PREMISES CONSIDERED, the assailed

Decision is AFFIRMED with MODIFICATION. AFFIRMED
insofar as it dismissed the case for unlawful detainer but modified
in that the award of attorneys fees in defendants [herein
respondents] favor is deleted and that the defendant [respondent]
is ordered to pay plaintiff [herein petitioner] the equivalent of ten
months unpaid rentals on the property or the total sum of
P135,000.00.
SO ORDERED.3
The RTC held that herein respondent possesses the

right to redeem the subject property and that, pending
expiration of the redemption period, she is entitled to
receive the rents, earnings and income derived from the
property.
Aggrieved by the Decision of the RTC, petitioner filed a
petition for review with the CA.
On September 8, 2004, the CA rendered its assailed
Decision disposing, thus:
WHEREFORE, premises considered, the assailed Decision of the

Regional Trial Court, Branch 16, 11th Judicial Region, Davao City is
AFFIRMED with the MODIFICATIONS as follows:
_______________
3Rollo, p. 66.
164

Ermitao vs. Paglas
(a) Private respondents obligation to pay the petitioner the

amount of ONE HUNDRED THIRTYFIVE THOUSAND PESOS
(P135,000.00) equivalent of ten (10) months is hereby DELETED
(b) Attorneys fees and litigation expenses were correctly
awarded by the trial court having compelled the private
respondent to litigate and incur expenses to protect her interests
by reason of the unjustified act of petitioner (Producers Bank of
the Philippines vs. Court of Appeals, 365 SCRA 326), Thus:
litigation expenses of only TEN THOUSAND PESOS (P10,000.00)
not TWENTYFIVE THOUSAND PESOS (P25,000.00) and
(c) Attorneys fees REINSTATED in the amount of TEN
THOUSAND PESOS (P10,000.00) instead of only TWO
THOUSAND PESOS (P2,000.00).
SO ORDERED.4
Quoting extensively from the decision of the MTCC as

well as on respondents comment on the petition for review,
the CA ruled that respondent did not act in bad faith when
she bought the property in question because she had every
right to rely on the validity of the documents evidencing
the mortgage and the foreclosure proceedings.
Petitioner filed a Motion for Reconsideration, but the CA
denied it in its Resolution dated August 16, 2006.
Hence, the instant petition for review on certiorari
raising the following assignment of errors:
A. WHETHER OR NOT THE COURT OF APPEALS ERRED

IN DISMISSING THE UNLAWFUL DETAINER CASE BY
RULING THAT A SHERIFFS FINAL CERTIFICATE OF SALE
WAS ALREADY ISSUED WHICH DECISION IS NOT BASED
ON THE EVIDENCE AND IN ACCORDANCE WITH THE
APPLICABLE LAWS AND JURISPRUDENCE.
_______________
4Id., at pp. 5758. (Emphasis in the original)
165
VOL. 689, JANUARY 23, 2013 165

Ermitao vs. Paglas
B. WHETHER OR NOT THE COURT OF APPEALS ERRED

WHEN IT RULED THAT PRIVATE RESPONDENT WAS A
BUYER IN GOOD FAITH EVEN IF SHE WAS INFORMED BY
PETITIONER THROUGH A LETTER ADVISING HER THAT
THE REAL ESTATE MORTGAGE CONTRACT WAS SHAM,
FICTITIOUS AS IT WAS A PRODUCT OF FORGERY BECAUSE
PETITIONERS PURPORTED SIGNATURE APPEARING
THEREIN WAS SIGNED AND FALSIFIED BY A CERTAIN
ANGELA CELOSIA.
C. WHETHER OR NOT THE COURT OF APPEALS ERRED
WHEN IT AWARDED ATTORNEYS FEES WHICH WAS
DELETED BY RTCBRANCH 16 OF DAVAO CITY DESPITE
THE ABSENCE OF ANY EXPLANATION AND/OR
JUSTIFICATION IN THE BODY OF THE DECISION.5
At the outset, it bears to reiterate the settled rule that

the only question that the courts resolve in ejectment
proceedings is: who is entitled to the physical possession of
the premises, that is, to the possession de facto and not to
the possession de jure.6 It does not even matter if a partys
title to the property is questionable.7 In an unlawful
detainer case, the sole issue for resolution is the physical or
material possession of the property involved, independent
of any claim of ownership by any of the party litigants.8
of any claim of ownership by any of the party litigants.8

Where the issue of ownership is raised by any of the
parties, the courts may pass upon the same in order to
determine who has the right to possess the property.9 The
adjudication is, however, merely provisional and would not
bar or prejudice an action between the same parties
involving title to the property.10
_______________
5 Id., at p. 21.
6Barrientos v. Rapal, G.R. No. 169594, July 20, 2011, 654 SCRA 165,
170.
7 Id., at pp. 170171.
8 Id., at p. 171.
9 Id.
10Id.
166

Ermitao vs. Paglas
In the instant case, pending final resolution of the suit

filed by petitioner for the declaration of nullity of the real
estate mortgage in favor of Yap, the MTCC, the RTC and
the CA were unanimous in sustaining the presumption of
validity of the real estate mortgage over the subject
property in favor of Yap as well as the presumption of
regularity in the performance of the duties of the public
officers who subsequently conducted its foreclosure sale
and issued a provisional certificate of sale. Based on the
presumed validity of the mortgage and the subsequent
foreclosure sale, the MTCC, the RTC and the CA also
sustained the validity of respondents purchase of the
disputed property from Yap. The Court finds no cogent
reason to depart from these rulings of the MTCC, RTC and
CA. Thus, for purposes of resolving the issue as to who
between petitioner and respondent is entitled to possess
the subject property, this presumption stands.
Going to the main issue in the instant petition, it is
settled that in unlawful detainer, one unlawfully withholds
possession thereof after the expiration or termination of his
right to hold possession under any contract, express or
implied.11 In such case, the possession was originally
lawful but became unlawful by the expiration or
termination of the right to possess hence, the issue of
rightful possession is decisive for, in such action, the
defendant is in actual possession and the plaintiffs cause

of action is the termination of the defendants right to
continue in possession.12
In the instant petition, petitioners basic postulate in her
first and second assigned errors is that she remains the
owner of the subject property. Based on her contract of
lease with respondent, petitioner insists that respondent is
not permitted to deny her title over the said property in
accordance with the provisions of Section 2 (b), Rule 131 of
the Rules of Court.
_______________
11 Union Bank of the Philippines v. Maunlad Homes, Inc., G.R. No.
190071, August 15, 2012, 678 SCRA 539.
12Malabanan v. Rural Bank of Cabuyao, Inc., G.R. No. 163495, May 8,
2009, 587 SCRA 442, 448.
167
VOL. 689, JANUARY 23, 2013 167

Ermitao vs. Paglas
The Court does not agree.

The conclusive presumption found in Section 2 (b), Rule
131 of the Rules of Court, known as estoppel against
tenants, provides as follows:
Sec. 2. Conclusive presumptions.The following are

instances of conclusive presumptions:
xxxx
(b) The tenant is not permitted to deny the title of his
landlord at the time of the commencement of the relation of
landlord and tenant between them. (Emphasis supplied).
It is clear from the abovequoted provision that what a

tenant is estopped from denying is the title of his landlord
at the time of the commencement of the landlordtenant
relation.13 If the title asserted is one that is alleged to have
been acquired subsequent to the commencement of that
relation, the presumption will not apply.14 Hence, the
tenant may show that the landlords title has expired or
been conveyed to another or himself and he is not estopped
to deny a claim for rent, if he has been ousted or evicted by
title paramount.15 In the present case, what respondent is
claiming is her supposed title to the subject property which
she acquired subsequent to the commencement of the
landlordtenant relation between her and petitioner.
Hence, the presumption under Section 2 (b), Rule 131 of

the Rules of Court does not apply.
The foregoing notwithstanding, even if respondent is not
estopped from denying petitioners claim for rent, her basis
for such denial, which is her subsequent acquisition of
ownership of the disputed property, is nonetheless, an
insufficient excuse from refusing to pay the rentals due to
petitioner.
_______________
13Santos v. National Statistics Office, G.R. No. 171129, April 6, 2011,
647 SCRA 345, 357.
14Id.
15Id.
168

Ermitao vs. Paglas
There is no dispute that at the time that respondent

purchased Yaps rights over the subject property,
petitioners right of redemption as a mortgagor has not yet
expired. It is settled that during the period of redemption,
it cannot be said that the mortgagor is no longer the owner
of the foreclosed property, since the rule up to now is that
the right of a purchaser at a foreclosure sale is merely
inchoate until after the period of redemption has expired
without the right being exercised.16 The title to land sold
under mortgage foreclosure remains in the mortgagor or
his grantee until the expiration of the redemption period
and conveyance by the masters deed.17 Indeed, the rule
has always been that it is only upon the expiration of the
redemption period, without the judgment debtor having
made use of his right of redemption, that the ownership of
the land sold becomes consolidated in the purchaser.18
Stated differently, under Act. No. 3135, the purchaser in
a foreclosure sale has, during the redemption period, only
an inchoate right and not the absolute right to the property
with all the accompanying incidents.19 He only becomes an
absolute owner of the property if it is not redeemed during
the redemption period.20
Pending expiration of the period of redemption, Section
7 of Act No. 3135, 21as amended, provides:
_______________
16Serrano v. Court of Appeals, G.R. No. 133883, December 10, 2003,

417 SCRA 415, 428 463 Phil. 77, 91 (2003) Medida v. Court of Appeals,
G.R. No. 98334, May 8, 1992, 208 SCRA 887, 897.
17Medida v. Court of Appeals, supra.
18 St. James College of Paraaque v. Equitable PCI Bank, G.R. No.
179441, August 9, 2010, 627 SCRA 328, 348349.
19Sta. Ignacia Rural Bank, Inc. v. Court of Appeals, G.R. No. 97872,
March 1, 1994, 230 SCRA 513, 524.
20Id.
21 An Act to Regulate the Sale of Property Under Special Powers
Inserted In or Annexed to Real Estate Mortgages.
169
VOL. 689, JANUARY 23, 2013 169

Ermitao vs. Paglas
Sec. 7. In any sale made under the provisions of this Act, the
purchaser may petition the Court of First Instance of the province
or place where the property or any part thereof is situated, to give
him possession thereof during the redemption period, furnishing
bond in an amount equivalent to the use of the property for a
period of twelve months, to indemnify the debtor in case it be
shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such
petition shall be made under oath and filed in [the] form of an ex
parte motion in the registration or cadastral proceedings if the
property is registered, or in special proceedings in the case of
property registered under the Mortgage Law or under section one
hundred and ninetyfour of the Administrative Code, or of any
other real property encumbered with a mortgage duly registered
in the office of any register of deeds in accordance with any
existing law, and in each case the clerk of the court shall, upon
the filing of such petition, collect the fees specified in paragraph
eleven of section one hundred and fourteen of Act Numbered Four
hundred and ninetysix, as amended by Act Numbered Twenty
eight hundred and sixtysix, and the court shall, upon approval of
the bond, order that a writ of possession issue, addressed to the
sheriff of the province in which the property is situated, who shall
execute said order immediately.
Thus, it is clear from the abovequoted provision of law

that, as a consequence of the inchoate character of the
purchasers right during the redemption period, Act. No.
3135, as amended, allows the purchaser at the foreclosure
sale to take possession of the property only upon the filing
of a bond, in an amount equivalent to the use of the
property for a period of twelve (12) months, to indemnify
the mortgagor in case it be shown that the sale was made

in violation of the mortgage or without complying with the
requirements of the law. In Cua Lai Chu v. Laqui,22 this
Court reiterated the rule earlier pronounced in Navarra v.
Court of Appeals23 that the purchaser at an extrajudicial
foreclosure sale has a right to the possession of the
property even during the oneyear redemption
_______________
22G.R. No. 169190, February 11, 2010, 612 SCRA 227, 233.
23G.R. No. 86237, December 17, 1991, 204 SCRA 850, 856.
170

Ermitao vs. Paglas
period provided the purchaser files an indemnity

bond. That bond, nonetheless, is not required after the
purchaser has consolidated his title to the property
following the mortgagors failure to exercise his right of
redemption for in such a case, the former has become the
absolute owner thereof.24
It, thus, clearly follows from the foregoing that, during
the period of redemption, the mortgagor, being still the
owner of the foreclosed property, remains entitled to the
physical possession thereof subject to the purchasers right
to petition the court to give him possession and to file a
bond pursuant to the provisions of Section 7 of Act No.
3135, as amended. The mere purchase and certificate of
sale alone do not confer any right to the possession or
beneficial use of the premises.25
In the instant case, there is neither evidence nor
allegation that respondent, as purchaser of the disputed
property, filed a petition and bond in accordance with the
provisions of Section 7 of Act No. 3135. In addition,
respondent defaulted in the payment of her rents. Thus,
absent respondents filing of such petition and bond prior to
the expiration of the period of redemption, coupled with her
failure to pay her rent, she did not have the right to possess
the subject property.
On the other hand, petitioner, as mortgagor and owner,
was entitled not only to the possession of the disputed
house and lot but also to the rents, earnings and income
derived therefrom. In this regard, the RTC correctly cited
Section 32, Rule 39 of the Rules of Court which provides as
follows:
Sec. 32. Rents, earnings and income of property pending

redemption.The purchaser or a redemptioner shall not be
entitled to receive the rents, earnings and income of the property
sold on execution, or the value of the use and occupation thereof
when such property is in the possession of a tenant. All rents,
earnings and in
_______________
24Sta. Ignacia Rural Bank, Inc. v. Court of Appeals, supra note 19, at p. 525.
25Gonzales v. Calimbas, G.R. No. L27878, December 31, 1927, 51 Phil. 355,
358 (1927).
171
VOL. 689, JANUARY 23, 2013 171

Ermitao vs. Paglas
come derived from the property pending redemption shall

belong to the judgment obligor until the expiration of his
period of redemption. (Emphasis supplied)
While the above rule refers to execution sales, the Court

finds no cogent reason not to apply the same principle to a
foreclosure sale, as in this case.
The situation became different, however, after the
expiration of the redemption period on February 23, 2001.
Since there is no allegation, much less evidence, that
petitioner redeemed the subject property within one year
from the date of registration of the certificate of sale,
respondent became the owner thereof. Consolidation of title
becomes a right upon the expiration of the redemption
period.26 Having become the owner of the disputed
property, respondent is then entitled to its possession.
As a consequence, petitioners ejectment suit filed
against respondent was rendered moot when the period of
redemption expired on February 23, 2001 without
petitioner having redeemed the subject property, for upon
expiration of such period petitioner lost his possessory
right over the same. Hence, the only remaining right that
petitioner can enforce is his right to the rentals during the
time that he was still entitled to physical possession of the
subject propertythat is from May 2000 until February 23,
2001.
In this regard, this Court agrees with the findings of the
MTCC that, based on the evidence and the pleadings filed
by petitioner, respondent is liable for payment of rentals
beginning May 2000 until February 2001, or for a period of
ten (10) months. However, it is not disputed that
respondent already gave to petitioner the sum of

P27,000.00, which is equivalent to two (2) months rental,
as deposit to cover for any unpaid rentals. It is only proper
to deduct this amount from the rent
_______________
26GC Dalton Industries, Inc. v. Equitable PCI Bank, G.R. No. 171169,
August 24, 2009, 596 SCRA 723, 730.
172

Ermitao vs. Paglas
als due to petitioner, thus leaving P108,000.00 unpaid

rentals.
As to attorneys fees and litigation expenses, the Court
agrees with the RTC that since petitioner is, in fact,
entitled to unpaid rentals, her complaint which, among
others, prays for the payment of unpaid rentals, is justified.
Thus, the award of attorneys and litigation expenses to
respondent should be deleted.
WHEREFORE, the Decision and Resolution of the Court
of Appeals in CAG.R. SP No. 77617, dated September 8,
2004 and August 16, 2006, respectively, are AFFIRMED
with the following MODIFICATIONS: (1) respondent is
ORDERED to pay petitioner P108,000.00 as and for unpaid
rentals (2) the award of attorneys fees and litigation
expenses to respondent is DELETED.
SO ORDERED.
Velasco, Jr. (Chairperson), Abad, Mendoza and Leonen,

JJ., concur.
Judgment and resolution affirmed with modifications.
Notes.In unlawful detainer, one unlawfully withholds

possession thereof after the expiration or termination of his
right to hold possession under any contract, express or
implied. (Malabanan vs. Rural Bank of Cabuyao, Inc., 587
SCRA 442 [2009])
Unlawful detainer is an action to recover possession of
real property from one who unlawfully withholds
possession after the expiration or termination of his right
to hold possession under any contract, express or implied.
(Union Bank of the Philippines vs. Maunlad Homes, Inc.,
678 SCRA 539 [2012])
o0o
VOL. 357, APRIL 27, 2001 429

Malayan Bank vs. Lagrama
*
G.R. No. 144884. April 27, 2001.
THE MALAYAN BANK (Formerly Republic Planters

Bank), petitioners, vs. AGUSTIN LAGRAMA, EDGARDO
LAGRAMA, DANILO LAGRAMA, ARTEMIO LAGRAMA,
CORAZON LAGRAMA, and the COURT OF APPEALS,
respondents.
Actions Mortgage A mortgagee who subsequently buys the

mortgaged land on foreclosure, is not a deemed a transferee at the
time of the constitution of the mortgage A transferee pendente lite
stands exactly in the shoes of the transferor and is bound by any
judgment or decree which may be rendered for or against the
transferor.Both the trial court and the Court of Appeals
correctly held that petitioner bank was a transferee pendente lite
whose title was subject to the incidents and results of the pending
litigation. Petitioner bank contends that it constituted the
mortgage more than a year before the private respondents action
for specific performance was filed and the fact that the foreclosure
and public auction sale took place after the institution of the case
is immaterial since the foreclosure sale retroacts to the date of the
constitution of the mortgage. Petitioner bank argues that it was a
purchaser for value long before the
_____________
* SECOND DIVISION.
430
http://central.com.ph/sfsreader/session/0000015cda905913be9a72d4003600fb002c009e/t/?o=False 1/13
filing of the case and, thereforee, it cannot be considered a

transferee pendente lite. This argument is specious. Petitioner
acquired the property only after the filing of private respondents
case for specific performance. When the mortgage was
constituted, petitioner was not yet, properly speaking, a
transferee, being a mere mortgagee of the property. Only when
petitioner acquired the property in the foreclosure sale and
subsequently consolidated its title did it become the transferee of
the property. Thus, petitioner bank is a transferee pendente lite of
the property in litigation within the contemplation of Rule 39,
47(b). As such, it is bound by the decision against Demetrio
Llego. As this Court held in one case: . . . A transferee pendente
lite stands exactly in the shoes of the transferor and is bound by
any judgment or decree which may be rendered for or against the
transferor his title is subject to the incidents and results of the
pending litigation, and his transfer certificate of title will, in that
respect, afford him no special protection.
Same Same Banks and Banking Where a bank acquires a
land with knowledge of the fraud committed by the transferor, it
cannot claim to be a purchaser in good faith and, thereforee, to
have a better right than Us predecessorininterest.Petitioner
insists that it is not a transferee pendente lite because it was a
purchaser for value long before the case for specific performance
was filed. The contention is without merit. Even if it is not a
transferee pendente lite, petitioner nevertheless cannot claim a
right superior to that of private respondents because petitioner
acted in bad faith when it foreclosed and acquired the property.
As the Court of Appeals pointed out, petitioner was aware of the
charge of fraud against Demetrio Llego in mortgaging the
property to it despite the previous sale thereof to private
respondent Agustin Lagrama. The trial court found the existence
of fraud in the transaction and declared private respondents to be
the absolute owners of the property. As already stated, this
decision of the trial court is now final and is binding on petitioner
bank. In the meantime, the bank consolidated its title over the
property. Since the bank acquired the land in question with
knowledge of the fraud committed by Llego, it cannot claim to be
a purchaser in good faith and, thereforee, to have a better right
than its predecessorininterest.

Court of Appeals.

Euclides G. Forbes for petitioner.
R.A. Martinez Law Office for private respondents.
431
VOL. 357, APRIL 27, 2001 431

MENDOZA, J.:
1
This is a petition for review of the decision, dated April 17,
2000, of the Court of Appeals in CAG.R. SP No. 53856,
affirming an order, dated September 29, 1998, of the
Regional Trial Court, Branch 56, Lucena City, the
WHEREFORE, FROM THE FOREGOING, defendant Republic

Planters Bank is hereby ordered to execute within twenty (20)
days from receipt hereof, the necessary deed of reconveyance
called for in the order of the Court dated 17 May 1993 in favor of
the plaintiffs. 2
SO ORDERED.
The background of the case is as follows:

Demetrio Llego, one of the defendants in the original
complaint filed in the Regional Trial Court of Lucena City,
inherited from his father a portion of a parcel of land
situated in Barangay Silangang Mayao, Lucena City. This
portion was part of a bigger parcel of land, the other
portions of which, in turn, were inherited by Llegos mother
and siblings. The heirs undertook the apportionment of the
inherited parcel of land informally, without executing a
written extrajudicial partition thereof. As a result, 3title to
the property remained in the name of Llegos father.
On March 25, 1976, Llego sold to his uncle, herein
private respondent Agustin Lagrama, and his aunt Paz
Abastillas his share in the inherited parcel of land. The lot
was to be paid in installments. Llego did not, however,
execute a deed of sale of the lot as title to the lot was still in
his fathers name. Llego promised that as soon as the title
was transferred in his name, he would immediately execute
a deed of
4
absolute sale in favor of the buyers, to which they
agreed.
Notwithstanding the absence of a deed of sale, on March
26, 1976, private respondent Lagrama and Abastillas
entered into and
______________
1 Per Justice Oswaldo D. Agcaoili, Chairman, and concurred in by

Justices Ma. Alicia AustriaMartinez and Wenceslao I. Agnir, Jr.
2 Rollo, pp. 4950.
3 Complaint, p. 8 Rollo , p. 17.
4 Id., pp. 89 Id., pp. 1718.
432

took possession of the portion of land sold to them by Llego.

On December 23, 1977, private respondent Lagrama and
Abastillas paid
5
the balance of the purchase price of the lot
sold to them.
On March 6, 1979, Llego6
and his coheirs extrajudicially
partitioned the property left by their father. A new title
was issued to Llego for his share, i.e., the portion of the
land he had previously sold to private respondent
Lagrama. On November 12, 1982, Llego, through his
attorneyinfact, Ceferino Tan, mortgaged the land to the
Republic Planters Bank for P45,000.00. As Llego failed to
pay his indebtedness to petitioner bank, the mortgage was
foreclosed and the property was sold to the bank as the
highest bidder. It appears
7
that Llego likewise failed to
redeem the property.
In 1983, private respondents filed with the trial court a
complaint for specific performance to compel Llego to
execute the necessary deed of absolute sale in their favor.
Impleaded as codefendants were Ceferino Tan and
petitioner bank. Llego did not answer the complaint and
was, for that reason, declared in default. Petitioner bank
in its answer, pleaded that it was a mortgagee in good
faith. On the other hand, Tan alleged that he 8acted as
Llegos attorneyinfact only as an accommodation.
On May 17, 1993, the lower court rendered its decision,
the dispositive portion of which stated:
WHEREFORE, by reason of the overwhelming evidence

presented, the Court finds the case of the plaintiffs and
conformably declares that plaintiffs [herein private respondents]
herein are the absolute owners of the land in question and
defendant Demetrio Llego is heretofore directed to execute the
necessary conveyance for him and defendant Ceferino Tan to
redeem the said property from the defendant bank.
Consequently, the Register of Deeds of Quezon is directed to
cancel Transfer Certificate of Title No. T31753 and upon the
execution and registration of the corresponding deed of sale the
title be registered in the names of plaintiffs Agustin Lagrama,
Edgardo Lagrama, Danilo Lagrama, Artemio Lagrama and
Corazon Lagrama.
______________
5 Id., p. 3 Id., p. 18.

6 Id., p. 4 Id., p. 19.
7 CA Decision, p. 2 Id., p. 80.
8 Id.
433
VOL. 357, APRIL 27, 2001 433

Plaintiffs not being able to prove damages, the Court denies the
same. 9
SO ORDERED.
Republic Planters Bank appealed, but the appeal was

dismissed for its failure to file the brief on time. As a
consequence, the decision of the lower court became final.
Thereafter, a writ of execution was issued, but it was
returned unsatisfied because it turned out that petitioner
bank had consolidated its title over the land in dispute
10
for
failure of Demetrio Llego to redeem it. Private
respondents then filed a motion to require the petitioner
bank to execute the necessary
11
deed of reconveyance, which
was opposed by the latter.
On September 29, 1998, the trial court granted private
respondents motion and ordered Republic Planters Bank to
execute the necessary deed of reconveyance called for in
the order of12
the Court dated May 17, 1995 in favor of the
plaintiffs. Petitioner bank moved for reconsideration, but
its motion was denied.
On appeal, the Court of Appeals rendered its questioned
decision affirming the trial courts decision and dismissing
the petition. The Court of Appeals held:
It is well to remember that Republic Planters Bank was

impleaded in the action below precisely because plaintiffs therein,
now private respondents Agustin Lagrama, et al., questioned the
act of Demetrio Llego in mortgaging the property to the bank
despite the fact that he had previously sold the same to Agustin
Lagrama. In its decision, the court found that, by his acts, Llego
engaged in a scheme designed to defraud plaintiffs. The court
noted that Llego did not even bother to answer the complaint and
allowed himself to be declared in default. Neither did Ceferino
Tan offer any evidence to counteract the imputation of fraud
against him, in conspiracy with Llego. Significantly, during the
proceedings, title to the land was still in the name of Demetrio
Llego. This thereforee explains why the court in its judgment
ordered Llego himself, and not the mortgagee
_______________
9 Rollo, p. 40.
10 CA Decision, p. 3 Id., p. 81.
11 Petition, p. 3 Id., p. 5.
12 Decision, supra note 9.
434

bank, to effect the conveyance to the plaintiffs. The court in fact

ordered the Register of Deeds to cancel the title (TCT No. T
31753) of Llego and issue a new title to the Lagramas upon the
execution and registration of the corresponding deed of sale.
Now, when execution of the final judgment was made, the
sheriff reported that defendant (Demeterio) Llego refused to sign
the document of reconveyance while defendant Ceferino Tan
cannot be located. Consequently, private respondents, as
prevailing parties, invoked the remedy provided for in section
10(a) of the 1997 Revised Rules of Civil Procedure which provides
that in lieu of directing a conveyance of the property, the court
may by an order divest the title of any party and vest it in others,
which shall have the same form of a conveyance executed in due
form of law.
Republic Planters Bank cannot blunt the impact of the courts
order of September 29, 1998 on the allegation that it is a
mortgagee in good faith. It was, to repeat, impleaded as a
defendant in the action for specific performance. It was aware of
the charge of fraud imputed to Demeterio Llego in mortgaging the
property to the bank despite the previous sale thereof to Agustin
Lagrama. The court indeed found the existence of fraud in the
transaction. The bank appealed the decision of the court but its
appeal was thrown out. Meantime, the bank consolidated its title
over the property. How then can the 13 bank insist on its
protestation that it has a good title thereto?
Petitioner banks motion for reconsideration was likewise

denied. Hence this petition.
The main question in this case is whether or not
petitioner bank may be compelled to execute a deed of
reconveyance transferring the parcel of land mortgaged to
petitioner in favor of private respondents.
The Court of Appeals rejected the contention that
petitioner cannot be compelled to execute the deed of
reconveyance since it was Demetrio Llego himself who was
ordered by the court to do so. It stressed that title to the
property had been consolidated in the name of the bank by
virtue of the failure of Llego to redeem the mortgage.

Hence, it could not be insisted that Llego should effect the
reconveyance. The Court of Appeals agreed with the trial
court
_____________
13 CA Decision, pp. 45 Rollo, pp. 8283.
435
VOL. 357, APRIL 27, 2001 435

that the bank took title to the property pendente 14

lite and,
thereforee, it was bound by the courts decision.
On the other hand, petitioner contends that it is a
mortgagee in good faith and for value of the property as of
March 12, 1982 when the same was mortgaged to it by
Demetrio Llego. It points out that the complaint for specific
performance was filed by private respondents only on May
3, 1984, more than one year after the mortgage was validly
constituted on November 12, 1982. As it was an innocent
purchaser for value long before the case against it was
filed, it could not be considered a transferee pendente lite.
Petitioner likewise cites15 St. Dominic Corp. v.
Intermediate Appellate Court, in which it was held that
the foreclosure sale retroacts to the date of the registration
of the mortgage and that a person who takes a mortgage in
good faith and for valuable consideration, the record
showing clear title to the mortgagor, will be protected
against equitable claims on the title in favor of third
persons of which he had no actual or constructive notice.
Prescinding from this, petitioner contends that the
foreclosure sale in the case at bar must be treated to have
taken place not on the actual date of the sale or during the
pendency of the case but on the date the mortgage was
executed and registered, or on November 12, 1982, more
than one year before the case in the lower court was filed.
Consequently, petitioner cannot be considered a transferee
pendente lite and it could not be accused of being aware 16
of
the flaw on said title when it transferred the property.
Petitioners contentions are without merit.
Several circumstances militate against petitioners
argument that the mortgage in its favor and the
subsequent foreclosure and consolidation of title of the
property under its name must be protected and respected.
First. In the complaint for specific performance filed by

private respondents, petitioner bank was impleaded as co
defendant along with Demetrio Llego and Ceferino Tan.
The trial courts decision,
______________
14 Id., p. 5 Id., p. 83.

15 151 SCRA 577 (1987).
16 Petition, pp. 58 Rollo, pp. 711.
436

dated May 17, 1993, has already attained finality as

petitioners appeal to the Court of Appeals was dismissed
for being filed out of time. As correctly pointed out by
private respondents in their comment, the instant petition
is improper considering that it attempts to reverse the 17
trial
courts decision which is already final and executory. This
being the case, whatever judgment was rendered by the
court in that case is necessarily binding on all defendants
therein, i.e., Llego, Tan and petitioner bank. As to which
defendant would actually execute the reconveyance is not
important, for this merely involves the implementation of
the courts order.
The trial court ordered Llego to execute the necessary
deed of reconveyance and, together with Ceferino Tan, to
redeem the property from petitioner bank believing that
title to the land was still in the name of Llego. As the writ
of execution directed at Llego could not be carried out,
because in the meantime petitioner bank had obtained title
to the land, the trial court directed its order to petitioner
bank. It cannot be argued that, in so doing, the court
modified its earlier judgment. It is noteworthy that
petitioner bank tried to appeal from the decision of the trial
court which ordered the Register of Deeds of Quezon to
cancel TCT No. T31753 and issue a new title to private
respondents, but the banks appeal was dismissed for its
failure to file its brief. As a result, the trial courts decision
became final, and petitioner bank cannot now claim that it
is not bound by the trial courts order to reconvey the land
to private respondents.
Second. Both the trial court and the Court of Appeals
correctly held that petitioner bank was a transferee
pendente lite whose title was subject to the incidents and
results of the pending litigation. Petitioner bank contends

that it constituted the mortgage more than a year before
the private respondents action for specific performance
was filed and the fact that the foreclosure and public
auction sale took place after the institution of the case is
immaterial since the foreclosure sale retroacts to the date
of the constitution of the mortgage. Petitioner bank argues
that it was a pur
______________
17 Comment, p. 6 Id., p. 111.
437
VOL. 357, APRIL 27, 2001 437

chaser for value long before the filing of the case and,
thereforee, it cannot be considered a transferee pendente
lite.
This argument is specious. Petitioner acquired the
property only after the filing of private respondents case
for specific performance. When the mortgage was
constituted, petitioner was not yet, properly speaking, a
transferee, being a mere mortgagee of the property. Only
when petitioner acquired the property in the foreclosure
sale and subsequently consolidated its title did it become
the transferee of the property.
Thus, petitioner bank is a transferee pendente lite of the
property in litigation within the contemplation of Rule 39,
47(b). As such, it is bound by the decision 18
against
Demetrio Llego. As this Court held in one case:
. . . A transferee pendente lite stands exactly in the shoes of the

transferor and is bound by any judgment or decree which may be
rendered for or against the transferor his title is subject to the
incidents and results of the pending litigation, and his transfer
certificate 19of title will, in that respect, afford him no special
protection.
Petitioner bank may thus be properly ordered to execute

the necessary deed of reconveyance in favor of private
respondents. The remedy left to petitioner is to pursue its
claim against Llego and his attorneyinfact Ceferino Tan
by filing the appropriate action to recover the unpaid
indebtedness.
Third. Petitioner insists that it is not a transferee

pendente lite because it was a purchaser for value long
before the case for specific performance was filed. The
contention is without merit. Even if it is not a transferee
pendente lite, petitioner nevertheless cannot claim a right
superior to that of private respondents because petitioner
acted in bad faith when it foreclosed and acquired the
property. As the Court of Appeals pointed out, petitioner
was aware of the charge of fraud against Demetrio Llego in
mortgaging the property to it despite the previous sale
thereof to private respon
______________
18 Yu v. Court of Appeals, 251 SCRA 509 (1995).

19 Id. citing Demontano v. Court of Appeals, 81 SCRA 287 (1978)
Director of Lands v. Martin, 84 Phil. 140 (1949) Tuazon v. Reyes and
Siochi, 48 Phil. 844 (1926) Rivera v. Moran, 48 Phil. 386 (1926).
438

dent Agustin Lagrama. The trial court found the existence

of fraud in the transaction and declared private
respondents to be the absolute owners of the property. As
already stated, this decision of the trial court is now final
and is binding on petitioner bank. In the meantime, the
bank consolidated its title over the property. Since the
bank acquired the land in question with knowledge of the
fraud committed by Llego, it cannot claim to be a purchaser
in good faith and, thereforee,
20
to have a better right than its
predecessorininterest.
Petitioners reliance on the 21case of St. Dominic Corp. v.
Intermediate Appellate Court is misplaced. The facts of
that case are different from those of the case at bar. In the
Dominic case, the facts were as follows: In 1961, the
Peoples Homesite and Housing Corporation (PHHC)
awarded a parcel of land covered by TCT No. 83783 to
Cristobal Santiago, who sold the same to the spouses
Carlos Robes and Adelia Francisco. The spouses Robes
mortgaged the lot to Manufacturers Bank and Trust
Company, and this fact was duly annotated on the back of
TCT 84387. Thereafter, Civil Case No. Q11895, entitled
Ricardo Castulo and Juan V. Ebreo v. Carlos Robes, Adelia
Francisco, and Peoples Homesite and Housing
Corporation, was filed seeking the cancellation of TCT No.
83783. Claiming legal interest in the property, the

Bustamante spouses were allowed to intervene in the case.
A notice of lis pendens was annotated on the title at the
instance of the Bustamante spouses. For failure of the
Robes spouses to pay the mortgage obligation,
Manufacturers Bank foreclosed the lot which was then
bought at public auction by Aurora Francisco, who was
subsequently issued a certificate of sale. As no redemption
of the property was effected, TCT No. 84387 issued in the
name of the Robes spouses was cancelled and TCT No.
217192 was issued to the buyer Aurora Francisco. The
notice of lis pendens was not carried over to TCT No.
217192.
Aurora Francisco applied for, and was issued, a writ of
possession for the property. The Bustamante spouses filed
a motion to quash the writ, which motion was denied by
the lower court. The
_____________
20 See id.
21 St. Dominic, supra note 14.
439
VOL. 357, APRIL 27, 2001 439

spouses then filed a petition for certiorari with the

Supreme Court. Thereafter, Aurora Francisco sold the
property to petitioner St. Dominic Corp., which was issued
TCT No. 22337. Again, no notice of any lien or
encumbrance appeared on the title.
Meanwhile, Civil Case No. Q11895 was decided. The
trial court ruled that the sale by PHHC to Cristobal
Santiago was void and cancelled TCT No. 83783. The sale
of the same lot to the spouses Robes was likewise declared
void and TCT No. 84387 was cancelled. PHHC was ordered
to process Bustamantes application to purchase the lot and
execute documents awarding the lot to her. A writ of
execution was issued to the Bustamante spouses, with the
qualification, however, that the writ could not be enforced
against St. Dominic Corp. The spouses questioned the
order via certiorari with the Intermediate Appellate Court,
which granted the writ of certiorari and ordered the trial
court to issue the writ of execution against St. Dominic
Corp.
On appeal, this Court reversed the ruling of the

Intermediate Appellate Court and held that St. Dominic
Corp. was not bound by the decision in that case because it
was never impleaded in Civil Case No. Q11895. Anent the
effect of the trial courts judgment on Manufacturers
Banks (mortgagee bank) rights and on the foreclosure of
the property in question, it was held that the invalidation
of the title issued as a result of regular land registration
proceedings in the name of the mortgagor when given as a
security for a loan would not nullify the rights of a
mortgagee who acted in good faith. The mortgagee is under
no obligation to look beyond the certificate of title and has
the right to rely on what appears on its face. The title to
the property given as security to Manufacturers Bank by
the spouses was valid, regular, and free from any lien or
encumbrance. The title of Aurora Francisco, as a purchaser
at the public auction sale of the property in question, could
not be affected by any adverse claim as the plaintiffs in the
civil case. This is even more true with petitioner St.
Dominic Corp. which had acquired title from Francisco
without any notice or flaw.
In the case of St. Dominic, when the property in
question was mortgaged to Manufacturers Bank, the title
showed that it was valid, regular, and free from any lien or
encumbrance. When it was later foreclosed and sold at
public auction and a new transfer cer
440

tificate of title was issued to the buyer, the notice of lis

pendens was not carried over to the new title. And, when
the property was sold to petitioner St. Dominic Corp.,
which was again issued TCT No. 22337, no notice of any
lien or encumbrance appeared on the title. These factual
circumstances led the Court to conclude that the mortgagee
bank and its subsequent transferrees had acted in good
faith. It is obvious that the case of St. Dominic Corp. v.
Intermediate Appellate Court22 cannot be invoked in this case
23
where both the trial court and the Court of Appeals
found that petitioner bank did not act in good faith in
acquiring title to the property.
WHEREFORE, the decision of the Court of Appeals
appealed from is AFFIRMED.
SO ORDERED.
Bellosillo (Chairman) and Buena, JJ., concur.

Quisumbing and De Leon, Jr., JJ., On leave.
Judgment affirmed.
Notes.Under the doctrine of the mortgagee in good

faith, despite the fact that the mortgagor is not the owner
of the mortgaged property, his title being fraudulent, the
mortgage contract and any foreclosure sale arising
therefrom are given effect by reason of public policy.
(Cavite Development Bank vs. Lim, 324 SCRA 346 [2000])
The issuance of a Transfer Certificate of Title (TCT) over
a foreclosed property in the buyers name does not entitle
said buyer to disregard the lease on the property. (Uy vs.
Land Bank of the Philippines, 336 SCRA 419 [2000])
o0o
______________
22 See Order of the Trial Court, p. 2 Rollo, p. 64.

23 See CA Decision, p. 5 Id., p. 83.
441

Dizon vs. Gaborro
No. L36821. June 22, 1978.*
JOSE P. DIZON, petitioner, vs. ALFREDO G. GABORRO

(Substituted by PACITA DE GUZMAN GABORRO as
Judicial Administratrix of the Estate of Alfredo G. Gaborro)
and the DEVELOPMENT BANK OF THE PHILIPPINES,
respondents.
Mortgages A judgment debtor is entitled to remain in

possession of the land foreclosed, during the period of redemption,
and to transfer his right of redemption.Under the Revised Rules
of Court, Rule 39, Section 33, the judgment debtor remains in
possession of the property foreclosed and sold, during the period
of redemption. If the judgment debtor is in possession of the
property sold, he is entitled to retain it and receive the fruits, the
purchaser not being entitled to such possession. (Riosa vs.
Verzosa, 26 Phil. 86 Velasco vs. Rosenbergs Inc., 32 Phil. 72
Pabico v. Pauco, 43 Phil. 572 Power v. PNB, 54 Phil. 54 Gorospe
v. Gochangco, L12735, Oct. 30, 1959). A judgment debtor, whose
property is levied on execution, may transfer his right of
redemption to any one whom he may desire. The right to redeem
land sold under execution within 12 months is a property right
and may be sold voluntarily by its owner and may also be
_______________
* FIRST DIVISION.
689
VOL. 83, JUNE 22, 1978 689
Dizon vs. Gaborro
http://central.com.ph/sfsreader/session/0000015cda918e2feaf65172003600fb002c009e/t/?o=False 1/26
attached and sold under execution. (Magno vs. Viola and Sotto, 61
Phil. 80).
Same Sales During the period of redemption, the judgment
debtor cannot make a conveyance of the ownership of property
foreclosed as said ownership belongs to purchaser at foreclosure
sale.These are the only rights that Dizon could legally transfer,
cede and convey unto respondent Gaborro under the instrument
captioned Deed of Sale with Assumption of Mortgage (Exh. A
Stipulation), likewise the same rights that said respondent could
acquire in consideration of the latters promise to pay and assume
the loan of petitioner Dizon with DBP and PNB. Such an
instrument cannot be legally considered a real and unconditional
sale of the parcels of land, firstly, because there was absolutely no
money consideration therefore, as admittedly stipulated, the sum
of P131,831.91 mentioned in the document as the consideration
receipt of which was acknowledged was not actually paid and
secondly, because the properties had already been previously sold
by the sheriff at the foreclosure sale, thereby divesting the
petitioner of his full right as owner thereof to dispose and sell the
lands.
Same Same Contracts Innominate Contracts Where
petitioner and respondent agreed to give and to do certain rights
and obligations respecting the land and mortgage debts of
petitioner, but partaking the nature of antichresis, the agreement
entered into is an innominate contract.In view of all these
considerations, the law and jurisprudence, and the facts
established, We find that the agreement between petitioner Dizon
and respondent Gaborro is one of those innominate contracts
under Art. 1307 of the New Civil Code whereby petitioner and
respondent agreed to give and to do certain rights and
obligations respecting the lands and the mortgage debts of
petitioner which would be acceptable to the bank, but partaking of
the nature of antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are concerned.
Same Same Same Mistake as a ground for Reformation of
instrument Where there has been a meeting of the minds of the
parties to a contract but their true intention is not embodied
therein, one of the parties may ask for a reformation of the said
agreement.Mistake is a ground for the reformation of an
instrument when there having been a meeting of the minds of the
parties to a contract, their true intention is not expressed in the
instrument purporting to embody the agreement, and one of the
parties may ask
690
Dizon vs. Gaborro
for such reformation to the end that such true intention may be
expressed. (Art. 1359, New Civil Code). When a mutual mistake of
the parties causes the failure of the instrument to disclose their
real agreement, said instrument may be reformed. (Art. 1361,
New Civil Code.) It was a mistake for the parties to execute the
Deed of Sale with Assumption of Mortgage and the Option to
Purchase Real Estate and stand on the literal meaning of the
terms and stipulations used therein.
Same Same Since the debtorredemptioner cannot legally
transfer the ownership of foreclosed estate, which belongs to
purchaser at forclosure sale, the transferee therefor is socalled
"Deed of Sale with Assumption of Mortgage, cannot give the
judgment debtortransferor, the option to purchase said estate. The
only legal effect of the option deed is the grant to judgment debtor
transferor of the right to recover the estate after due
reimbursement of amounts paid by the transferee to the judgment
creditor.In legal consequence thereby, respondent Gaborro as
transferee of these certain limited rights or interests under Exh.
AStipulation, cannot grant to petitioner Dizon more than said
rights, such as the option to purchase the lands as stipulated in
the document called Option to Purchase Real Estate (ExhibitB
Stipulation). This is necessarily so for the reason that respondent
Gaborro did not purchase or acquire the full title and ownership
of the properties by virtue of the Deed of Sale With Assumption of
Mortgage (Exh. AStipulation), earlier executed between them
which We have ruled out as an absolute sale. The only legal effect
of this Option Deed is the grant to petitioner the right to recover
the properties upon reimbursing respondent Gaborro of the total
sums of money that the latter may have paid to DBP and PNB on
account of the mortgage debts, the said right to be exercised
within the stipulated 5 years period.
Same Same Same Equity Concept of equity applied in the
case at bar as to preclude third party from recovering interest on
amounts he paid to judgment creditor and to bar judgment debtor
from recovering value of harvest during the period the former, as
transferee of right of redemption, was in possession of the land in
dispute.On the issue of the accounting of the fruits, harvests
and other income received from the three parcels of land from
October 6, 1959 up to the present, prayed and demanded by Dizon
of Gaborro or the Judicial Administratrix of the latters estate. We
hold that in fairness and equity and in the interest of justice that
since We ruled out the obligation of petitioner Dizon to reimburse
respondent
691
VOL. 83, JUNE 22, 1978 691

Dizon vs. Gaborro
Gaborro of any interests and land taxes that have accrued or been
paid by the latter on the loans of Dizon with DBP and PNB,
petitioner Dizon in turn is not entitled to an accounting of the
fruits, harvests and other income received by respondent Gaborro
from the lands, for certainly, petitioner cannot have both benefits
and the two may be said to offset each other.
PETITION for review on certiorari of the decision of the

Court of Appeals.

Leonardo A bola for petitioner.
Carlos J. Antiporda for respondents.
GUERRERO, J.:
Petition for1 review on certiorari of the decision of the Court

of Appeals in CAG.R, No. 46975R entitled Jose P. Dizon,
PlaintiffAppellant, versus Alfredo G. Gaborro (substituted
by Pacita de Guzman Gaborro as Judicial Administratrix of
the Estate of Alfredo G. Gaborro) and the Development
Bank of the Philippines, DefendantsAppellees, affirming
with modification the decision of the Court of First
Instance of Pampanga, Branch II in Civil Case No. 2184.
The dispositive portion of the decision sought to be
reviewed reads:
IN VIEW OF THE FOREGOING, the judgment appealed

therefrom is hereby affirmed with modification that the plaintiff
appellant has the right to refund or reimburse the defendant
appellees the sum of P131,831.91 with interest at 8% per annum
from October 6, 1959 until full payment, said right to be exercised
within one year from the date this judgment becomes final, with
the understanding that, if he fails to do so within the said period,
then he is deemed to have lost his 2
right over the lands forever.
With costs against the appellant.
MODIFIED.
__________________
1 First division, penned by Justice Canonoy, with the concurrence of

Acting Presiding Justice Juan P. Enriquez and Justice Eulogio S. Serrano.
2 Records, pp. 5051.
692

Dizon vs. Gaborro
The basic issue to be resolved in this case is whether the

Deed of Sale with Assumption of Mortgage and the
Option to Purchase Real Estate, two instruments
executed by and between petitioner Jose P. Dizon and
Alfredo G. Gaborro (defendant below) on the same day,
October 6, 1959 constitute in truth and in fact an absolute
sale of the three parcels of land therein described or merely
an equitable mortgage or conveyance thereof by way of
security for reimbursement, refund or repayment by
petitioner Jose P. Dizon of any and all sums which may
have been paid to the Development Bank of the Philippines
and the Philippine National Bank by Alfredo G, Gaborro
(later substituted herein by his wife Pacita de Guzman
Gaborro as administratrix of the estate of Alfredo G.
Gaborro) who had died during the pendency of the case.
A supplementary issue raised is whether or not Gaborro
or the respondent administratrix of the estate should
account for all the fruits produced and income received by
them from the lands mentioned and described in the
aforesaid Deed of Sale with Assumption of Mortgage.
The antecedent facts established in the record are not
disputed. Petitioner Jose P. Dizon was the owner of the
three (3) parcels of land, subject matter of this litigation,
situated in Mabalacat, Pampanga with an aggregate area
of 130.58 hectares, as evidenced by Transfer Certificate of
Title No. 15679. He constituted a first mortgage lien in
favor of the Development Bank of the Philippines in order
to secure a loan in the sum of P38,000.00 and a second
mortgage lien in favor of the Philippine National Bank to
secure his indebtedness to said bank in the amount of
P93,831.91.
Petitioner Dizon having defaulted in the payment of his
debt, the Development Bank of the Philippines foreclosed
the mortgage extrajudicially pursuant to the provisions of
Act No. 3135. On May 26, 1959, the lands were sold to the
DBP for P31,459.21, which amount covered the loan,
interest and expenses, and the corresponding Certificate of
Sale, (Exhibit A2, Exhibit 1b) was executed in favor of
the said bank. On November 12, 1959, Dizon himself
executed the deed of sale (Exhibit A1a) over the
properties in favor of the DBP which
693
VOL. 83, JUNE 22, 1978 693

Dizon vs. Gaborro
deed was recorded in the Office of the Register of Deeds on

October 6, 1960.
Sometime prior to October 6, 1959 Alfredo G. Gaborro
and Jose P. Dizon met. Gaborro became interested in the
lands of Dizon. Dizon originally intended to lease to
Gaborro the property which had been lying idle for some
time. But as the mortgage was already foreclosed by the
DPB and the bank in fact purchased the lands at the
foreclosure sale on May 26, 1959, they abandoned the
projected lease. They then entered into the following
contract on October 6, 1959 captioned and quoted, to wit:
DEED OP SALE WITH ASSUMPTION

OF MORTGAGE
This DEED OF SALE WITH ASSUMPTION OF MORTGAGE,

made and executed at the City of Manila, Philippines, on this 6th
day of October, 1959 by and between
JOSE P. DIZON, of legal age, Filipino, married to Norberta
Torres, with residence and postal address at Mabalacat,
Pampanga, hereinafter referred to as the VENDOR,
ALFREDO G. GABORRO, likewise of legal age, Filipino,
married to Pacita de Guzman, with residence and postal address
at 46, 7th St., Gilmore Avenue, Quezon City, hereinafter referred
to as the VENDEE,
W I T N E S S E T H : That
WHEREAS, the VENDOR is the registered owner of three (3)

parcels of land covered by Transfer Certificate of Title No. 15679
of the land records of Pampanga, situated in the Municipality of
Mabaiacat, Province of Pampanga, and more particularly
described and bounded as follows:
1. A parcel of land (Lot No. 188 of the Cadastral Survey of
Mabalacat), with the improvements thereon, situated in the
Municipality of Mabalacat. Bounded on the NE., by Lot No. 187
on the SE., by Lots Nos. 183, 189, 191 and 192 on the SW., by Lot
No. 192 and on the NW., by the unimproved provincial road to
Magalang. Containing an area of TWO HUNDRED AND
TWENTY ONE THOUSAND ONE HUNDRED SEVENTY TWO
SQUARE
694

Dizon vs. Gaborro
METERS (221,172), more or less.

Municipality of Mabalacat. Bounded on the NE., by a road and
Lots Nos. 569, 570 and 571 on the SE., by Lot No. 571 and the
unimproved road to Magalang on the SW., by a road and on the
NE., by a road and the Sapang Pritil. Containing an area of NINE
HUNDRED SEVENTY EIGHT THOUSAND SEVEN HUNDRED
AND SEVENTEEN SQUARE METERS (978,717), more or less.
Municipality of Mabalacat. Bounded on the NE., by Lot No. 570,
on the SE., SW and NW by roads. Containing an area of ONE
HUNDRED FIVE THOUSAND NINE HUNDRED AND
TWENTY ONE SQUARE METERS (105,921), more or less.
WHEREAS, the abovedescribed properties are presently
mortgaged (first mortgage) to the Development Bank of the
Philippines (formerly Rehabilitation Finance Corporation) to
secure the payment of a loan, plus interest, of THIRTY EIGHT
THOUSAND PESOS ONLY (P38,000.00), Philippine currency, as
evidenced by a deed of mortgage for P. . . . . dated . . . . . . . . . . . . .,
which deed was ratified and acknowledged before Notary Public of
Manila, Mr. . . . . . as Doc. No. . . . Page No. . . . Reg. No. . . .
Series of 196. . . .
WHEREAS, the aforesaid properties are likewise mortgage
(second mortgage) to the Philippine National Bank to secure the
payment of a loan of NINETY THREE THOUSAND EIGHT
HUNDRED THIRTY ONE PESOS & 91/100 (P93,831.91),
Philippine Currency, plus interest up to August 13, 1957, as
evidenced by deed of Mortgage for P. . . . . . . dated . . . . . . . . . .
which deed was ratified and acknowledged before Notary Public of
Manila, Mr. . . . . . . . . ., as Doc. No. . . . . ., Page No . . . . ., Reg. No.
. . . . . Series of 196 . . . . . .
WHEREAS, the VENDOR, has offered to sell and the
VENDEE is willing to purchase the abovedescribed properties for
ONE HUNDRED THIRTY ONE THOUSAND EIGHT HUNDRED
THIRTY ONE PESOS & 91/100 (P131,831.91), Philippine
Currency, under the terms and conditions herein below set forth
NOW, THEREFORE, for and in consideration of the above
premises and the amount of ONE HUNDRED THIRTY ONE
THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91/100
695
VOL. 83, JUNE 22, 1978 695

Dizon vs. Gaborro
(P131,831.91), Philippine Currency, in hand paid in cash by the

VENDEE unto the VENDOR, receipt whereof is hereby
acknowledged by the VENDOR to his entire and full satisfaction,
and the assumption by the VENDEE of the entire mortgage
indebtedness, both with the Development Bank of the Philippines
and the Philippine National Bank above mentioned, the VENDOR
does by these presents, sell, transfer and convey, as he had sold,
transferred, and conveyed, by way of absolute sale, perpetually
and forever, unto the VENDEE, his heirs, successors and assigns,
abovedescribed properties, with all the improvements thereon,
free from all liens and encumbrances of whatever nature, except
the preexisting mortgage obligations with the Development Bank
of the Philippines and the Philippine National Bank
aforementioned. The VENDOR does hereby warrant title,
ownership and possession over the properties herein sold and
conveyed, and binds himself to defend the same from any and all
claimants.
That the VENDEE, does by these presents, assume as he has
assumed, under the same terms and conditions of the mortgage
contracts dated. . . . . . . . . . and . . . . . . . . . . . ., of the mortgage
indebtedness of the VENDOR in favor of the Development Bank
of the Philippines and the Philippine National Bank, respectively,
as if the aforesaid documents were personally executed by the
VENDEE and states and reiterates all the terms and conditions
stipulated in said both documents, making them to all intents and
purposes, parts hereof by reference. IN WITNESS WHEREOF,
the VENDOR and the VENDEE, together with their instrumental
witnesses, have signed this deed of the place, date, month and
year first above written.
(Sgd.) JOSE P. DIZON (Sgd.) ALFREDO G. GABORRO
Vendor Vendee
Signed in the Presence of:
(Sgd.) (Illegible) (Sgd.) (Illegible)
(Acknowledgment Omitted)
The second contract executed the same day, October 6,

1959 is called Option to Purchase Real Estate, and is in the
following wise and manner:
696

Dizon vs. Gaborro
OPTION TO PURCHASE REAL ESTATE
That I, ALFREDO G. GABORRO, of legal age, Filipino, married

to Pacita de Guzman, with residence and postal address at 46, 7th
St., Gilmore Ave., Quezon City, for valuable consideration, do
hereby give to JOSE P. DIZON, of legal age, Filipino, married to
Norberta Torres, resident of Mabalacat, Pampanga, his heirs,
successors and assigns, the option of repurchasing the following
described properties:
TRANSFER CERTIFICATE OF TITLE

NO. 15679, PROVINCE OF PAMPANGA
1. A parcel of land (Lot No. 188 of Cadastral Survey of

Mabalacat, Pamp.), containing an area of (211,172) more or less.
Mabalacat, Pampanga), containing an area of (978,172) more or
less.
Mabalacat, Pamp.), containing an area of (105,921), more or less,
which I acquired from the said Jose P. Dizon by purchase by
virtue of that document entitled Deed of Sale with Assumption of
Mortgage dated October 6, 1959, acknowledged by both of us
before Notary Public of Manila GREGORIO SUMBILIO as Doc.
No. 342, Page No. 70, Reg. No. VII Series of 1959.
Said option shall be valid and effective within the period
comprised from January, 1965 to December 31, 1970, inclusive,
upon payment of the amount of ONE HUNDRED THIRTY ONE
THOUSAND EIGHT HUNDRED THIRTY ONE PESOS & 91/100
(P131,831.91), Philippine Currency, plus an interest of eight per
centum (8%) thereof, per annum. This is without prejudice at any
time to the payment by Mr. Dizon of any partial amount to be
applied to the principal obligation, without any way disturbing
the possession and/or ownership of the above properties since only
full payment can effect the necessary change.
In the event that Mr. Jose P. Dizon may be able to find a
purchaser for the foregoing properties on or the fifth year from
the date the execution of this document, the GRANTEE, Mr.
JOSE P. DIZON, may do so provided that the aggregate amount
which was paid to Development Bank of the Philippines and to
the Philippine
697
VOL. 83, JUNE 22, 1978 697

Dizon vs. Gaborro
National Bank together with the interests thereon at the rate of

8% shall be refunded to the undersigned.
Furthermore, in case Mr. Jose P. Dizon shall be able to find a
purchaser for the said properties, it shall be his duty to first notify
the undersigned of the contemplated sale, naming the price and
the purchaser therefor, and awarding the first preference in the
sale hereof to the undersigned.
IN WITNESS WHEREOF, I have hereunto signed these
presents at the City of Manila, on this 6th day of October, 1959.
(Sgd.) ALFREDO G. GABORRO
CONFORME:
(Sgd.) JOSE P. DIZON
SIGNED IN THE PRESENCE OF:
The sum of P131,813.91 which purports to be the

consideration of the sale was not actually paid by Alfredo
G. Gaborro to the petitioner. The said amount represents
the aggregate debts of the petitioner with the Development
Bank of the
After the execution of said contracts, Alfredo G. Gaborro
took possession of the three parcels of land in question.
Philippines and the Philippine National Bank.
On October 7, 1959, Gaborro wrote the Development
Bank of the Philippines a letter (Exh. J), as follows:
Sir.
This is with reference to your mortgage lien of P38,000.00 more or

less over the properties more particularly described in TCT No.
15679 of the land records of Pampanga in the name of Jose P.
Dizon. In this connection, we have the honor to inform you that
pursuant to a Deed of Sale with Assumption of Mortgage executed
on October 6, 1959 by Jose P. Dizon in my favor, copy of which is
hereto attached, the ownership of the same has been transferred
to me subject of course to your conformity to the assumption of
mortgage. As a consequence of the foregoing document, the
obligation therefore of paying your goodselves the total amount of
indebtedness has shifted to me.
698

Dizon vs. Gaborro
Considering that these agricultural properties have not been

under cultivation for quite a long time, I would therefore request
that, on the premise that the assumption of mortgage would be
agreeable to you, that I be allowed to pay the outstanding
obligation, under the same terms and conditions as embodied in
the original contract of mortgage within ten (10) years to be
divided in 10 equal annual amortizations. I am enclosing
herewith a check in the amount of P3,609.95 representing 10% of
the indebtedness of Jose P. Dizon to show my honest intention in
assuming the mortgage obligation to you. x x x
The Board of Governors of the DBP, in its Resolution No.

7066 dated October 21, 1959 approved the offer of Gaborro
but said Board required him to pay 20% of the purchase
price as initial payment. (Exh. D) Accordingly, on July 11,
1960, the DBP and Gaborro executed a conditional sale of
the properties in consideration of the sum of P36,090.95
(Exh. C) payable 20% down and the balance in 10 years in
the yearly amortization plan at 8% per annum.
On January 7, 1960, Dizon assigned his right of redemption to

Gaborro in an instrument (Exh. 9) entitled:
ASSIGNMENT OF EIGHT OF REDEMPTION

AND ASSUMPTION OF OBLIGATION
This instrument, made and executed by and between JOSE P.

DIZON, married to Norberta P. Torres, Filipino, of legal age, with
residence and postal address at Mabalacat, Pampanga,
hereinafter referred to as the ASSIGNOR and ALFREDO G.
GABORRO, married to Pacita de Guzman, likewise of legal age,
Filipino, with residence and postal address at 46, 7th Street,
Gilmore Ave., Quezon City, hereinafter referred to as the
ASSIGNEE,
W I T N E S S E T H:
WHEREAS, the Assignor is the owner and mortgagor of three

(3) parcels agricultural land together with all the
improvements existing thereon and more particularly described
and bounded as follows:
699
VOL. 83, JUNE 22, 1978 699

Dizon vs. Gaborro
TRANSFER CERTIFICATE OF TITLE NO. 1567

PROVINCE OF PAMPANGA
1. A parcel of land (Lot No. 188 of the Cadastral Survey of Mabalacat),

with the improvements thereon, situated in the Municipality of
Mabalacat. Bounded on the NE, by Lot No. 187 on the SE. by Lots Nos.
183, 189, 191 and 192 on the SW, by Lot No. 192 and on the NW, by the
unimproved provincial road to Magalan. Containing an area of two
hundred twentyone thousand one hundred and seventy two square
meters (221,172), more or less.
Mabalacat. Bounded on the NE. by a road and Lots Nos. 569, 570 and
571 on the SE. by Lot No. 571 and the unimproved road to Magalan on
the SW. by a road and on the NW. by a road and the Sapang Pritil.
Containing an area of nine hundred seventy eight thousand seven
hundred and seventeen square meters (978,717), more or less.
Mabalacat. Bounded on the NE. by Lot No. 570 and on the SE., SW. and
NW. by roads. Containing an area of one hundred five thousand nine
hundred and twentyone square meters (105,921), more or less.
WHEREAS, the above described properties were mortgaged with

the Rehabilitation Finance Corporation, now Development Bank
of the Philippines, which mortgage has been foreclosed on May 26,
1959
AND WHEREAS, the herein Assignor has still the right to
redeem the said properties from the said Development Bank of
the Philippines within a period of one (1) year counted from the
date of foreclosure of the said mortgage.
NOW, THEREFORE, for. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.......................................................
. . ., and other valuable considerations, receipt whereof is hereby
acknowledged by the Assignor from the Assignee, the herein
Assignor does hereby transfer and assign to the herein Assignee,
his heirs, successors and assigns the aforesaid right to redeem the
aforementioned properties above described.
700

Dizon vs. Gaborro
That with this document the herein Assignor relinguishes any

and all rights to the said properties including the improvements
existing thereon.
That the Assignee, by these presents, hereby assumes the
obligation in favor of the said Development Bank of the
Philippines, as paying whatever legal indebtedness the Assignor
has with the said Bank in connection with the transaction
regarding the above mentioned properties subject to the terms
and conditions that the said Bank may require and further
recognizes the second mortgage in favor of the Philippine
National Bank.
IN WITNESS WHEREOF, the parties have hereunto set their
hands in the City of Manila, Philippines thisday of,
1959.
(Sgd) JOSE P. DIZON (Sgd) ALFREDO G. GABORRO
(Assignor) (Assignee)
After the execution of the conditional sale to him, Gaborro

made several payments to the DBP and PNB. He
introduced improvements, cultivated the lands, raised
sugarcane and other crops and appropriated the produce to
himself. He also paid the land taxes thereon.
On July 5, 1961, Jose P. Dizon through his lawyer, Atty.
Leonardo Abola, wrote a letter to Gaborro informing him
that he is formally offering to reimburse Gaborro of what
he paid to the banks but without, however, tendering any
cash, and demanding an accounting of the income and of
the property, contending that the transaction they entered
into was one of antichresis. Gaborro did not accede to the
demands of the petitioner, whereupon, on July 30, 1962,
Jose P. Dizon instituted a complaint in the Court of First
Instance of Pampanga, against Gaborro, alleging that the
documents Deed of Sale With Assumption of Mortgage and
the Option to Purchase Real Estate did not express the
true intention and agreement between the parties.
Petitioner Dizon, as plaintiff below, contended that the two
deeds constitute in fact a single transaction that their real
agreement was not an absolute sale of the said parcels of
land but merely an equitable mortgage or con
701
VOL. 83, JUNE 22, 1978 701

Dizon vs. Gaborro
veyance by way of security for the reimbursement or refund

by Dizon to Gaborro of any and all sums which the latter
may have paid on account of the mortgage debts in favor of
the DBP and the PNB. Plaintiff prayed that defendant
Gaborro be ordered to accept plaintiffs offer to reimburse
him of what he paid to the banks to surrender the
possession of the lands to plaintiff to make an accounting
of all the fruits, produce, harvest and other income which
he had received from the three (3) parcels of land and to
pay the plaintiff for the loss of two barns and for damages.
In its answer, the DBP specifically denied the material
averments of the complaint and stated that on October 6,
1959, the plaintiff Dizon was no longer the owner of the
land in question because the DBP acquired them at the
extrajudicial foreclosure sale held on May 26, 1959, and
that the only right which plaintiff possessed was a mere
right to redeem the lands under Act 3135 as amended.
Defendant Alfredo G. Gaborro also answer, denying the
material averments of the complaint, stating that the
Deed of Sale with Assumption of Mortgage expresses the
true agreement of the parties fully, truthfully and
religiously but the Option to Purchase Real Estate does
not express the true intention of the parties because it was
made only to protect the reputation of the plaintiff among
his townmates, and even in the supposition that said option
is valid, the action is premature. He also filed a
counterclaim for damages, which plaintiff denied.
The issues having been joined, a pretrial was held and
the following stipulation of facts admitted by the parties
was approved by the Court in the following order dated
February 22, 1963:
ORDER
At todays initial trial, the following were present: Mr. Leonardo

Abola, for the plaintiff Mr. Carlos Antiporda, for the defendant
Alfredo Gaborro and Mr. Virgilio Fugoso, for the Development
Bank of the Philippines:
The parties have stipulated on the following facts:
702

Dizon vs. Gaborro
1. That Annex A attached to the complaint is marked

Exhibit AStipulation. The parties have admitted
the due execution, authenticity and genuineness of
said Exhibit AStipulation. This fact has been

admitted by all the three parties.
2. That the defendant Gaborro executed Annex B,
which is marked Exhibit BStipulation. This fact
has been admitted only between plaintiff and
defendant Gaborro.
3. That the three parcels of land referred to in
paragraph 3 of the complaint, on or before October
6, 1959, were subject to a first mortgage lien in
favor of the Development Bank of the Philippines,
formerly Rehabilitation Finance Corporation, to
secure payment of a loan obtained by the plaintiff
Jose P. Dizon in the original sum of P38,000.00 plus
interest, which has been assumed by defendant
Gaborro by virtue of a document, Exhibit A
Stipulation, and also subject to a second mortgage
lien in favor of the Philippine National Bank to
secure the payment of a loan in the sum of
P93,831.91 plus interest up to August 30, 1951,
which mortgage liens were duly annotated on TCT
15679. This fact has been admitted by the plaintiff
and defendant Gaborro.
4. In respect to the foreclosure of the first mortgage
referred to above, it was admitted that the same
was foreclosed on May 26, 1959, the second
mortgage has not been admitted nor foreclosed.
5. That the Development Bank of the Philippines
admits that the first mortgage referred to above
was foreclosed on May 26, 1959, under the
provisions of Public Act No. 3135, as amended.
6. That subsequently the Development Bank and the
defendant Gaborro executed a document entitled
Conditional Sale over the same parcels of land
referred to in paragraph 3 of the complaint, and
copy thereof will be furnished by the Development
Bank of the Philippines and marked Exhibit C
Stipulation.
7. That on or before October 6, 1960, TCT No. 15679 of
the Register of Deeds of Pampanga in the name of
Jose P. Dizon covering the three parcels of land
referred to in the complaint was cancelled and in
lieu thereof TCT NO. 24292 of the Register of Deeds
of Pampanga was issued in the name of the
Development Bank of the Philippines. This fact has
been admitted by all the parties.
8. That after the execution of the deed of conditional
sale, certain payments were made by the defendant
Gaborro to the Development Bank, the exact

amount to be determined later and receipts of
payments to be also exhibited later. This fact has
been admitted by all the three parties.
703
VOL. 83, JUNE 22, 1978 703

Dizon vs. Gaborro
9. That since October 6, 1959, the defendant Gaborro

has made several payments to the PNB in the
amounts appearing on the receipts which will be
shown later, such payments being made on account
of the sum of P38,831.91. The payment was
assumed by said defendant Gaborro. This fact has
been admitted by plaintiff and defendant Gaborro
only.
10. That since the execution of Exhibits A and B
Stipulation, the defendant Gaborro has been and
still is in the actual possession of the three parcels
of land in question and he is actually cultivating
the same and that the land taxes thereon have been
paid by said defendant Gaborro, the amounts of
said taxes appearing on the official receipts to be
shown later. This fact has been admitted by
plaintiff and defendant Gaborro only.
11. That since defendant Gaborro took possession of the
lands in question, he has been appropriating all the
fruits produced and other income of said lands
without giving to the plaintiff any share thereof.
This fact has been admitted by plaintiff and
defendant Gaborro only.
Let a copy of this order be served upon the plaintiff,
defendant Gaborro and the Development Bank of
the Philippines with the understanding that, if,
within fifteen (15) days, none of the parties
questions the correctness of the facts set forth
above, this stipulation of facts shall be conclusive
upon the parties interested in this case.
Set the trial on the controversial facts on April 18,
1963, at 9:00 oclock in the morning.
Paragraphs 3 and 10 of the above quoted order were

deleted in an order dated July 26, 1963.
The records disclose that during the pendency of the
case in the trial court, motions were filed by the plaintiff
for the appointmnt of a receiver of the properties but all

were denied. Plaintiff also reiterated the same motion
before the appellate court which, however, dismissed the
same, reserving to him the right to file in the trial court.
Plaintiff did file but with the same result. Certiorari
proceedings were resorted to in the Court of Appeals in CA
G.R. No. SP01403 entitled Jose P. Dizon vs. Hon. Felipe
Buencamino, et al. which the respondent court denied.
After trial the court held that the true agreement
between Jose P. Dizon, the plaintiff therein, and the
defendant Alfredo
704

Dizon vs. Gaborro
G. Gaborro is that the defendant would assume and pay

the indebtedness of the plaintiff to the Development Bank
of the Philippines and the Philippine National Bank, and in
consideration therefor, the defendant was given the
possession and enjoyment of the properties in question
until the plaintiff shall have reimbursed to defendant fully
the amount of P131,831.91 plus 8% interest per annum.
Accordingly, on March 14, 1970, the lower court
rendered judgment, the dispositive part of which reads:
IN VIEW OF THE FOREGOING, the documents entitled Deed

of Sale with Assumption of Mortgage (Exhibit AStipulation) and
Option to Purchase Real Estate (Exhibit BStipulation) are
hereby reformed to the extent indicated above. However, since
this action was filed before the period allowed the plaintiff to
redeem his property, the prematurity of this action aside from not
being principally alleged in the complaint, deters this Court from
ordering further reliefs and remedies. The counterclaim of the
defendant is dismissed.
The plaintiffs motion for new trial and for reconsideration,

and motion for admission of supplemental complaint
having been denied for lack of merit, on June 6, 1970,
plaintiff appealed to the Court of Appeals, which, however,
affirmed the decision with the modification that the
plaintiffappellant has the right to refund or reimburse the
defendantappellee the sum of P131,831.91 with interest at
8% per annum from October 6, 1959 until full payment,
said right to be exercised within one (1) year from the date
the judgment becomes final, with the understanding that,
if he fails to do so within the said period, then he is deemed

to have lost his right over the lands forever.
Petitioners motion for reconsideration and/or rehearing
having been denied by the Court of Appeals, hence the
present petition for review on certiorari. The petitioner
assigns the following errors, to wit:
I. The Court of Appeals, like the lower court, erred in not holding
that upon established facts and undisputed documentary
evidence, the deed of sale with assumption of mortgage (Exhibit
A
705
VOL. 83, JUNE 22, 1978 705

Dizon vs. Gaborro
Stipulation) constitutes an equitable mortgage or conveyance to

secure petitioners obligation to reimburse or refund to defendant
Alfredo Gaborro any and all sums to the extent of P131,831.91,
paid by said defendant in total or partial satisfaction of
petitioners mortgage debts to the DBP and the PNB. In this
connection, the Court of Appeals erred:
(A) In not finding that the petitioner was the lawful owner of the lands in
question:
(B) In not finding that the deed of sale in question is not a real and
unconditional sale and
(C) In not holding that the option to purchase real estate (Exhibit B
Stipulation) is conclusive evidence that the transaction in question is in
fact an equitable mortgage.
II. The Court of Appeals also erred in finding that the

instrument entitled Assignment of Right of Redemption and
Assumption of Obligation is conclusive evidence that the real
transaction evidenced by the Deed of Sale with Assumption of
Mortgage is not an equitable mortgage. In this connection the
said court also erred or at least committed a grave abuse of
discretion:
(A) In not finding that the said deed of assignment is in fact a mere
reiteration of the terms and condition of the deed of sale
(B) In finding that the price or consideration of the aforesaid
assignment of right of redemption consisted of 300 cavans of palay
delivered by Mrs. Gaborro to the petitioner and
(C) In finding that defendant Gaborro purchased the lands in question
by virtue of the aforementioned deed of assignment.
III. The Court of Appeals, like the trial court, also erred in not
finding that the estate of Alfredo G. Gaborro is under obligation to
render an accounting of all the produce, fruits and other income of

the lands in question from October 6, 1959, and to reconvey the
said lands to the herein petitioner. In this connection, the said
court also erred:
(A) In not holding that as a mortgagee in possession, the Gaborro estate

has the obligation to either render an accoun
706

Dizon vs. Gaborro
ting of the produce or fruits of the lands, or to pay rentals for

the occupation of said lands
(B) In not finding that the Gaborro estate has the obligations to reconvey
the lands in controversy to the herein petitioner, upon payment of the
balance due from him after deducting either the net value of the produce
or fruits of the said lands or the rentals thereof
(C) In not finding that further reliefs or remedies may be granted the
herein petitioner and
(D) In not ordering the admission of herein petitioners Supplemental
Complaint dated April 30, 1970.
IV. The Court of Appeals finally erred in not reversing the

decision of the trial court, and in not rendering judgment
declaring that the deed of sale with assumption of mortgage
(Exhibit AStipulation) is in fact an equitable mortgage and in
not ordering the Gaborro estate either to render an accounting of
all the produce or fruits of the lands in question or to pay rentals
for the occupation thereof, from October 6, 1959 and in not
ordering the estate of Alfredo G. Gaborro to reconvey, transfer
and assign unto the petitioner the aforementioned lands.
The two instruments sought to be reformed in this case

appear to stipulate rights and obligations between the
parties thereto pertaining to and involving parcels of land
that had already been foreclosed and sold extrajudicially,
and purchased by the mortgage creditor, a third party. It
becomes, therefore, necessary to determine the legality of
said rights and obligations arising from the foreclosure and
sale proceedings not only between the two contracting
parties to the instruments executed between them but also
in so far as the agreement affects the rights of the third
party, the purchaser Bank.
Act 3135, Section 6 as amended by Act 4118, under
which the properties were extrajudicially foreclosed and
sold, provides that:
Sec. 6. In all cases in which an extrajudicial sale is made under

the special power hereinbefore referred to. the debtor, his
successors in interest or any judicial creditor or judgment creditor
of sale debtor, or any person having a lien on the property
subsequent
707
VOL. 83, JUNE 22, 1978 707

Dizon vs. Gaborro
to the mortgage or deed of trust under which the property is sold,

may redeem the same at any time within the term or one year
from and after the date of the sale and such redemption shall be
governed by the provisions of sections four hundred and sixtyfour
to four hundred and sixtysix, inclusive, of the Code of Civil
Procedure, in so far as these are not consistent with the
provisions of this Act.
Under the Revised Rules of Court, Rule 39, Section 33, the
judgment debtor remains in possession of the property
foreclosed and sold, during the period of redemption. If the
judgment debtor is in possession of the property sold, he is
entitled to retain it and receive the fruits, the purchaser
not being entitled to such possession. (Riosa v. Verzosa, 26
Phil. 86 Velasco v. Rosenbergs Inc., 32 Phil. 72 Pabico v.
Pauco, 43 Phil. 572 Power v. PNB, 54 Phil. 54 Gorospe v.
Gochangco, L12735, Oct. 30, 1959).
A judgment debtor, whose property is levied on
execution, may transfer his right of redemption to any one
whom he may desire. The right to redeem land sold under
execution within 12 months is a property right and may be
sold voluntarily by its owner and may also be attached and
sold under execution. (Magno v. Viola and Sotto, 61 Phil.
80).
Upon foreclosure and sale, the purchaser is entitled to a
certificate of sale executed by the sheriff. (Section 27,
Revised Rules of Court) After the termination of the period
of redemption and no redemption having been made, the
purchaser is entitled to a deed of conveyance and to the
possession of the properties. (Section 35, Revised Rules of
Court). The weight of authority is to the effect that the
purchaser of land sold at public auction under a writ of
execution only has an inchoate right in the property,
subject to be defeated and terminated within the period of
12 months from the date of sale, by a redemption on the
part of the owner. Therefore, the judgment debtor in
possession of the property is entitled to remain therein
during the period allowed for redemption. (Riosa v.

Verzosa, 26 Phil. 86 89 Gonzales v. Calimbas, 51 Phil.
355.)
In the case before Us, after the extrajudicial foreclosure
and sale of his properties, petitioner Dizon retained the
right to redeem the lands, the possession, use and
enjoyment of the
708

Dizon vs. Gaborro
same during the period of redemption. And these are the

only rights that Dizon could legally transfer, cede and
convey unto respondent Gaborro under the instrument
captioned Deed of Sale with Assumption of Mortgage (Exh.
AStipulation), likewise the same rights that said
respondent could acquire in consideration of the latters
promise to pay and assume the loan of petitioner Dizon
with DBP and PNB.
Such an instrument cannot be legally considered a real
and unconditional sale of the parcels of land, firstly,
because there was absolutely no money consideration
therefor, as admittedly stipulated, the sum of P131,831.91
mentioned in the document as the consideration receipt of
which was acknowledged was not actually paid and
secondly, because the properties had already been
previously sold by the sheriff at the foreclosure sale,
thereby divesting the petitioner of his full right as owner
thereof to dispose and sell the lands.
In legal consequence thereby, respondent Gaborro as
transferee of these certain limited rights or interests under
Exh. AStipulation, cannot grant to petitioner Dizon more
than said rights, such as the option to purchase the lands
as stipulated in the document called Option to Purchase
Real Estate (Exhibit BStipulation). This is necessarily so
for the reason that respondent Gaborro did not purchase or
acquire the full title and ownership of the properties by
virtue of the Deed of Sale With Assumption of Mortgage
(Exh. AStipulation), earlier executed between them which
We have ruled out as an absolute sale. The only legal effect
of this Option Deed is the grant to petitioner the right to
recover the properties upon reimbursing respondent
Gaborro of the total sums of money that the latter may
have paid to DBP and PNB on account of the mortgage
debts, the said right to be exercised within the stipulated 5
years period.
In the light of the foreclosure proceedings and sale of the

properties, a legal point of primary importance here, as
well as other relevant facts and circumstances, We agree
with the findings of the trial and appellate courts that the
true intention of the parties is that respondent Gaborro
would assume and pay the indebtedness of petitioner Dizon
to DBP and PNB, and in consideration therefor, respondent
Gaborro was given the
709
VOL. 83, JUNE 22, 1978 709

Dizon vs. Gaborro
possession, the enjoyment and use of the lands until petitioner
can reimburse fully the respondent the amounts paid by

the latter to DBP and PNB, to accomplish the following
ends: (a) payment of the bank obligations (b) make the
lands productive for the benefit of the possessor,
respondent Gaborro (c) assure the return of the land to the
original owner, petitioner Dizon, thus rendering equity and
fairness to all parties concerned.
In view of all these considerations, the law and
jurisprudence, and the facts established, We find that the
agreement between petitioner Dizon and respondent
Gaborro is one of those innominate contracts under Art.
1307 of the New Civil Code whereby petitioner and
respondent agreed to give and to do certain rights and
obligations respecting the lands and the mortgage debts of
petitioner which would be acceptable to the bank, but
partaking of the nature of the antichresis insofar as the
principal parties, petitioner Dizon and respondent Gaborro,
are concerned.
Mistake is a ground for the reformation of an
instrument when, there having been a meeting of the
minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the
agreement, and one of the parties may ask for such
reformation to the end that such true intention may be
expressed. (Art. 1359, New Civil code). When a mutual
mistake of the parties causes the failure of the instrument
to disclose their real agreement, said instrument may be
reformed (Art. 1361, New Civil Code.) It was a mistake for
the parties to execute the Deed of Sale With Assumption of
Mortgage and the Option to Purchase Real Estate and
stand on the literal meaning of the terms and stipulations
used therein.
The instruments must, therefore, be reformed in

accordance with the intention and legal rights and
obligations of the partiesthe petitioner, the respondent
and the Banks. We agree with the reformation decreed by
the trial and appellate courts, but in the sense that
petitioner Jose P. Dizon has the right to reacquire the three
parcels of land within the oneyear period indicated below
by refunding or reimbursing to respondent Alfredo G.
Gaborro or the Judicial Administratrix of his Estate
whatever amount the latter has actually paid on ac
710

Dizon vs. Gaborro
count of the principal only, of the loans of Dizon with the

DBP and PNB, excluding the interests and land taxes that
may have been paid or may have accrued, on duly certified
financial statements issued by the said banks.
On the issue of the accounting of the fruits, harvests and
other income received from the three parcels of land from
October 6, 1959 up to the present, prayed and demanded by
Dizon of Gaborro or the Judicial Administratrix of the
latters estate, We hold that in fairness and equity and in
the interests of justice that since We have ruled out the
obligation of petitioner Dizon to reimburse respondent
Gaborro of any interests and land taxes that have accrued
or been paid by the latter on the loans of Dizon with DBP
and PNB, petitioner Dizon in turn is not entitled to an
accounting of the fruits, harvests and other income received
by respondent Gaborro from the lands, for certainly,
petitioner cannot have both benefits and the two may be
said to offset each other.
By virtue of the Option to Purchase Real Estate (Exh. B
Stipulation) which on its face granted Dizon the option to
purchase the properties which must be exercised within the
period from January, 1960 to December 31, 1965 but which
We held to be simply the grant of the right to petitioner
Dizon to recover his properties within the said period,
although already expired by reasons and circumstances
beyond his control, petitioner is entitled to a reconveyance
of the properties within a reasonable period. The period of
one year from the date of the finality of this judgment as
laid down by the Court of Appeals for the exercise of such
right by petitioner Dizon appears fair and reasonable and
We approve the same.
Since We are not informed of the status of Dizons loan

of P93,831.91 with the Philippine National Bank which
appears to be on a subsisting basis, it is proper to indicate
here how petitioner Dizon may exercise the right to a
reconveyance of the properties as herein affirmed, as
follows:
(a) Dizon is granted the right to a reconveyance of the
properties by reimbursing Gaborro (or his estate) whatever
amount(s) the latter has actually paid on account of the
principal only, of Dizons loans of P38,000.00 and
P93,831.91 which
711
VOL. 83, JUNE 22, 1978 711

Dizon vs. Gaborro
the DBP and PNB, respectively, excplusive of the interests

that may have accrued thereon or may have been paid by
Gaborro, on the basis of duly certified statements issued by
said banks
(b) Any outstanding balance due on Dizons original
principal loan of P38,000.00 with the Development Bank of
the Philippines assumed by Gaborro and on Dizons
original principal loan of 93,831.91 with the PNB shall be
deducted from the abovefixed reconveyance price payable
to Gaborro, in order to enable Dizon to pay off the said
mortgage loans directly to the said banks, in accordance
with terms mutually agreed upon with them by Dizon
(c) In other words, the maximum reconveyance price
that Dizon is obligated to pay is the total sum of
P131,831.91 (the sum total of the principals of his two
original loans with the DBP and PNB), and should the
amounts due to the said banks exceed this total of
P131,831.91 (because of delinquent interests and other
charges), nothing shall be due Gaborro by way of
reimbursement and Dizon will thereupon step into the
shoes of Gaborro as ownermortgagor of the properties and
directly arrange with the banks for the settlement of the
amounts stilt due and payable to them, subject to the right
of Dizon to recover such amounts in excess of P131,831.91
from Gaborro by writ of execution in this case and
(d) As already stated, Dizon is not entitled to an
accounting of the fruits, harvests and other income received
by Gaborro from the land while Gaborro in turn is not
entitled to the payment of any interests on any amounts
paid by him on account of the principal loans to the banks
nor reimbursement of any interests paid by him to the

banks.
WHEREFORE, the judgment appealed from is hereby
affirmed with the modification that petitioner Dizon is
granted the right within one year from finality of this
decision to a reconveyance of the properties in ligitation
upon payment and reimbursement to respondent estate of
Alfredo G. Gaborro of the amounts actually paid by
Gaborro or his estate on account of the principal only of
Dizons original loans with the Development Bank of the
Philippines and Philippine National Bank in and up to the
total amount of P131,831.91, under the terms
712

Dizon vs. Gaborro
and conditions set forth in the preceding paragraph with

subparagraphs (a) to (d), which are hereby incorporated by
reference as an integral part of this judgment, and upon
the exercise of such right, respondent estate shall forthwith
execute the corresponding deed of reconveyance in favor of
petitioner Dizon and deliver possession of the properties to
him. Without pronouncement as to costs.
Teehankee (Chairman), Makasiar, Muoz Palma

and
Fernandez, JJ., concur.
Notes.A mortgagor does not become directly liable for

the payment of the loan secured by a mortgage in the
absence of stipulation to that effect. (Gaboya vs. Cui, 38
SCRA 85).
A mortgage over a parcel of land includes the
improvements found thereon. (Manahan vs. Cruz, 61 SCRA
137).
The reckoning date for redemption in an extrajudicial
foreclosure sale is from the registration of the sale, not the
date of the auction sale. (Reyes vs. Tolentino, 42 SCRA
365).
There is no pacto commissorio in the mere fact of extra
judicial foreclosure of a chattel mortgage. (Northern
Motors, Inc. vs. Herrera, 49 SCRA 392).
The mortgagee may ask for a writ of possession over
foreclosed property pending its redemption by the
judgment debtor. (Marcelo Steel Corporation vs. Court of

Appeals, 54 SCRA 89).
Once the auction of the mortgaged property is effected
and the resulting deficiency in the mortgage debt
ascertained, the mortgageecreditor is then and there
entitled to secure a deficiency judgment which may
immediately be executed, whether or not the mortgagor is
still entitled to redeem the property sold. (Development
Bank of the Philippines vs. Vda. de Moll, 43 SCRA 82).
The foreclosure of a chattel mortgage precludes any
further action against the debtor and his guarantor.
(Pascual vs. Universal Motors Corporation, 61 SCRA 121).
713
VOL. 83, JUNE 22, 1978 713

Valencia vs. Republic
In reforming instruments, courts do not make another

contract for the parties merely inquire into the intention of
the parties and, having found it, reform the written
instrument (not the contract) in order that it may express
the real intention of the parties. (Cosio vs. Palileo, 14
SCRA 170.)
The remedy where there is simple mistake in the
drafting of the document of sale in designating the land
object to the sale, is reformation of the instrument, there
being a meeting of the minds of the parties to the contract.
(Atilano vs. Atilano, 28 SCRA 231.)
o0o
[No. 25729. November 24, 1926]
THE BELGIAN CATHOLIC MISSIONARIES, INC.,

plaintiff and appellee, vs. MAGALLANES PRESS, INC.,
ET AL., defendants. JOSE MARIA MEMIJE, appellant.
1. CHATTEL MORTGAGE DEPOSIT OF PROPERTY.

The trial court did not commit an error in authorizing the
plaintiff corporation to take possession of the personal
property in litigation upon the filing of a bond sufficient to
secure the conservation or value of the same, such act not
constituting a delivery of the personal property, as the
appellant contends, but only a deposit of the property in
litigation applied for by said plaintiff corporation which
became a receiver by authority of the court, it being the
party most interested in the conservation and care of said
property.
2. lD. INCREASE OF SECURITY.The increase of a

mortgage security becomes a new mortgage where the
original mortgage does not contain any stipulation in
regard to the increase of the mortgage credit, and, even if
it does, said increase would take effect only from the date
of the increase. A mortgage which contains a stipulation in
regard to future increases of credit will take effect from
the date the same are made and not from the date of the
original. mortgage.
3. ID. SECURITY OF FUTURE DEBT.Where the statute

provides that the parties to a chattel mortgage must take
oath that the debt is a just debt, honestly due and owing
from the mortgagor to the mortgagee, it is obvious that a
valid mortgage cannot be made to secure a future debt.

Manila. Diaz, J.
648
http://central.com.ph/sfsreader/session/0000015cda92a4e5de7b9cc2003600fb002c009e/t/?o=False 1/10
Belgian Catholic Missionaries vs. Magallanes Press
Antonio M. Opisso, Romualdez Hermanos and Luciano de

la Rosa for appellant.
Cavanna, Aboitiz & Agan for appellee.
VILLAREAL, J.:
This is an appeal taken by Jose Maria Memije from a

judgment of the Court of First Instance of Manila the
dispositive part of which is as follows:
"For all the foregoing, the court is of the opinion that the
plaintiff has a right to the relief prayed for in its complaint.
Wherefore, judgment is rendered declaring that Exhibits C
and D, that is, the mortgage deeds in question in this
proceeding, in so far as they prejudice the rights of the
plaintiff, are null and void that the preliminary injunction
issued in this case against the defendant Jose Ma. Memije
is final and absolute and that the plaintiff recover the
amount of the fire insurance policies of the defendant
'Magallanes Press, Inc.,' which, or the representatives of
which, is hereby ordered to endorse said insurance policies
to the plaintiff, with the costs of the proceeding against the
defendants, with the exception of J. P. Heilbronn Co., Inc.
It is so ordered."
In support of his appeal, the appellant assigns the
following supposed errors as committed by the lower court
in its judgment, to wit: (1) The court erred in overruling the
demurrer filed by this defendant to the complaint in this
action (2) the trial court erred in giving the plaintiff
corporation possession of the property mortgaged to this
appellant without following the necessary proceedings or
complying with the provisions of the law (3) the trial court
erred in issuing the writ of preliminary injunction against
the appellant and E. E. Elser, restraining the former from
receiving from the latter, or the latter from delivering to
the former, the amount of the insurance policies covering
the property mortgaged to the appellant, which was
damaged by the fire that occurred in the establishment of
the Magallanes Press, Inc. (4) the trial
649
VOL. 49, NOVEMBER 24, 1926 649

court erred in giving to the unnecessary intervention of the

Magallanes Press, Inc., in the execution of the deed Exhibit
C an interpretation which is neither based upon law nor

upon the contract (5) the trial court erred in ordering the
suspension of the foreclosure of the appellant's mortgage on
the property of the Magallanes Press, Inc. (6) the trial
court erred, under the facts proven in this case, in applying
article 1297 of the Civil Code (7) the trial court erred in
finding in its decision that the defendant Jose Ma. Memije
should not have executed the documents Exhibits C and D
without taking into account the rights of the plaintiff
corporation, The Belgian Catholic Missionaries, Inc. (8) the
trial court erred in declaring Exhibits C and D null and
void in so far as they prejudice the rights of the plaintiff,
over whose credit that of the herein appellant is
preferential in declaring the writ of preliminary injunction
issued against the defendant Jose Ma. Memije final and
absolute in giving judgment for the plaintiff to recover the
amount of the fire insurance policies of the defendant the
Magallanes Press, Inc. and (9) the trial court erred in not
making any pronouncement as to the counterclaim and
crosscomplaint of the defendant Jose Ma. Memije in this
action, nor taking the same into consideration and
rendering judgment thereon in favor of said defendant.
The oral evidence has not been forwarded to this court
so that we are compelled to base our opinion exclusively
upon the documentary evidence and the facts found and
stated by the trial court in its judgment. It appears that on
December 1, 1921, the Magallanes
Press, through its manager H. Camea, executed a
promissory note in favor of J. P. Heilbronn & Co., Inc., for
the sum of P3,472.92, with interest at 10 per cent per
annum, payable at the rate of P250 a month, plus the
interest earned on the unpaid balance, until the whole
amount of the indebtedness shall have been paid, the first
payment to be made on January 1, 1922, with the condition
that upon
650

the failure to pay any monthly installment of the interest

earned on the unpaid balance, the whole amount of the
indebtedness shall become due, and the maker shall pay
the payee an additional sum equivalent to 15 per cent of
the total balance, for attorney's fee and expenses of
collection, forfeiting all right of exemption.
On the same date, December 1, 1921, the said

Magallanes Press, through its manager H. Camea, also
executed a promissory note in f avor of J. P. Heilbronn &
Co., Inc., for the sum of P10,715.77, with interest at 12 per
cent per annum, payable at the rate of P500 a month,
together with the interest earned on the unpaid balance,
until the whole amount of the indebtedness shall have been
paid, the first payment to be made on January 1, 1922,
with the condition that upon the failure to pay any monthly
installment or the interest earned on the unpaid balance,
the whole amount of the indebtedness shall become due,
and the maker shall pay the payee an additional sum equal
to 15 per cent of the total balance for attorney's fee and
expenses of collection, forfeiting all right of exemption.
To secure the payment of said promissory notes which
amounted to a total of P14,188.69, H. Camea, as general
manager of the Magallanes Press, executed a chattel
mortgage on all the printing machinery and its accessories,
belonging to the said Magallanes Press, in favor of J. P.
Heilbronn & Co,, Inc.
On June 19, 1922, the Magallanes Press Co., Inc.,
successor to the Magallanes Press, with all the latter's
rights and obligations, through its duly authorized
president, E. F. Clemente, executed a chattel mortgage on
the same printing machinery and its accessories in favor of
the Belgian Catholic Missionaries Co., Inc., which the
Magallanes Press had mortgaged to J. P. Heilbronn & Co.,
Inc., to secure the payment of a loan of P30,500, with
interest at 12 per cent per annum, which the said
Magallanes Press & Co., Inc., had obtained from the
Belgian Catholic Missionaries Co.,
651
VOL. 49, NOVEMBER 24, 1926 651

Inc., the duration of the mortgage loan being one year from
the execution of the mortgage deed.
In December, 1922 the appellant Jose Ma. Memije made
a loan in the sum of P2,000 to E. F. Clemente which was
paid on account of the indebtedness of the Magallanes
Press to J. P. Heilbronn & Co., Inc., together with the sum
of P1,641 which A. F. Mendoza owed said E. F. Clemente.
On the occasion of the issuance of the writ of attachment
in civil cause No. 23818 of the Court of First Instance of
Manila, entitled Jose Ma. Cavanna vs. The Magallanes
Press Co., Inc., the defendant Jose Ma. Memije, on

February 21, 1923, filed an intervention in said case.
All the promissory notes executed by the Magallanes
Press in favor of J. P. Heilbronn & Co., Inc., having been
overdue for nonpayment of the installments, as well as the
respective chattel mortgage, the said J. P. Heilbronn & Co.,
Inc., transferred all its mortgage credit against the
Magallanes Press to Jose Ma. Memije in consideration of
the sum of P8,280.90, the balance of said mortgage credit.
On March 14, 1923, Enrique Clemente, as manager of
the Magallanes Press Co., Inc., executed a deed in favor of
Jose Ma. Memije by virtue of which the chattel mortgage
which was given by the Magallanes Press in favor of J. P.
Heilbronn & Co., Inc., and transferred by the latter to Jose
Ma. Memije, was made to cover an additional loan of
P5,895.79, which included the sum of P2,000 which said
Jose Ma. Memije had advanced said Enrique Clemente in
December, 1922.
On April 21, 1923, a fire occurred in the building where
the printing machinery, its accessories and other personal
property of the Magallanes Press Co., Inc., were located
and which were covered by said chattel mortgages. Said
property was insured, and the insurance policies covering it
were endorsed to J. P. Heilbronn & Co., Inc., upon the
execution of the chattel mortgage thereon in favor of the
latter. When J. P. Heilbronn & Co., Inc., transferred
652

its mortgage credit to Jose Ma. Memije it, in turn, endorsed

said insurance policies to him. The insurance companies
were disposed to pay the respective insurance policies,
which amounted to P7,686.45, but due to the issuance of
the abovementioned writ of preliminary injunction,
payment could not be made.
Due to the filing of the complaint in the present case on
May 9, 1923, and the issuance of the writ of preliminary
injunction on May 10th of the same year, Jose Ma. Memije
was unable to collect the amount of the insurance policies,
and when he was summoned under the complaint on May
14, 1923, he made demand on the Magallanes Press Co.,
Inc., for the payment of his mortgage credit and on the
same date the manager of said corporation, E. F. Clemente,
permitted the secretary of the said corporation to place the
property covered by the mortgage into the hands of the said
Jose Ma. Memije in order that the same might be sold, but
the sale could not be consummated due to the issuance of
the said writ of preliminary injunction.
The first question raised by the defendant and appellant
has reference to the overruling of the demurrer filed by him
to the complaint.
One of the grounds of said demurrer was that the
complaint in this case did not allege facts sufficient to
constitute a cause of action against the said def endant, in
that, notwithstanding the fact that the said complaint was
instituted to annul the document of transfer of the
mortgage credit Exhibit C, it was not alleged in the said
complaint that the defendant Jose Ma. Memije had any
intention to defraud the interests of the plaintiff
corporation, which was absolutely impossible due to the
nature of the "transaction and the preferential character of
the mortgage credit of J. P. Heilbronn & Co., Inc.
As to this paragraph of the complaint, the plaintiff
company having known of the existence of a chattel
mortgage in favor of J. P. Heilbronn & Co., Inc., the latter,
either as
653
VOL. 49, NOVEMBER 24, 1926 653

the first or as the second mortgagee, had a perfect right to

transfer its mortgage credit, without the knowledge or
consent of any other mortgagee, inasmuch as whoever
acquired it, would have exactly the same status as the
transferor with the same rights and obligations. The fact,
therefore, that the Magallanes Press Co., Inc., had
consented to the transfer of the mortgage credit of J. P.
Heilbronn & Co., Inc., to Jose Ma. Memije, does not
constitute a fraud that can vitiate the said transfer,
inasmuch as the order of preference of the existing
mortgages has not been altered, and its allegation does not
constitute a cause of action to annul the said transfer.
In regard to the allegation contained in the ninth
paragraph of the complaint, it is very clear that the
increase made by Jose Ma. Memije in the mortgage credit
acquired by him from J. P. Heilbronn & Co., Inc., and the
extension made by the Magallanes Press, Inc., of the
mortgage to said additional credit without the knowledge
or consent of the plaintiff company, as second mortgagee,
prejudices the credit of the latter, inasmuch as the security
for the payment of said credit was reduced as to it, and,
therefore, constitutes a fraud that vitiates the contract of

extension of the mortgage evidenced by the deed Exhibit D,
rendering it void.
The facts alleged in paragraph 9 of the complaint are
sufficient to constitute a cause of action of nullity, and the
lower court did not err in overruling the demurrer filed by
the defendant Jose Ma. Memije.
In regard to the second assignment of error, it appears
that the defendant Jose Ma. Memije having attempted to
foreclose the mortgage, by which the mortgage credit
acquired by him from J. P. Heilbronn & Co., Inc., was
secured, in order to recover not only the original credit but
also the increase, the Belgian Catholic Missionaries Co.,
Inc., filed a complaint, with a petition for a writ of
preliminary injunction against the sheriff, in whose hands
the fore
654

closure of the mortgage was placed. The writ of preliminary

injunction having been issued, upon the filing of a bond in
the sum of P15,000, and there being no person more
interested in the conservation and custody of the property
covered by the mortgage than said plaintiff company, being
the largest creditor, it applied and obtained from the court
the possession of the same.
Contrary to the contention of the appellant, this case is
not one of replevin but simply a proceeding instituted by
the plaintiff for the deposit of the property in litigation,
upon the filing of a bond, said plaintiff acting as a receiver
by authority of the court, being the person most interested
in the conservation and care of the same (sec. 174, Act No.
190 11 C. J., 726).
The lower court, therefore, did not err in authorizing the
plaintiff company to take possession of the personal
property in litigation upon the filing of a bond sufficient to
secure the conservation or value thereof.
The third assignment of error raises the question as to
the preference of right between the plaintiff company and
the defendant over the mortgaged property and the amount
of the insurance policies covering a part thereof which was
destroyed by fire.
As we have seen in the statement of the pertinent facts
necessary for the clear and accurate solution of the
questions of law involved in the present appeal, the firm of
J. P. Heilbronn & Co., Inc., had a mortgage credit against

the Magallanes Press for the sum of P14,186.69, secured by
a first chattel mortgage. The plaintiff company, the Belgian
Catholic Missionaries Co., Inc., also had a mortgage credit
for the amount of P30,500, secured by a second mortgage
on the same personal property. After this second mortgage
had been executed, the payment of the mortgage credit of J.
P. Heilbronn & Co., Inc., became due, which credit had
been reduced to the sum of P8,280.90 through partial pay
655
VOL. 49, NOVEMBER 24, 1926 655

ments, and the herein defendantappellant Jose Ma,

Memije acquired said mortgage credit and increased it by
P5,895.59, of which increase P2,000 was a previous loan.
There is no question but that J. P. Heilbronn & Co., Inc.,
at the time of the transfer of its mortgage rights to Jose
Ma. Memije, had a preferential right over that of the
Belgian Catholic Missionaries Co., Inc., for the remainder
of the amount of the mortgage credit, that is, P8,280.90.
The plaintiff company had a preferential right to the rest of
the value of the mortgaged property after deducting the
remaining mortgage credit of J. P. Heilbronn & Co., Inc.
The increase of P5,895.59 made by the defendant Jose
Ma. Memije in favor of the Magallanes Press Co., Inc., and
the extension of the mortgage thereto, are not only
subordinate to the mortgage credit of the plaintiff company,
being subsequent in time and in registration, but said
increase in the security is also void. The increase of the
mortgage security becomes a new mortgage in itself,
inasmuch as the, original mortgage did not contain any
stipulation in regard to the increase of the mortgage credit,
and even if it did, said increase would take effect only from
the date of the increase. A mortgage that contains a
stipulation in regard to future advances in the credit will
take effect only from the date the same are made and not
from the date of the mortgage (11 C. J., 448 5 R. C. L., 420
421). In accordance with the provisions of section 5 of Act
No. 1508, known as the Chattle Mortgage Law, the parties
to the original deed swore that the same was mortgaged "to
secure the obligations specified therein and for no other
purpose." Neither the increase in question, nor the
extension of the mortgage to secure the payment of the
same, is specified in the deed, consequently said extension
is void. "Where the statute provides that the parties to a
chattel mortgage must make oath that the debt is a just

debt, honestly due and owing from the mortgagor to the
656

mortgagee, it is obvious that a valid mortgage cannot be

made to secure a debt to be thereafter contracted." (11 C.
J., 448.)
Briefly, therefore, we have the following:
(a) That Jose Ma. Memije has a preferential right to

the value of the chattels mortgaged and the amount
of the insurance policies up to the sum of P8,280.90
(b) That the plaintiff corporation, the Belgian Catholic
Missionaries Co., Inc., has a right to the remainder
of the value of said chattels and the insurance
policies up to the amount of P30,500, after
deducting the preferential credit of Jose Ma.
Memije
(c) That as to the increase of P5,895.59, the right of the
defendant Jose Ma. Memije is that of an ordinary
creditor.
In regard to the damages claimed by the defendant in his

counterclaim and which is the subjectmatter of his
remaining assignments of error, said defendant has a right
to interest at 12 per cent on the P8,280.90, the amount of
the mortgage credit acquired by him from J. P. Heilbronn
& Co., Inc., from February 26, 1923, the date of the
acquisition until fully paid.
For the foregoing reasons, the judgment appealed from
is revoked and it is ordered that another be entered
declaring all the mortgages overdue, and the mortgage
credit of Jose Ma. Memije preferential over that of the
Belgian Catholic Missionaries Co., Inc., up to the amount of
P8,280.90, with interest at the rate of 12 per cent per
annum from February 26, 1923, until fully paid the
mortgage credit of the Belgian Catholic Missionaries Co.,
Inc., for the sum of P30,500 with interest at the rate of 12
per cent per annum, from June 19, 1922, until fully paid,
plus the sum of P3,000 for attorney's fees, over the
additional credit of Jose Ma. Memije for P5,895.59 and
ordering the foreclosure of the said mortgages by selling
the mortgaged property at public auction, to the proceeds of
which shall be added the amount of the insurance
657
VOL. 49, DECEMBER 3, 1926 657

O'Brien vs. Del Rosario and Bank of the Philippine Islands
policies and the abovementioned credits in the order of

preference above established, without special
pronouncement as to costs. So ordered.
Avancea, C. J., Johnson, Street, Ostrand, and Johns,

JJ., concur.
Judgment reversed.
______________

Barretto vs. Villanueva
No. L14938. January 28, 1961.
MAGDALENA C. DE BARRETO, ET AL., plaintiffs

appellants, vs. JOSE G. VILLANUEVA, ET AL.,
defendantsappellees.
Concurrence and preference of credits Sales Vendor's lien

The promissory note for the unpaid balance of the selling price of
real property may be the basis of a vendor's lien.
Same.The unpaid vendor of real property and the

mortgagee have the right to share pro rata the proceeds of the
foreclosure sale of said realty.
Same Vendor's lien need not be registered.Article 2242 of

the New Civil Code expressly requires that the mortgage credit
should be registered. No such requirement is made with respect to
the vendor's lien for the unpaid price of real property sold. The
law does not make any distinction between a registered and
unregistered vendor's lien. Any lien of that kind enjoys the
preferred credit status.
Same Torrens system Paramount right of lienholders.

Section 70 of Act 496 respects without reserve or qualification the
paramount rights of lienholders on real property, including the
unpaid vendor.
Same Insolvency Civil Code.Nothing in the New Civil

Code indicates that its provisions on concurrence and preference
of credits are applicable only to the insolvent debtor. If those
provisions are intended only to insolvency cases, then other
creditordebtor relationship where there are concurrence and
preference of credits, would be left without any governing rules, a
view that would render purposeless the laws on insolvency.
Motion to Reconsider:
http://central.com.ph/sfsreader/session/0000015cda94d3adf633099d003600fb002c009e/t/?o=False 1/15
Concurrence and preference of credits Provisions of Old and

New Civil Codes compared.Under the old Civil Code, one class
of creditors could exclude the creditors of the lower order until the
claims of the former were fully satisfied out of the proceeds of the
sale of the real property subject of the preference and could even
exhaust the proceeds if necessary. In contrast, under the system
of priorities of the New Civil Code, only taxes enjoy a similar
absolute preference. All the remaining thirteen classes of
preferred creditors under article 2242 enjoy no priority among
themselves, but must be paid pro rata, or in proportion to the
amount of the respective credits.
Same Necessity of proceeding for prorating preferred credits.

In order that the payment pro rata of preferred creditors under
articles 2242 and 2249 of the New Civil Code may be effected,
there must be some proceeding, where the claims of all the
preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of a decedent's estate or other similar
liquidation proceeding. The creditors will be convened in that
289
VOL. 1, JANUARY 28, 1961 289
Barretto vs. Villanueva,
proceeding and the import of their claims ascertained.
Same.In the absence of the proper liquidation proceeding,

wherein the pro rata dividend corresponding to each of the
creditors preferred with respect to specific real property may be
determined, the order of a court in an ordinary action decreeing
that the proceeds of a foreclosure sale should be apportioned
between the unpaid vendor and the mortgagee of the realty sold is
incorrect.
Same When recorded mortgage credit is superior to unpaid

vendor's lien.A recorded mortgage lien is superior to a vendor's
lien over real property, following the rule concerning registered
lands that a purchaser in good faith and for value takes registered
lands free from liens and encumbrances, other than statutory
liens and those recorded in the certificate of title. Where there is
no insolvency or liquidation proceeding, the unpaid vendor's lien
does not acquire the character and rank of a statutory lien
coequal to the recorded mortgage lien. It must remain

subordinate to the latter.
Concurrence and preference of credits Necessity of recording.

It is not excessively burdensome to require preferred creditors
with respect to specific real property to cause their claims to be
recorded in the Registry of Deeds should they desire to project
their rights even outside of insolvency or liquidation proceedings.
Same Vendor's lien.Where the vendor sold to the alleged

vendee an option to acquire the land from the Development Bank,
the registered owner thereof, and the bank sold the property to
the alleged vendee the unpaid price in the first sale is not the
vendor's lien contemplated in article 2242 of the New Civil Code.
APPEAL from an order of the Court of First Instance of

Manila.

Bausa, Ampil & Suarez for plaintiffsappellants.
Esteban Ocampo for defendantsappellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as

administratrix of the intestate estate of her deceased
husband Pedro Cruzado in Special Proceedings No. 4959 of
the Court of First Instance of Manila, obtained from the
defunct Rehabilitation Finance Corporation (hereinafter
referred to as the RFC) a loan in the amount of P
11,000.00. To secure payment thereof, she mortgaged the
land then
290

covered by Transfer Certificate of Title No. 61358 issued in

her name and that of her deceased husband. As she failed
to pay certain installments on the loan, the mortgage was
foreclosed and the RFC acquired the property for
P11,000.00, subject to her rights as mortgagor to
repurchase the same. On July 26, 1951, upon her
application, the land was sold back to her conditionally for
the amount of P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953,
Rosario Cruzado, as guardian of her minor children in
Special Proceedings No. 14198 of the Court of First

Instance of Manila, was authorized by the court to sell with
the previous consent of the RFC the land in question
together with the improvements thereon for a sum not less
than P19,000. Pursuant to such authority and with the
consent of the RFC, she sold to Pura L. Villanueva for
P19.000.00 "all their rights, interest, title and dominion on
and over the herein described parcel of land together with
the existing improvements thereon, including one house
and an annex thereon free from all charges and
encumbrances, with the exception of the sum of P11,009.52,
plus stipulated interest thereon which the vendor is still
presently obligated to the RFC and which the vendee
herein now assumes to pay to the RFC under the same
terms and conditions specified in that deed of sale dated
July 26, 1951." Having paid in advance the sum of
P1,500.00, Pura L. Villanueva, the vendee, in consideration
of the aforesaid sale, executed in favor of the vendor
Rosario Cruzado a promissory note dated March 9, 1953,
undertaking to pay the balance of P17,500.00 in monthly
installments. On April 22, 1953, she made an additional
payment of P5,500.00 on the promissory note. She was,
subsequently, able to secure in her name Transfer
Certificate of Title No. 32526 covering the house and lot
above referred to, and on July 10, 1953, she mortgaged the
said property to Magdalena C. Barretto as security for a
loan in the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the
remaining installments on the unpaid balance of
P12,000.00 on her promissory note for the sale of the
property in question, a complaint for the recovery of the
same from
291
VOL. 1, JANUARY 28, 1961 291

her and her husband was filed on September 21, 1953 by

Rosario Cruzado in her own right and in her capacity as
judicial guardian of her minor children. Pending trial of the
case, a lien was constituted upon the property in the nature
of a levy in attachment in favor of the Cruzados, said lien
being annotated at the back of Transfer Certificate of Title
No. 32626. After trial, decision was rendered ordering Pura
Villanueva and her husband, jointly and aeveraHy, to pay
Rosario Cruzado the sum of P2,000.00, with legal interest
thereon from the date of the filing of the complaint until

fully paid plus the sum of Pl,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her
indebtedness of P30,000.00 to Magdalena C. Barretto, the
latter, jointly with her husband, instituted against the
Villanueva spouses an action for foreclosure of mortgage,
impleading Rosario Cruzado and her children as parties
defendants. On November 11, 1956, decision was rendered
in the case absolving the Cruzados from the complaint and
sentencing the Villanuevas to pay the Barrettos, jointly
and severally, the sum of P30,000.00, with interest thereon
at the rate of 12% per annum from January 11, 1954, plus
the sum of P4,000.00 as attorney's fees. Upon the finality of
this decision, the Barrettos filed a motion for the issuance
of a writ of execution which was granted by the lower court
on July 31, 1958. On August 14, 1958, the Cruzados filed
their "Vendor's Lien" in the amount of P12,000.00, plus
legal interest, over the real property subject of the
foreclosure suit, the said amount representing the unpaid
balance of the purchase price of the said property. Giving
due course to the lien, the court on August 18, 1958 ordered
the same annotated in Transfer Certificate of Title No.
32526 of the Registry of Deeds of Manila, decreeing that
should the realty in question be sold at public auction in
the foreclosure proceedings, the Cruzados shall be credited
with their prorata share in the proceeds thereof, "pursuant
to the provision of articles 2248 and 2249 of the new Civil
Code in relation to Article 2242, paragraph 2 of the same
Code." The Barrettos filed a motion for reconsideration on
September 12, 1958, but on that same date, the sheriff of
the City of Manila,
292

acting in pursuance of the order of the court granting the

writ of execution, sold at public auction the property in
question. As highest bidder, the Barrettos themselves
acquired the properties for the sum of P49,000.00.
On October 4, 1958, the Court of First Instance issued
an order confirming the aforesaid sale and directing the
Register of Deeds of the City of Manila to issue to the
Barrettos the corresponding certificate of title, subject,
however, to the order of August 18, 1958 concerning the
vendor's lien. On the same date, the motion of the
Barrettos seeking reconsideration of the order of the court
giving due course to the said vendor's lien was denied.

From this last order, the Barretto spouses interposed the
present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court of First
instance of Manila in Civil Case No. 20075awarSing the
amount of P12,000.00 in favor of Rosario Cruzado and her
minor childrencannot constitute a basis for the vendor's
lien filed by the appellee Rosario Cruzado, appellants
allege that the action in said civil case was merely to
recover the balance of a promissory note. But while,
apparently, the action was to recover the remaining
obligation of promissor Pura Villanueva on the note, the
fact remains that Rosario P. Cruzado as guardian of her
minor children was an unpaid vendor of the realty in
question, and the promissory note was, precisely, for the
unpaid balance of the purchase price of the property bought
by said Pura Villanueva.
Article 2242 of the new Civil Code enumerates the
claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and among
them are:
"(2) For the unpaid price of real property sold, upon the
immovable sold" and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are
two or more credits with respect to the same specific real
property or real rights, they shall be satisfied prorata,
after the payment of the taxes and 'assessments upon the
immovable property or real rights."
293
VOL. 1, JANUARY 28, 1961 293

Application of the abovequoted provisions to the case at

bar would mean that the herein appellee Rosario Cruzado
as an unpaid vendor of the property in question has the
right to share prorata with. the appellants, the proceeds of
the foreclosure sale.
The appellants, however, argue that inasmuch as the
unpaid vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered rights
over the property. There is nothing to this argument. Note
must be taken of the fact that article 2242 of the new Civil
Code enumerating the preferred claims, mortgages and

liens on immovables, specifically requires thatunlike the
unpaid price of real property soldmortgage credits, in
order to be given preference, should be recorded in the
Registry of Property. If the legislative intent was to impose
the same requirement in the case of the vendor's lien, or
the unpaid price of real property sold, the lawmakers could
have easily inserted the same qualification which now
modifies the mortgage credits. The law, however, does not
make any distinction between registered and unregistered
vendor's lien, which only goes to show that any lien of that
kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded
vendor's lien the same standing as the registered mortgage
credit would be to nullify the principle in land registration
system that prior unrecorded interests cannot prejudice
persons who subsequently acquire interests over the same
property. The Land Registration Act itself, however,
respects without reserve or qualification the paramount
rights of lien holders on real property. Thus, section 70 of
that Act provides that
"Registered land, and ownership therein shall in all respects be

subject to the same burdens and incidents attached by law to
unregistered land. Nothing contained in this Act shall in any way
be construed to relieve registered land or the owners thereof from
any rights incident to the relation of husband and wife, or from
liability to attachment on mesne process or levy on execution, or
from liability to any lien of any description established by law on
land and the buildings thereon, or the interest of the owners of
such land or buildings, or to change the laws of descent, or the
rights of partition between coowners, joint tenants and other co
tenants, or the right to
294

take the same by eminent domain, or to relieve such land

fromliability to be appropriated in any lawful manner for
the payment of debts, or to change or affect in any other
way anyother rights or liabilities created by law and
applicable to unregistered land, except as otherwise
expressly provided in thisAct or in the amendments
thereof." (Italics supplied)
As to the point made that the articles of the Civil Code on
concurrence and preference of credits are applicable only to
the insolvent debtor, suffice it to say that nothing in the

law shows any such limitation. If we are to interpret this
portion of the Code as intended only for insolvency cases,
then other creditordebtor relationships where there are
concurrence of credits would be left without any rules to
govern them, and it would render purposeless the special
laws on insolvency.
Premises considered, the order appealed from is hereby
affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador,

Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur
in the result.
Order affirmed.
R E S O L U T I O N ON
MOTION TO RECONSIDER
December 29, 1962.
REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion

vigorously urging, for reason to be discussed in the course
of this resolution, that our decision of 28 January 1981 be
reconsidered and set aside, and a new one entered
declaring that their right as mortgagees remain superior to
the unrecorded claim of herein appellee for the balance of
the purchase price of her rights, title, and interests in the
mortgaged property.
It will be recalled that, with Court authority, Rosario
Cruzado sold all her right, title, and interest and that of
her children in the house and lot herein involved to Pura L.
Villanueva for P19,000.00. The purchaser paid P1,500
295
VOL. 1, JANUARY 28, 1961 295

in advance, and executed a promissory note for the balance

of P17,500.00. However, the buyer could only pay P5,500 on
account of the note, for which reason the vendor obtained
judgment for the unpaid balance. In the meantime, the
buyer Villanueva was able to secure a clean certificate of
title (No. 32626), and mortgaged the property to appellant
Magdalena C. Barretto, married to Jose C. Barretto, to

secure a loan of P30.000.03, said mortgage having been
duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor
of Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for
execution on 31 July 1958. On 14 August 1958, Cruzado
filed a motion for recognition for her "vendor's lien" in the
amount of ?12,000.00, plus legal interest, invoking Articles
2242, 2243, and 2249 of the new Civil Code. After hearing,
the court below ordered the "lien" annotated on the back of
Certificate of Title No. 32526, with the proviso that in case
of sale under the foreclosure decree the vendor's lien and
the mortgage credit of appellant Barretto should be paid
pro rata from the proceeds. Our original decision affirmed
this order of the Court of First Instance of Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of

the new Civil Code of the Philippines, can only
become effective in the event of insolvency of the
vendee, which has not been proved to exist in the
instant case and
(2) That the appellee Cruzado is not a true vendor of
the foreclosed property.
We have given protracted and mature consideration to the

facts and law of this case, and have reached the conclusion
that our original decision must be reconsidered and set
aside, for the following reasons:
A. The previous decision failed to take fully into account
the radical changes introduced by the Civil Code of the
Philippines into the system of priorities among creditors
ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors
entitled to preference as to specific real property under
296

Article 1923 were to be resolved according to an order of

priorities established by Article 1927, whereby one class of
creditors could exclude the creditors of lower order until
the claims of the former were fully satisfied out of the
proceeds of the sale of the real property subject of the
preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines

however, only taxes enjoy a similar absolute preference. All
the remaining thirteen classes of preferred creditors under
Article 2242 enjoy no priority among themselves, but must
be paid pro rata, i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro rata, after
the payment of the taxes and assessments upon the immovable
property or real rights."
But in order to make this prorating fully effective, the

preferred creditors enumerated in Nos. 2 to 14 of Article
2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full application of
Articles 2249 and 2242 demands that there must be first
some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency,
the settlement of decedent's estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of similar
import.
This explains the rule of Article 2243 of the new Civil
Code that
1
"The claims or credits enumerated in the two preceding articles
shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing
insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code

Commission, as follows:
"The question as to whether the Civil Code and the Insolvency

Law can be harmonized is settled by this Article (2243). The
preferences named in Articles 2261 and 2262 (now 2241 and 2242)
are to be enforced in accordance with the Insolvency
_______________
1 Articles 2241 and 2242.
297
VOL. 1, JANUARY 28, 1961 297

Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's

thirdparty claim to the proceeds of a foreclosure sale (as in
the case now before us) is not the proceeding contemplated
by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the claims is for
taxes, a dispute between two creditors will not enable the
Court to ascertain the prorata dividend corresponding to
each, because the rights of the other creditors likewise
enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeingthat the
proceeds of the foreclosure sale be apportioned only
between appellant and appellee, is incorrect, and must be
reversed.
In the absence of insolvency proceedings (or other
equivalent general liquidation of the debtor's estate), the
conflict between the parties now before us must be decided
pursuant to the well established principle concerning
registered lands that a purchaser in good faith and for
value (as the appellant concededly is) takes registered
property free from liens and encumbrances other than
statutory liens and those recorded in the certificate of title.
There being no insolvency or liquidation, the claim of the
appellee, as unpaid vendor, did not require the character
and rank of a statutory lien coequal to the mortgagee's
recorded encumbrance, and must remain subordinate to
the latter.
We are understandably loathed (absent a clear precept
of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered
Torrens titles and nullify the beneficient objectives sought
to be obtained by the Land Registration Act. No argument
is needed to stress that if a person dealing with registered
land were to be held to take it in every instance subject to
all the fourteen preferred claims enumerated in Article
2242 of the new Civil Code, even if the existence and
import thereof can not be ascertained from the records. all
confidence in Torrens titles would be destroyed, and credit
transactions on the faith of such titJtes would be
298

hampered, if not prevented, with incalculable results.

Loans on real estate security would become aleatory and
risky transactions, for no prospective lender could

accurately estimate the hidden liens on the property
offered as security, unless he indulged in complicated,
tedious investigations. The logical result might well be a
contraction of credit unforeseeable proportions that could
lead to economic disaster.
Upon the other hand, it does not appear excessively
burdensome to require the privileged creditors to cause
their claims to be recorded in the books of the Register of
Deeds should they desire to protect their rights even
outside of insolvency or liquidation proceedings.
B. The close study of the facts disclosed by the records
casts strong doubt on the proposition that appellees
Cruzados should be regarded as unpaid vendors of the
property (land, buildings, and improvements) involved in
the case at bar so as to be entitled to preference under
Article 2242. The record on appeal, specially the final
decision of the Court of First Instance of'Manila in the suit
of the Cruzados against Villanueva, clearly establishes that
after her husband's death, and with due court authority,
Rosario Cruzado, for herself and as administratrix of her
husband's estate, mortgaged the property to the
Rehabilitation Finance Corporation (RFC) to secure
payment of a loan ofFl 1,000, in installmentSi, but that the
debtor failed to pay some of the installments wherefore the
RFC, on 24 August 1949, foreclosed the mortgage, and
acquired the property, subject to the debtor's right to
redeem or repurchase the said property and that on 25
September 1950, the RFC consolidated its ownership, and
the certificate of title of the Cruzados was cancelled and a
new certificate issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed
selling back the property to the erstwhile mortgagors and
former owners Cruzados in installments, subject to the
condition (among others) that the title to the property and
its improvements "shall remain in the name of Corporation
(RFC) until after said purchase price, advances and
interests shall have been fully paid", as of 27 September
1952, Cruzado had only paid a total of Pl,360, and had
299
VOL. 1, JANUARY 28, 1961 299

defaulted on six monthly amortizations for which reason

the RFC rescinded the sale, and forfeited the payments
made, in accordance with the terms of the contract of 26

July 1951.
It was only on 10 March 1953 that the Cruzados sold to
Pura L. Villanueva all "their rights, title, interest and
dominion on and over" the property, lot, house, and
improvements for P19.000.00, the buyer undertaking to
assume payment of the obligation to the RFC, and by
resolution of 30 April 1953, the RFC approved "the transfer
of the rights and interest of Rosario P. Cruzado and her
children in their property herein abovedescribed in favor
of Pura L. Villanueva" and on 7 May 1953 the RFC
executed a deed of absolute sale of the property to said
party, who had fully paid the price of P14,269.03.
Thereupon, the spouses Villanueva obtained a new
Transfer Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the
property to the spouses Barretto, appellants herein.
It is clear from the facts abovestated that ownership of
the property had passed to the Rehabilitation Finance
Corporation since 1950, when it consolidated its purchase
at the foreclosure sale and obtained a certificate of title in
its corporate name. The subsequent contract of resale in
favor of the Cruzados did not revest ownership in them,
since they failed to comply with its terms and conditions,
and the contract itself provided that the title should remain
in the name of the RFC until the price was fully paid.
Therefore, when after defaulting in their payments due
under the resale contract with the RFC the appellants
Cruzados sold to Villanueva "their rights, title, interest and
dominion" to the property, they merely assigned whatever
rights or claims they might still have thereto the
ownership of the property rested with the RFC. The sale
from Cruzado to Villanueva, therefore, was not so much a
sale of the land and its improvements as it was a quitclaim
deed in favor of Villanueva. In law, the operative sale was
that from the RFC to the latter, and it was the RFC that
should be regarded as the true vendor of the
300

property. At the most, the Cruzados transferred to

Villanueva an option to acquire the property, but not the
property itself, and their credit, therefore, can not legally
constitute a vendor's lien on the corpus of that property
that should stand on an equal footing with the mortgaged

credit held by appellant Barretto.
In view of the foregoing, the previous decision of this
Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one entered
reversing the judgment appealed from and declaring the
appellants Barretto entitled to full satisfaction of their
mortgaged credit out of the proceeds of the foreclosure sale
in the hands of the Sheriff of the City of Manila. No costs.
Padilla, Bautista Angelo, Concepcion, Barrera,

Paredes, Regala and Makalintal, JJ., concur.
Bengzon, Labrador and Dizon, JJ., did not take
part.
Motion for reconsideration granted judgment of lower

court reversed.
Notes.The pro rata rule does not apply to "credits

annotated in the Registry of Property, in virtue of a judicial
order. by attachments and executions" which are preferred
as to "later credits" (Art. 2242(7), New Civil Code). In
satisfying several credits annotated by attachments or
executions, the rule is still preference according to the
priority of the credits in the order of time (Manabat vs.
Laguna Federation of Facomas, Inc., L23888, March 18,
1967, 19 Supreme Court Reports Annotated 621).
Preference of mortgage credits is determined by the
priority of registration of the mortgages, following the
maxim prior tempore, potior jure. (Reyes vs. De Leon, L
22331, June 6, 1967, 20 Supreme Court Reports Annotated
369).
Where the persons claiming to be the "unpaid suppliers"
of mortgaged properties were merely "financiers" who
advanced the money for the purchase thereof and one of
them acted as buying agent in their purchase, and they
knew that said properties were covered by the mortgage,
they have no vendor's lien on said properties, superior to
the mortgage lien. (People's Bank and Trust Company
301
VOL. 1, JANUARY 28, 1961 301

Tan Chiu vs. Collector of Internal Revenue
vs. Dahican Lumber Company, L17500, May 16, 1967, 20

Supreme Court Reports Annotated 84).
VOL. 277, AUGUST 11, 1997 209

State Investment House, Inc. vs. Court of Appeals
*
G.R. No. 123240. August 11, 1997.
STATE INVESTMENT HOUSE, INC., petitioner, vs. THE

COURT OF APPEALS, the SECURITIES & EXCHANGE
COMMISSION and PHILIPPINE BLOOMING MILLS,
CO., INC., respondents.
Civil Law Mortgages In any rehabilitation/receivership

proceedings where claims of several creditors shall have to be
resolved, the provisions of the Title XIX of the Civil Code apply.
In any rehabilitation/receivership proceedings where claims of
several creditors shall have to be resolved, the provisions of the
Title XIX of the Civil CodeConcurrence and Preference of
Credits applies.
Same Same Petitioners motion to declare and confirm the

highest preference of its first mortgage lien is at the very least
premature.It may easily be seen that petitioners motion to
declare and confirm the highest preference of its first mortgage
lien is at the very least premature. There may or may not exist
claims enumerated in the abovecited Article 2242 which, by
virtue of Article 2243, shall be considered as mortgagees of the
specific property involved. At best this issue should be resolved in
the light of the rehabilitation plan approved by the SEC on
January 3, 1990 which includes the schedule of payment.
MOTION FOR RECONSIDERATION of a decision of the

Supreme Court.
The facts are stated in the resolution of the Court.

Padilla Law Office for petitioner.
Balgos & Perez for private respondent.
RESOLUTION
MELO, J.:
http://central.com.ph/sfsreader/session/0000015cda95c84bc6e6efb7003600fb002c009e/t/?o=False 1/7
In a minute resolution we issued on February 5, 1996, the

petition at bench was denied due course for its failure to
show
____________________
* THIRD DIVISION.
210

that respondent court committed any reversible error (p.

114, Rollo).
On March 1, 1996, petitioner filed a motion for
reconsideration imputing upon this Court the principal
error of having stated that the doctrine in PCIB vs. Court
of Appeals (172 SCRA 436 [1989]), had already been
abrogated by the rulings of this Court in the cases of
Alemars Sibal & Sons vs. Elbinias (186 SCRA 94 [1990]
BF Homes Inc. vs. Court of Appeals, 190 SCRA 262 [1990]
Araneta vs. Court of Appeals, 211 SCRA 390 [1992] and
RCBC vs. Court of Appeals, 213 SCRA 830 [1992]), where
we ruled that whenever a distressed corporation asks the
Securities and Exchange Commission (SEC) for
rehabilitation and suspension of payments, preferred
creditors may no longer assert such preference, but shall
stand on equal footing with other creditors. Petitioner
points out two main matters for consideration: (1) that the
abovecited cases of Alemars, BF Homes, Araneta, and BPI
vs. Court of Appeals (229 SCRA 223 [1994]) all involved
unsecured creditors and are, therefore, not relevant to the
resolution of this case, and (2) that of the abovecited cases
where the Court ruled contrary to PCIB, thereby
abandoning the ruling in said case, only the RCBC Case
could have complied with the Constitutional requirement
that no doctrine or principle of law rendered en banc or in
division may be modified or reversed except by the Court
sitting en banc (Par. 3, Section 4, Article VIII, 1987
Constitution), because only the RCBC Case was rendered
by the Court en banc. Nonetheless, petitioner submits that
the judgment in RCBC has not yet attained finality as the
motion for reconsideration therein up to the present time,
has remained pending and unresolved, and could,
therefore, not be relied upon in the instant case as a
precedent. After review of the arguments presented in the
motion for reconsideration, we find no cogent reason to
reverse our previous dismissal of the instant case.

However, if only to clarify matters for the guidance of the
bench and the bar, we shall discuss the applicable law on
the matter.
To put the case at hand in its proper factual perspective,
it is worthy to note that what petitioner filed with the SEC
in
211
VOL. 277, AUGUST 11, 1997 211

the pending action for settlement of claims of the various

creditors of respondent Philippine Blooming Mills Co., Inc.
(PBM) was a Motion to Declare and Confirm the Highest
Preference of Movants First Mortgage Lien. The SEC
hearing officer denied said motion. Petitioner appealed this
denial to the SEC en banc, which dismissed the appeal.
Then, on appeal before respondent court, the Court of
Appeals affirmed the SEC decision. Finally, finding no
reversible error committed by respondent Court of Appeals,
we denied due course to the instant petition. Now, the
present motion for reconsideration. Stated plainly, the
issue squarely raised in the main petition is whether or not
petitioner SIHI, as mortgagee of respondent PBM, may be
declared to have highest preference over specific property
subject of the mortgage, despite the pendency of
rehabilitation/receivership proceedings pending before the
SEC.
Under the factual circumstances obtaining in the instant
case, as well as the applicable provisions of the law, the
Court is duty bound to resolve this issue in the negative.
In any rehabilitation/receivership proceedings where
claims of several creditors shall have to be resolved, the
provisions of the Title XIX of the Civil CodeConcurrence
and Preference of Credits applies. In the present case
where a mortgaged piece of realty is involved, the following
relevant articles govern, to wit:
Art. 2242. With reference to specific immovable property andreal

rights of the debtor, the following claims, mortgages and
liensshall be preferred, and shall constitute an encumbrance on
the immovable or real right:
(1) Taxes due upon the land or building

(2) For unpaid price of real property sold, upon the
immovable sold
(3) Claims of laborers, mason, mechanics and other workmen,

as well as architects, engineers and contractors, engaged
in the construction, reconstitution or repair of buildings,
canals or other works, upon said buildings, canals or other
works
212

(4) Claims of furnishers of materials used in the construction,

reconstruction, or repair of buildings, canals or other
works, upon said buildings, canals or other works
(5) Mortgaged credits recorded in the Registry of Property,
upon the real estate mortgaged
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon
the immovable preserved or improved
(7) Credits annotated in the Registry of Property in virtue of
a judicial order, by attachment or executions, upon the
property affected, and only as to the latter credits
(8) Claims of coheirs for warranty in the partition of an
immovable among them, upon the real property thus
divided
(9) Claims of donors of real property for pecuniary charges or
other conditions imposed upon the donee, upon the
immovable donated
(10) Credits of insurers, upon the property insured, for the
insurance premium for two years.
Art. 2243. The claims of credits enumerated in the two preceding

articles shall be considered as mortgagees or pledges of real or
personal property, or liens within the purview of legal provisions
governing insolvency. Taxes mentioned in No. 1, article 2241, and
No. 1, article 2242, shall first be satisfied.
It may easily be seen that petitioners motion to declare

and confirm the highest preference of its first mortgage lien
is at the very least premature. There may or may not exist
claims enumerated in the abovecited Article 2242 which,
by virtue of Article 2243, shall be considered as mortgagees
of the specific property involved. At best this issue should
be resolved in the light of the rehabilitation plan approved
by the SEC on January 3, 1990 which includes the schedule
of payment. Verily, this rehabilitation plan is not included
among the matters submitted for review in the present
petition. On this score alone, without having to refer to any

of the abovecited decisions yet, the instant petition may
already be dismissed. We shall reserve our ruling on
whether or not petitioner may be adjudged to be a
preferred creditor at the proper opportunity when the
entire judgment of the SEC shall be before us for review.
213
VOL. 277, AUGUST 11, 1997 213

Petitioner cannot compel us to blindly adhere to the case of

Philippine Commercial International Bank vs. Court of
Appeals (172 SCRA 436 [1989]), which relied upon the case
of Chartered Bank vs. Imperial and National Bank (48
Phil. 931 [1928]). It is significant to note that Chartered
Bank was decided before the passage of Republic Act No.
386, the Civil Code of the Philippines (which took effect on
August 30, 1950), when the abovecited Articles 2242 and
2243 or any similar provisions were not yet operative.
However, if only to appease petitioner on its insistence
that the instant case should be consolidated with the RCBC
as these two cases involve similar facts and issues, we rule
to deny such prayer first, because the decision in RCBC
had long been rendered, and second, the factual premises
in RCBC are not on all fours with the instant case.
It is worthy to stress that RCBC was precipitated by the
Rizal provincial sheriffs refusal to execute a certificate of
sale of the property sold on public auction before any writ
of execution against the conduct of such public auction had
been issued. The regional trial court before which the
action for mandamus was filed by RCBC granted the
petition, thereby ordering respondent provincial sheriff to
execute and deliver to petitioner the Certificate of Auction
Sale of January 29, 1985, involving the property sold
therein. . . (RCBC vs. IAC, 213 SCRA 830, at pp. 833834).
Aggrieved thereby, BF Homes filed an original complaint
with then Intermediate Appellate Court (IAC) for the
annulment of this judgment of the regional trial court. This
action for annulment before the IAC prospered and the
Register of Deeds of Pasay City was accordingly ordered to
suspend the issuance to the mortgageepurchaser RCBC of
the owners copies of the new land titles until the matter
shall have been resolved by the Securities and Exchange
Commission in the rehabilitation case before it. It was this
judgment of the IAC which was the subject of the aforecited
RCBC Case. The issues involved in the RCBC Case are,
therefore, essentially different from the issues in the

instant case. There, the question of retroactive application
of the writ of injunction to the foreclosure proceedings was
in
214

volved. Also, the propriety of the IACs disposition of the

original action for annulment of judgment which is the
proper subject of the petition in the RCBC Case necessarily
involves issues concerning the requisite elements of a void
judgment, such as lack of jurisdiction and/or fraud,
accident, mistake or excusable negligence.
In the present petition, the foreclosure sale of the
mortgaged property was declared by this Court in G.R. No.
87053 to be totally null and void, and petitioner SIHIs
claim was accordingly referred to the SEC for
determination of the preferences or priorities under the law
in the settlement of claims of firms under receivership or
liquidation. Hence, unlike in RCBC, in the present case
there are no longer any previous foreclosure proceedings to
speak of. Also, in the present petition, the factual
considerations in the issuance of the pertinent
rehabilitation plan where SIHIs claim had been reportedly
included in the schedule of payment finds relevance. This
was not true in the RCBC Case.
As seen in the foregoing disquisition, the resolution of
the motion for reconsideration in the RCBC Case is not a
crucial matter in the present case.
WHEREFORE, premises considered, petitioners motion
for consolidation is denied and its motion for
reconsideration is hereby likewise DENIED, with finality.
SO ORDERED.
Narvasa (C.J., Chairman), Davide, Jr., Francisco

and Panganiban, JJ., concur.
Motions denied.
o0o
215

Central Bank of the Philippines vs. Morfe
*
No. L38427. March 12, 1975.
CENTRAL BANK OF THE PHILIPPINES as Liquidator of

the FIDELITY SAVINGS BANK, petitioner, vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding
Judge of Bran ch XIII, Court of First Instance of Manila,
Spouses AUGUSTO and ADELAIDA PADILLA and
Spouses MARCELA and JOB ELIZES, respondents.
Mercantile law Banks Deposits Loans Bank deposits are

simple loans.It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are not true
deposits. They are considered simple loans and, as such, are not
preferred credits.
Same Same Same Central Bank Act Insolvency laws
Preference of credits Where a suit for recovery of a bank deposit
was filed after the bank has been declared insolvent by the Central
Bank, a judgment in favor of the depositor cannot be considered a
preferred credit under Article 22H(H)(b ) of the Civil Code.The
Board in its Resolution No. 350 dated February 18, 1969 banned
the Fidelity Savings Bank from doing business. It took charge of
the banks assets. Evidently , one purpose in prohibiting the
insolvent bank from doing business is to prevent some depositors
from having an undue or fraudulent preference over other
creditors and depositors. That purpose would be nullified if, as in
this case, after the bank is declared insolvent, suits by some
depositors could be maintained and judgments would be rendered
for the payment of their deposits and then such judgments would
be considered preferred credits under article 2244(14)(b) of the
Civil Code.
Same Same Same Same Same A nonpreferred credit
cannot be raised to that category simply because a depositor,
taking advantage of long interval of time between declaration of
insolvency and filing of judicial assistance, was able to secure a
judgment for payment of his deposit.Considering that the
deposits in question, in their inception, were not preferred credits,
it does not seem logical and just that they should be raised to the
http://central.com.ph/sfsreader/session/0000015cda96c6627625ab92003600fb002c009e/t/?o=False 1/11
category of preferred credits simply because the depositors, taking

advantage of the long interval between the declaration of
insolvency and the filing of the petition for judicial assistance and
supervision, were able to secure judgments for the pay ment of
their time deposits.
APPEAL by certiorari from the orders of the Court of First

Instance of Manila.
_______________
* SECOND DIVISION.
115
VOL. 63, MARCH 12, 1975 115


F.E. Evangelista & Agap ito S. Fajardo for petitioner.
Juan C. Nabong, Jr. for respondent Spouses Augusto
and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and
Job Elizes.
AQUINO, J.:
This case involves the question of whether a final judgment

for the payment of a time deposit in a savings bank, which
judgment was obtained after the bank was declared in solv
ent, is a preferred claim aga inst the bank. The question
arises under the following facts:
On February 18, 1969 the Monetary Board found the
Fidelity Savings Bank to be insolvent. The Board directed
th e Superintendent of Banks to take charge of its assets,
forbade it to do business, and instructed the Central Bank
Legal Counsel to take appropriate legal actions (Resolution
No. 350).
On December 9, 1969 the Board resolved to seek the
courts assistance and supervision in the liquidation of the
bank. The resolution was implemented only on January 25,
1972 when the Central Bank of the Philippines filed the
corresponding petition for assistance and supervision in the
Court of First Instance of Manila (Civil Case No. 86005
assigned to Branch XIII).
Prior to th e institution of th e liquidation proceeding
but after the declaration of insolvency, or, specifically,
sometime in Ma rch , 197 1, the spouses Job Elizes and
Marcela P. Elizes filed a comp laint in the Court of First

Instance of Manila against the Fidelity Savings Bank for
the recovery of the sum of P50,584 as the balance of their
time deposits (Civil Case No. 82520 assigned to Branch I).
In th e ju dg men t rend ered in th at case o n Decemb er
13 , 197 2 the Fidelity Savings Bank was ordered to pay the
Elizes spouses the sum of P50,584 plus accumulated
interest.
In another case, assigned to Branch XXX of the Court of
First Instance of Manila, the spouses Augusto A. Padilla
and Adelaida Padilla secured on April 14, 1972 a judgment
against the Fidelity Savings Bank for the sums of P80,000
as the balance of their time deposits, plus interests,
P70,000 as mo ral and exemplary damages and P9,600 as
attorneys fees (Civil
116

Case No. 84200 where the action was filed on September 6,

1971).
In its orders of August 20, 1973 and February 25, 1974 ,
the lower court (Branch XIII having cognizance of the
liquidation proceeding), upon motions of the Elizes and
Padilla spouses and over the opposition of the Central
Bank, directed the latter, as liquidator, to pay their time
deposits as preferred credits, evidenced by final judgments,
within the meaning of article 2244(14)(b) of the Civil Code,
if there are enough fu nds in the liquidators custody in
excess of the credits mo re preferred under section 30 of the
Central Bank Law in relation to articles 2244 and 2251 of
the Civil Code.
From the said order, the Central Bank appealed to this
Court by certiorari. It contends that the final judgments
secured by the Elizes a nd Padilla spouses do not enjoy any
preference because (a) they were rendered after the
Fidelity Savings Bank was declared insolvent and (b) under
the charter of the Central Bank and the General Banking
Law, no final judgment can be validly obtained against an
insolvent bank .
Republic Act No. 265 provides:
SEC. 29. Proceedings upon insolvency.Whenever, upon

examination by the Superintendent or his examiners or agents
into the condition of any banking institution, it shall be disclosed
that the condition of the same is one of insolvency , or that its
continuance in business would involve probable loss to its

depositors or creditors, it shall be the duty of the Superintendent
forthwith, in writing, to inform the Mo netary Board of the facts,
and the Board, upon finding the statements of the Superintendent
to be true, shall forthwith forbid the institution to do business in
the Philippines and shall take charge of its assets and proceeds
according to law.
The Monetary Board shall thereupon determine within thirty
day s whether the institution may be reorganized or otherwise
placed in such a condition so that it may be permitted to resume
business with safety to its creditors and shall prescribe the
conditions under which such resumption of business shall take
place. In such case the expenses and fees in the administration of
the institution shall be determined by the Board and shall be paid
to the Central Bank out of the assets of such banking institution.
At any time within ten days after the Monetary Board has
taken charge of the assets of any banking institution, such
institution may apply to the Court of First Instance for an order
requiring the Monetary Board to show cause why it should not be
enjoined from continuing such charge of its assets, and the court
may direct the
117
VOL. 63, MARCH 12, 1975 117

Board to refrain from further proceedings and to surrender charge

of its assets.
If the Monetary Board shall determine that the banking
institution cannot resume business with safety to its creditors, it
shall, by the Solicitor General, file a petition in the Court of First
Instance reciting the proceedings which have been taken and pray
ing the assistance and supervision of the court in the liquidation
of the affairs of the same. The Superintendent shall thereafter,
upon order of the Monetary Board and under the supervision of
the court and with all convenient speed, convert the assets of the
banking institution to money.
SEC. 30. Distribution of assets.In case of liquidation of a
banking institution, after pay ment of the costs of the proceedings,
including reasonable expenses and fees of the Central Bank to be
allowed by the court, the Central Bank shall pay the debts of such
institution, under the order of the court, in accordance with their
legal priority .
The General Banking Act, Republic Act No. 337, provides:
SEC. 85. Any director or officer of any banking institution who

receives or permits or causes to be received in said bank any
deposit, or who pay s out or permits or causes to be paid out any

funds of said bank, or who transfers or permits or causes to be
transferred any securities or property of said bank, after said
bank becomes insolvent, shall be punished by fine of not less than
one thousand nor more than ten thousand pesos and by
imprisonment for n ot less than two nor more than ten y ears.
The Civil Code provides:
ART. 2237. Insolvency shall be governed by special laws insofar

as they are not inconsistent with this Code, (n)
ART. 2244. With reference to other property , real and
personal, of the debtor, the following claims or credits shall be
preferred in the order named:
x x x x x x x x x x x x
(14) Credits which, without special privilege, appear in (a) a

public instrument or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instruments
and of the judgments, respectively . (1924a)
ART. 2251. Those credits which do not enjoy any preference
with respect to specific property , and those which enjoy
preference, as to the amount not paid, shall be satisfied according
to the following rules:
118

(1) In the order established in article 2244

(2) Common credits referred to in article 2245 shall be
paid pro roto regardless of dates. (1929a)
The trial court or, to be exact, th e liquidation court noted

that there is no provision in th e charter of th e Central
Bank and in the General Banking Law (Republic Acts Nos.
265 and 337, respectively) which suspends or abates civil
actions ag ain st an in so lv en t b ank p e nd ing in co ur ts
o ther th an th e liquidation court. It reasoned out that,
because such actions are not suspended, judgments against
insolvent banks could be considered as preferred credits
under article 2244 (14)(b ) of the Civil Code. It further
noted that, in contrast with the Central Bank Act, section
18 of the Insolvency Law provides that upon the issuance
by the court of an order declaring a person insolv ent, all
civil proceedings against the said in solvent shall be

stayed.
The liquidation court directed the Central Bank to honor
the writs of execution issued by Branches I and XX X for
the enforcement of the judgments obtained by the Elizes
and Padilla spouses. It suggested that, after satisfaction of
the judgments, the Central Bank, as liquidator, should
include said judgments in the list of pr eferred credits
contained in the Project of Distribution with the notation
already paid .
On the other hand, the Central Bank argues that after
the Monetary Board has declared that a bank is insolvent
and has ordered it to cease operations, the Board becomes
the trustee of its assets for the equal benefit of all the
creditors, including the depositors. The Central Bank cites
the ruling that the assets of an insolvent banking
institution are held in trust for the equal benefit of all
creditors, and after its ins olvency, one cannot obtain an
advantage or a preference over another by an attachment,
execution or otherwise (Rohr vs. Stanton Trust & Savings
Bank, 76 Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors an d
creditors of the insolvent bank should file their actions
with the liquidation court. In support of that view it cites
the provision that the Insolvency Law does not apply to
banks (last sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director or
officer of a bank who disburses, or allows disbursement, of
the funds of the bank after it becomes in solv ent (Sec. 85 ,
General Banking
119
VOL. 63 , MARCH 12, 1975 119

Act, Republic Act No. 337). It cites th e ruling that a

creditor of an insolvent state bank in the hands of a
liquidator who recovered a judgment against it is not
entitled to a preference for (by) the mere fact that he is a
judgment creditor (Thomas H. Briggs & Sons, Inc. vs.
Allen, 207 N. Carolina 10, 175 S. E. 838, Braver,
Liquidation of Fin ancial Institutions, p. 922).
It should be noted that fixed, savings, and current
deposits of money in banks and similar institutions are not
true deposits. They are considered simple loans and, as
such, are not preferred credits (Art. 1980, Civil Code In re
Liquidation of Mercantile Bank of Ch ina: Tan Tiong Tick
vs. American Apothecaries Co., 65 Phil. 414 Pacific Coast

Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375
Fletcher American National Bank vs. Ang Cheng Lian, 65
Phil. 385 Pacific Commercial Co. vs. American
Apothecaries Co., 65 Phil. 429 Gopoco Grocery vs. Pacific
Co ast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Banks charter
explicitly provides th at when a bank is found to be
insolvent, the Monetary Board sh all forbid it to do busin
ess and shall take charge of its assets. The Board in its
Resolution No. 350 dated February 18, 1969 banned the
Fidelity Sav ings Bank from doing business. It took charge
of the banks assets. Evidently, one purpose in prohibiting
the in solvent bank from doing business is to prevent some
depositors from having an undue or fraudulent preference
over other creditors an d depositors.
That purpose would be nu llified if, as in this case, after
the bank is declared insolvent, suits by some depositors
could be maintained and judgments would be rendered for
the payment o f th eir d eposits an d th en su ch ju dg men
ts wou ld be con sid ered p r eferred cred its un d er article
22 44(14 )(b ) of th e Civ il Code.
We are of the opinion that such judgments cannot be
considered preferred and that article 2244(14)(b) does not
apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the
declaration of insolvency.
A contrary rule or practice would be productive of
injustice, mischief and confusion. To recognize such
judgments as entitled to priority would mean that
depositors in insolvent banks, after learning that the bank
is insolvent as shown by the fact that it can no lo nger pay
withdrawals or that it has closed its doors or has been
enjoined by the Monetary Board from doing business,
would rush to the courts to secure judgments
120

for the payment of their deposits.

In such an ev entu ality, the courts wou ld be swamped
with suits of that character. Some of the judgments would
be default judgments. Depositors ar med with such
judgments would pester the liquidation court with claims
for preference on the basis of article 2244(14)(b). Less alert
depositors would be prejudiced. That ineq uitable situation
could not have been contemplated by the framers of section

29.
The Rohr case (supra) supplies some illu min ation on
the disposition of the instant case. It appears in that case
that the Stanton Trust & Savings Bank of Great Falls
closed its doors to business on July 9, 1923. On November
7, 1924 the bank (then already under liquidation) issued to
W illiam Rohr a certificate stating that he was entitled to
claim from the bank $1,191.72 and that he was entitled to
dividends th ereon. Later, Rohr sued the bank for the
payment of his claim. The bank demurred to the complaint.
The trial court sustained the demurrer. Rohr appealed. In
affirming the order sustaining the demurrer, the Supreme
Court of Montana said:
The general principle of equity that the assets of an insolvent are

to be distributed ratably among general creditors applies with full
force to the distribution of the assets of a bank. A general
depositor of a bank is merely a general creditor, and, as such, is
not entitled to any preference or priority over other general
creditors.
The assets of a bank in process of liquidation are held in trust
for the equal benefit of all creditors, and one cannot be permitted
to obtain an advantage or preference over another by an
attachment, execution or otherwise. A disputed claim of a creditor
may be adjudicated, but those whose claims are recognized and
admitted may not successfully maintain action thereon. So to
permit would defeat the very purpose of the liquidation of a bank
whether being voluntarily accomplished or through the
intervention of a receiver.
x x x x x x x x x
The available assets of such a bank are held in trust, and so

conserved that each depositor or other creditor shall receive
payment or dividend according to the amount of his debt, and that
none of equal class shall receive any advantage or preference over
another.
And with respect to a national bank under voluntary

liquidation, the court noted in the Rohr case that the assets
of such a bank become a trust fund, to be administered for
the
121
VOL. 63 , MARCH 12, 1975 121

benefit of all creditors pro rata, and, while the bank retains
its corporate existence, and may be sued, the effect of a
judgment obtained against it by a creditor is only to fix the
amount of debt He can acquire no lien which will give him
any preference**or advantage over other general creditors.
(245 Pac. 249).
Considering that the deposits in question, in their
inception, were not preferred credits, it does not seem
logical and just that they should be raised to the category
of preferred credits simply because the depositors, taking
advantage of the long interval between the declaration of
insolv ency and the filing of the petition for judicial
assistance and supervision, were able to secure judgments
for the payment of their time deposits.
_______________
** It must be borne in mind that the predominant policy of the

insolvent sy stem is intended to secure an equality among creditors, and
to prohibit all preferences except such as are expressly permitted. When,
therefore, doubtful or ambiguous provisions of the enactments making up
the sy stem are to be construed, that interpretation which best comports
with and gives effect to the ultimate and controlling purpose of the statute
must be adopted and applied, rather than one which totally, or even
partially , defeat or thwart that design. And this is but another way of say
ing that preferences which do not clearly and unequivocally appear to be
authorized ought not to be created by mere construction, since the
tendency of all preferences is to frustrate, to some extent, equality among
creditors, and thus to disturb the very policy which lies at the root of all
the insolvent laws. (Roberts vs. Edie, 85 Md. 181, 36 Atl. 820, 822).
When control of a bank for liquidation purposes is taken b y the
superintendent of banks, the question of preference creates in reality a
controversy between the depositor claiming a preference and the other
depositors who are general creditors, inasmuch as the assets in which all
are to participate are diminished to the extent of whatever preferences are
allowed. The creation of preferences, generally speaking, should therefore
be discouraged except in cases where the right thereto is clearly
established. As said in Cavin v. Gleason, 105 N. Y. 256, at page 262, 11
N.E. 504, 506:
The equitable doctrine that, as between creditors, equality is equity,
admits, so far as we know, of no exception founded on the greater
supposed sacredness of one debt, or that it arose out of a violation of duty ,
or that its loss i nvolves greater apparent hardship in one case than
another, unless it appears, in addition, that there is some specific
recognized equity founded on some agreement, or the relation of the debt
to the assigned property , which entitles the claimant, according to
equitable principles, to preferential pay ment . (Ramisch vs. Fulton, 41
Ohio App. 443, 180 N.E. 735).
122

The judicial declaration that the said deposits were payable

to the depositors, as indisputably they were due, could not
have given the Elizes and Padilla spouses a priority over
the other depositors whose deposits were likewise
indisputably due and owing from the insolvent bank but
who did not want to incur litigation expenses in securing a
judgment for the payment of the deposits.
The circumstance that the Fid elity S avings Bank,
having stopped operations since February 19, 1969, was
forbidden to do business (and that ban would include the
payment of time deposits) implies that suits for th e
payment of such deposits were prohibited. What was
directly prohibited should not be encompassed indirectly.
(See Maurello vs. Broadway Bank & Trust Co. of Paterson,
176 Atl. 391, 114 N. J.L. 167).
It is noteworthy that in the trial courts order of October
3, 1972, which contain s the Bank Liquidation Rules and
Regulations, it indicated in Step III the proced ure for
processing the claims against the inso lvent bank. In Step
IV, the court directed the Central Ban k, as liquidator, to
submit a Project of Distribution wh ich should include a
list of th e preferred credits to be paid in full in the order of
priorities established in Articles 2241 , 2242, 2243, 2246
and 2247 of the Civil Code (note that article 2244 was not
mentioned). There is no cogent reason why the Elizes and
Padilla spouses should not adhere to th e procedure
outlined in th e said rules and regulations.
WHEREFORE, the lower courts orders of Au gust 20,
1973 and February 25, 19 74 are reversed and set aside. No
costs.
SO ORDERED.
Makalintal, C.J., Fernando, Barredo, and

Fernandez, JJ.
Antonio, J., did not take part.
Orders reversed and set aside.
_______________
Ordinary deposit becomes banks money and creates debtorcreditor

relation, precluding preference as against banks receiver. (Andrew v.
Union Savings Bank & Trust Co. of Davenport, 220 Iowa 712, 263 N.W.
495).
Where judgment was rendered against bank after bank was in custody
of liquidator, judgment creditor was not entitled to preference because of
judgment (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. C. 10, 175 S.
E. 838).
123
VOL. 63 , MARCH 13, 1975 123

Lichauco vs. Court of Appeals
Notes.Under the old Civil Code, one class of creditors

could exclude the creditors of the lower order until the
claims of the former were fully satisfied out of the proceeds
of the sale of the real property subject of the preference and
could even exhaust the proceeds if necessary. In contrast,
under the system of prio rities of the new Civil Code, only
taxes enjoy a similar absolute preference. All th e re
maining thirteen classes of preferred creditors under
article 2242 enjoy no priority among themselves, but must
be paid pro rata, or in proportion to the amount of the
respective credits. (Barretto vs. Villanueva, 1 SCRA 289).
o0o
VOL. 154, SEPTEMBER 24, 1987 257

Lipana vs. Development Bank of Rizal
*
No. L73884. September 24,1987.
SPOUSES ROMEO LIPANA and MILAGROS LIPANA,

petitioners, vs. DEVELOPMENT BANK OF RIZAL,
respondent.
Remedial Law Civil Procedure Judgments Execution Rule

that once a decision becomes final and executory it is the
ministerial duty of the court to order its execution Exceptions.
The rule that once a decision becomes final and executory, it is
the ministerial duty of the court to order its execution, admits of
certain exceptions as in cases of special and exceptional nature
where it becomes imperative in the higher interest of justice to
direct the suspension of its execution (Vecine vs. Geronimo, 59
O.G. 579) whenever it is necessary to accomplish the aims of
justice (Pascual vs. Tan, 85 Phil. 164) or when certain facts and
circumstances transpired after the judgment became final which
could render the execution of the judgment unjust (Cabrias vs.
Adil, 135 SCRA 354).
Same Same Same Stay of execution of judgment warranted
by the fact that the bank was placed under receivership Reason.
ln the instant case, the stay of the execution of judgment is
warranted by the fact that respondent bank was placed under
receivership. To execute the judgment would unduly deplete the
assets of respondent bank to the obvious prejudice of other
depositors and creditors, since, as aptly stated in Central Bank of
the Philippines vs. Morfe (63 SCRA 114), after the Monetary
Board has declared that a bank is insolvent and has ordered it to
cease operations, the Board becomes the trustee of its assets for
the equal benefit of all the creditors, including depositors. The
assets of the insolvent banking institution are held in trust for the
equal benefit of all creditors, and after its insolvency, one cannot
obtain an advantage or a preference over another by an
attachment, execution or otherwise.
Same Same Same Same Execution of judgment in case at
bar will prejudice other depositors and creditors.The time of the
filing of the complaint is immaterial. It is the execution that will
http://central.com.ph/sfsreader/session/0000015cda97a9cab1d6f483003600fb002c009e/t/?o=False 1/8
obviously prejudice the other depositors and creditors. Moreover,

as stated in the said Morfe case, the effect of the judgment is only
to fix the amount of the debt, and not give priority over other
depositors and creditors.
_______________
* SECOND DIVISION.
258
Same Same Same Same Provisional Remedies Attachment

Receivership In Central Bank vs. Court of Appeals, the Supreme
Court refused to recognize any preference resulting from an
attachment of properties of the bank, and ruled that after a
declaration of insolvency the remedy of depositors is to intervene in
the liquidation proceedings.Anent the contention of petitioners
that the attachment of one of the properties of respondent bank
was erased by virtue of the delayed receivership is to expand the
power of the Central Bank, Suffice it to say that in the case of
Central Bank of the Philippines, et al. .vs. Court of Appeals, et al.
(Resolution of this Court dated September 17, 1984 in G.R. No.
33302), wherein the original plaintiff Algue Inc. was able to
obtain a writ of preliminary attachment against the original
defendant Island Savings Bank, this Court refused to recognize
any preference resulting from such attachment and ruled that
after a declaration of insolvency, the remedy of the depositors is to
intervene in the liquidation proceedings.
Same Same Same Same Stay of execution of judgment in
case at bar is not only in accordance with law but is supported by
jurisprudence, and that it is not without a time limit.Said
contention, likewise, is devoid of merit. Apart from the fact that
the stay of execution is not only in accordance with law but is also
supported by jurisprudence, such staying of execution is not
without a time limit. In fact, the Monetary Board, in its resolution
No. 433 approved the liquidation of respondent bank on April
26,1985 and ordered, among others, the filing of a petition in the
Regional Trial Court praying for assistance of said court in the
liquidation of the bank. (Rollo, p. 81). The staying of the writ of
execution will be lifted after approval by the liquidation court of
the project of distribution, and the liquidator or his deputy will
authorize payments to all claimants concerned in accordance with
the approved project of distribution.
PETITION for certiorari to review the order of the Regional

Trial Court of Pasig. Br. 159.
PARAS, J.:
This is a petition for review on certiorari of the August 30,

1985 Order of the Regional Trial Court of Pasig denying
petitioners' Motion to Lift Stay of Execution in Civil Case
No. 50802.
259
VOL. 154, SEPTEMBER 24, 1987 259

During the period from 1982 to January, 1984, herein

petitioners opened and maintained both time and savings
deposits with the herein respondent Development Bank of
Rizal all in the aggregate amount of P939,737.32. When
some of the Time Deposit Certificates matured, petitioners
were not able to cash them but instead were issued a
manager's check which was dishonored upon presentment.
Demands for the payment of both time and savings
deposits having failed. on March 14, 1984, petitioners filed
with the Regional Trial Court of Pasig a Complaint With
Prayer For Issuance of a Writ of Preliminary Attachment
for collection of a sum of money with damages, docketed
therein as Civil Case No. 50802 (Record, pp. 311).
Respondent Judge, in an Order dated March 19,1984
(Ibid., p. 1921), ordered the issuance of a writ of
attachment, and pursuant thereto, a writ of attachment
dated March 20, 1984 was issued in favor of the petitioners
(Ibid., p. 33).
On June 27,1984, respondent bank filed its Answer
(Ibid., p. 5861).
On July 23, 1984, petitioners filed a Motion For
Judgment on the Pleadings (Ibid., pp. 6873), opposed by
respondent bank (Ibid., pp. 7476), but respondent judge, in
a Decision dated November 13, 1984, rendered judgment in
favor of petitioners. The dispositive portion of the said
Decision, reads:
"IN VIEW OF ALL THE FOREGOING, the Court renders

judgment in favor of the plaintiffs, ordering the defendant to pay
the total sum of P939,737.32 plus stipulated interest the sum
equivalent to 15% of the amount due as attorney's fees and costs
of suit.
'The counterclaim is dismissed, for lack of merit."
Meanwhile, on August 10, 1984, the Monetary Board, in its

Resolution No. 1009, finding that the condition of
respondent bank was one of insolvency and that its
continuance in business would result in probable loss to its
depositors and creditors, decided to place it under
receivership (Rollo, p. 84).
On December 7, 1984, petitioners filed a Motion for
Execution Pending Appeal (Rcd., pp. 9193), which was
opposed by respondent bank (Ibid., p. 9496). On December
27, 1984, petitioners filed their Reply to the opposition
(Ibid., pp. 98101), to
260

which respondent bank filed its Rejoinder on January 1,

1985 (Ibid., pp. 102105).
In an order dated January 29, 1985, respondent judge
ordered the issuance of a writ of execution (Ibid., p. 106).
On February 11, 1985, respondent bank filed a Motion
for Reconsideration of order dated January 29, 1985 and to
Stay Writ of Execution {Ibid., pp. 109110), opposed by
petitioners (Ibid., p. 111), but in an Order dated March 6,
1985, respondent judge stayed the execution (Ibid,, p. 113),
On August 7, 1985, petitioners filed a Motion to Lift
Stay of Execution (Ibid,, pp. 119122), opposed by
respondent bank (Ibid., pp. 123127), and in an Order dated
August 30, 1985 respondent judge denied the said motion
(Ibid,, p. 130). Hence the instant petition (Rollo, pp. 817).
The Second Division of the Court, in a resolution dated
May 5, 1986, resolved to require the respondent to
comment (Ibid., p. 52). In compliance therewith,
respondent bank filed its Comment on June 9,1986 (Ibid.,
pp. 5358).
The petition was given due course in a resolution dated
August 11, 1986, and the parties were required to file their
respective memoranda (Ibid., p. 61). In compliance
therewith. petitioners filed their Memorandum on
September 19, 1986 (Ibid., p. 6375), while respondent bank
filed its Memorandum on September 25,1986 (Ibid., pp. 76
83), and the case was considered submitted for deliberation
In the Resolution dated October 8, 1986 (Ibid., p. 88).
Petitioners raised the following issues:
1. Respondent judge cannot legally stay execution of

judgment that has already become final and
executory
2. The placing under receivership by the Central Bank
of the respondent bank, long after the complaint
was filed removed it from the application of the
doctrine in Re: Central Bank vs. Morfe (63 SCRA
113)
3. The filing of the complaint for a sum of money with
damages against respondent bank and the
subsequent attachment of its property in Pasig,
Metro Manila long before the receivership took
place render inapplicable the doctrine laid down by
this Honorable Supreme Court in the said Morfe
case
261
VOL. 154, SEPTEMBER 24. 1987 261

4. The indefinite stay of execution without a ruling as

to how long it will last, amounts to deprivation of
petitioners of their property without due process of
law.
The instant petition is without merit.
I.
The main issue in this case is whether or not respondent

edge could legally stay execution of judgment that has
already become final and executory.
The answer is in the affirmative.
The rule that once a decision becomes final and
executory, it is the ministerial duty of the court to order its
execution, admits of certain exceptions as in cases of
special and exceptional nature where it becomes imperative
in the higher interest of justice to direct the suspension of
its execution (Vecine vs. Geronimo, 59 O.G. 579) whenever
it is necessary to accomplish the aims of justice (Pascual vs.
Tan, 85 Phil. 164) or when certain facts and circumstances
transpired after the judgment became final which could
render the execution of the edgment unjust (Cabrias vs.
Adil, 135 SCRA 354),
In the instant case, the stay of the execution of judgment
is warranted by the fact that respondent bank was placed
under receivership. To execute the judgment would unduly

deplete the assets of respondent bank to the obvious
prejudice of other depositors and creditors, since, as aptly
stated in Central Bank of the Philippines vs. Morfe (63
SCRA 114), after the Monetary Board has declared that a
bank is insolvent and has ordered it to cease operations,
the Board becomes the trustee of its assets for the equal
benefit of all the creditors, including depositors. The assets
of the insolvent banking institution are held in trust for the
equal benefit of all creditors, and after its resolvency, one
cannot obtain an advantage or a preference over another by
an attachment, execution or otherwise.
Moreover, it will be noted that respondent bank was
placed under receivership on August 10, 1984, and the
Decision of respondent judge is dated November 13, 1984.
Accordingly, in time with the ruling in the aforesaid Morfe
case, which reads:
"The circumstance that the Fidelity Savings Bank, having
262

Lipana us. Development Bank of Rizal
stopped operations since February 19, 1969, was forbidden to do

business (and that ban would include the payment of time
deposits) implies that suits for the payment of such deposits were
prohibited. What was directly prohibited should not be
encompassed indirectly. x x x."
petitioners' complaint should have been dismissed.
II.
It is the contention of petitioners, however, that the placing

under receivership of respondent bank long after the filing
of the complaint removed it from the doctrine in the said
Morfe case.
This contention is untenable. The time of the filing of
the complaint is immaterial. It is the execution that will
obviously prejudice the other depositors and creditors.
Moreover, as stated in the said Morfe case, the effect of the
judgment is only to fix the amount of the debt, and not give
priority over other depositors and creditors.
III.
Anent the contention of petitioners that the attachment of

one of the properties of respondent bank was erased by
virtue of the delayed receivership is to expand the power of
the Central Bank, Suffice it to say that in the case of
Central Bank of the Philippines, et al. vs. Court of Appeals,
et al. (Resolution of this Court dated September 17, 1984 in
G.R. No. 33302), wherein the original plaintiff Algue Inc.
was able to obtain a writ of preliminary attachment against
the original defendant Island Savings Bank, this Court
refused to recognize any preference resulting from such
attachment and ruled that after a declaration of insolvency,
the remedy of the depositors is to intervene in the
liquidation proceedings.
IV.
It is also contended by the petitioners that the indefinite

stay of execution without ruling as to how long it will last,
amounts to a deprivation of their property without due
process of law.
263
VOL. 154, SEPTEMBER 24, 1987 263

Said contention. likewise. is devoid of merit. Apart from the

fact that the stay of execution is not only in accordance
with law but is also supported by jurisprudence, such
staying of execution is not without a time limit. In fact, the
Monetary Board, in its resolution No. 433 approved the
liquidation of respondent bank on April 26,1985 and
ordered, among others, the filing of a petition in the
Regional Trial Court praying for assistance of said court in
the liquidation of the bank. (Rollo, p. 81). The staying of the
writ of execution will be lifted after approval by the
liquidation court of the project of distribution, and the
liquidator or his deputy will authorize payments to all
claimants concerned in accordance with the approved
project of distribution.
PREMISES CONSIDERED, the instant petition is
hereby DISMISSED.
SO ORDERED.
Yap (Chairman), MelencioHerrera, Padilla and

Sarmiento, JJ., concur.
Petition dismissed.
Notes.Partial execution of judgment is acceptance of

its correctness. (Insular Bank of Asia and America
Employees' Union (IBAAEU) vs. Inciong, 132 SCRA 663.)
A writ of execution may be issued to a person not a party
to the case where the latter's remedy which he did not avail
of, was to intervene in the case in question involving right
over the same parcel of land and said person in another
case was adjudged a buyer in bad faith thereof. (Lising vs.
Plan, 133 SCRA 194.)
oOo
264

Philippine Savings Bank vs. Lantin
*
No. L33929. September 2, 1983.
PHILIPPINE SAVINGS BANK, petitioner, vs. HON.

GREGORIO T. LANTIN, Presiding Judge, Court of First
Instance of Manila, Branch VII, and CANDIDO RAMOS,
respondents.
Obligations Loans When the law on concurrence of credits

becomes material.Concurrence of credits occurs when the same
specific property of the debtor or all of his property is subjected to
the claims of several creditors. The concurrence of credits raises
no questions of consequence where the value of the property or
the value of all assets of the debtor is sufficient to pay in full all
the creditors. However, it becomes material when said assets are
insufficient for then some creditors of necessity will not be paid or
some creditors will not obtain the full satisfaction of their claims.
In this situation, the question of preference will then arise, that is
to say who of the creditors will be paid ahead of the others.
(Caguioa, Comments and Cases on Civil Law, 1970 ed., Vol. VI, p.
472.)
Same Same Taxation Only taxes and realty assessments
enjoy absolute preference over any other type of obligation.Under
the system established by Article 2249 of the Civil Code of the
Philippines, only taxes and assessments upon immovable
property
_______________
* FIRST DIVISION.
477
VOL. 124, SEPTEMBER 2, 1983 477

http://central.com.ph/sfsreader/session/0000015cda98b76f2450ada0003600fb002c009e/t/?o=False 1/11
enjoy absolute preference. All the remaining specified classes of

preferred creditors under Article 2242 enjoy no priority among
themselves. Their credits shall be satisfied prorata, i.e., in
proportion to the amount of the respective credits.
Same Same The law on the concurrence of credits cannot be
applied in a mere action to collect from the obligor. There must be
an insolvency or other type of in rem liquidation proceeding of
obligors estate.The proceedings in the court below do not
partake of the nature of insolvency proceedings or settlement of a
decedents estate. The action filed by Ramos was only to collect
the unpaid cost of the construction of the duplex apartment. It is
far from being a general liquidation of the estate of the Tabligan
spouses.
Same Same Same.Insolvency proceedings and settlement
of a decedents estate are both proceedings in rem which are
binding against the whole world. All persons having interest in
the subject matter involved, whether they were notified or not,
are equally bound. Consequently, a liquidation of similar import
or other equivalent general liquidation must also necessarily be
a proceeding in rem so that all interested persons whether known
to the parties or not may be bound by such proceeding.
Same Same Same.In the case at bar, although the lower
court found that there were no known creditors other than the
plaintiff and the defendant herein, this can not be conclusive. It
will not bar other creditors in the event they show up and present
their claims against the petitioner bank, claiming that they also
have preferred liens against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in favor of the
bank which is supposed to be indefeasible would remain
constantly unstable and questionable. Such could not have been
the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory liens.
Neither does the De Barretto case sanction such instability.
Same Sales A purchaser in good faith takes a registered land
free from liens not therein annotated.Since the action filed by
the private respondent is not one which can be considered as
equivalent general liquidation having the same import as an
insolvency or settlement of the decedents estate proceeding, the
well established principle must be applied that a purchaser in
good faith and for value takes registered land free from liens and
encumbrances other than
478

statutory liens and those recorded in the Certificate of Title. It is

an admitted fact that at the time the deeds of real estate
mortgage in favor of the petitioner bank were constituted, the
transfer certificate of title of the spouses Tabligan was free from
any recorded alien and encumbrances, so that the only registered
liens in the title were deeds in favor of the petitioner.
PETITION for review of the decision of the Court of First

Instance of Manila, Br. VII. Lantin, J.

Jose Diokno for petitioner.
Romeo C. Carlos for private respondent.
GUTIERREZ, JR., J.:
This is a petition for review of the decision of the Court of

First Instance of Manila, Branch VII, presided over by
respondent Judge Gregorio T. Lantin, in Civil Case No.
79914 entitled Candido Ramos v. Philippine Savings Bank
and of the order denying a motion for its reconsideration.
The dispositive portion of the decision reads:

plaintiff and against the defendant ordering the defendant to pay
the plaintiff the sum of P15,000.00 as his prorata share in the
value of the duplexapartment house which was built by the
plaintiff for the spouses Filomeno Tabligan and Socorro Espiritu,
which is now registered in the name of the defendant under
Transfer Certificate of Title No. 101864 issued by the Register of
Deeds of the City of Manila, on August 6, 1970, with legal interest
from the date of the filing of the complaint until fully paid to pay
the sum of P500.00 as attorneys fees and to pay the costs.
The counterclaim interposed by the defendant is hereby
dismissed.
Involved in this case is a duplexapartment house on a lot

covered by TCT No. 86195 situated at San Diego Street,
Sampaloc, Manila, and owned by the spouses Filomeno and
Socorro Tabligan.
The duplexapartment house was built for the spouses
by
479
VOL. 124, SEPTEMBER 2, 1983 479

private respondent Candido Ramos, a duly licensed

architect and building contractor, at a total cost of
P32,927.00. The spouses paid private respondent the sum
of P7,139.00 only. Hence, the latter used his own money,
P25,788.50 in all, to finish the construction of the duplex
apartment.
Meanwhile, on December 16, 1966, February 1, 1967,
and February 28, 1967, the spouses Tabligan obtained from
petitioner Philippine Savings Bank three (3) loans in the
total amount of P35,000.00, the purpose of which was to
complete the construction of the duplexapartment. To
secure payment of the loans, the spouses executed in favor
of the petitioner three (3) promissory notes and three (3)
deeds of real estate mortgages over the property subject
matter of this litigation.
On December 19, 1966, the petitioner registered the
December 16, 1966 deed of real estate mortgage with the
Register of Deeds of Manila. The subsequent mortgages of
February 1, 1967, and February 28, 1967, were registered
with the Register of Deeds of Manila on February 2, 1967
and March 1, 1967, respectively. At the time of the
registration of these mortgages, Transfer Certificate of
Title No. 86195 was free from all liens and encumbrances.
The spouses failed to pay their monthly amortizations.
As a result thereof, the petitioner bank foreclosed the
mortgages, and at the public auction held on July 23, 1969,
was the highest bidder.
On August 5, 1969, the petitioner bank registered the
certificate of sale issued in its favor. On August 9, 1970, the
bank consolidated its ownership over the property in
question, and Transfer Certificate of Title No. 101864 was
issued by the Register of Deeds of Manila in the name of
the petitioner bank.
Upon the other hand, the private respondent filed an
action against the spouses to collect the unpaid cost of the
construction of the duplexapartment before the Court of
First Instance of Manila, Branch I, which case was
docketed therein as Civil Case No. 69228. During its
pendency, the private respondent succeeded in obtaining
the issuance of a writ of preliminary attachment, and
pursuant thereto, had the property in question attached.
Consequently, a notice of
480

adverse claim was annotated at the back of Transfer

Certificate of Title No. 86195.
On August 26, 1968, a decision was rendered in Civil
Case No. 69228 in favor of the private respondent and
against the spouses. A writ of execution was accordingly
issued but was returned unsatisfied.
As the spouses did not have any properties to satisfy the
judgment in Civil Case No. 69228, the private respondent
addressed a letter to the petitioner for the delivery to him
(private respondent) of his prorata share in the value of
the duplexapartment in accordance with Article 2242 of
the Civil Code. The petitioner refused to pay the prorata
value prompting the private respondent to file the instant
action. As earlier stated, a decision was rendered in favor
of the private respondent.
The parties are agreed that the only issue is whether or
not the private respondent is entitled to claim a prorata
share in the value of the property in question. The
applicable provision, Article 2242 of the Civil Code, reads
as follows:
ART. 2242. With reference to specific immovable property and

real rights of the debtor, the following claims, mortgages and liens
shall be preferred, and shall constitute an encumbrance on the
immovable or real right:
(1) Taxes due upon the land or building

(2) For the unpaid price of real property sold, upon the
immovable sold
(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and
contractors, engaged in the construction, reconstruction or
repair of buildings, canals or other works, upon said
buildings, canals or other works
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other
works upon said buildings, canals or other works
(5) Mortgage credits recorded in the Registry of Property,
upon the real estate mortgaged
(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon
the immovable preserved or improved
481
VOL. 124, SEPTEMBER 2, 1983 481

(7) Credits annotated in the Registry of Property, in virtue of

a judicial order, by attachments or executions, upon the
property affected, and only as to later credits
(8) Claims of coheirs for warranty in the partition of an
immovable among them, upon the real property thus
divided
(9) Claims of donors of real property for pecuniary charges or
other conditions imposed upon the donee, upon the
immovable donated
(10) Credits of insurers upon the property insured, for the
insurance premium for two years.
Both the petitioner bank and private respondent Ramos

rely on the case of De Barreto v. Villanueva (6 SCRA 928).
The petitioner bank would impress upon this Court that
the proceedings had before the court below is not one of the
proceedings contemplated in the De Barreto case that will
sustain the authority of the respondent court to adjudicate
the claims of all preferred creditors under Article 2242 of
the Civil Code. Petitioner argues that for Article 2242 of
the Civil Code to apply, there must have been an
insolvency proceeding or other liquidation proceedings of
similar import. And under the facts then obtaining, there
could have been no insolvency
**
proceeding as there were
only two known creditors. Consequently, it is argued that
private respondents unpaid contractors claim did not
acquire the character of a statutory lien equal to the
petitioners registered mortgage.
Upon the other hand, private respondent Ramos
maintains that the proceedings had before the court below
can qualify as a general liquidation of the estate of the
spouses Tabligan because the only existing property of said
spouses is the property subject matter of this litigation.
Concurrence of credits occurs when the same specific
property of the debtor or all of his property is subjected to
the claims of several creditors. The concurrence of credits
raises no questions of consequence where the value of the
property or
_______________
** Section 20 of the Insolvency Law provides that the adjudication of

insolvency must be made on the petition of three or more creditors.
482

the value of all assets of the debtor is sufficient to pay in

full all the creditors. However, it becomes material when
said assets are insufficient for then some creditors of
necessity will not be paid or some creditors will not obtain
the full satisfaction of their claims. In this situation, the
question of preference will then arise, that is to say who of
the creditors will be paid ahead of the others. (Caguioa,
Comments and Cases on Civil Law, 1970 ed., Vol. VI, p.
472.)
Under the system established by Article 2249 of the
Civil Code of the Philippines, only taxes and assessments
upon immovable property enjoy absolute preference. All the
remaining specified classes of preferred creditors under
Article 2242 enjoy no priority among themselves. Their
credits shall be satisfied prorata, i.e., in proportion to the
amount of the respective credits.
Under the De Barreto decision, the full application of
Articles 2242 and 2249 demands that there must first be
some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency,
the settlement of a decedents estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of similar
import.
The pertinent ruling reads:
Thus, it becomes evident that one preferred creditors thirdparty

claim to the proceeds of a foreclosure sale (as in the case now
before us) is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the
claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two
creditors will not enable the Court to ascertain the pro rata
dividend corresponding to each because the rights of the other
creditors likewise enjoying preference under Article 2242 can not
be ascertained. Wherefore, the order of the Court of First Instance
of Manila now appealed from, decreeing that the proceeds of the
foreclosure sale be apportioned only between appellant and
appellee, is incorrect and must be reversed.
In the absence of insolvency proceedings (or other equivalent
general liquidation of the debtors estate), the conflict between the
parties now before us must be decided pursuant to the well
established principle concerning registered lands that a
purchaser in
483
VOL. 124, SEPTEMBER 2, 1983 483

good faith and for value (as the appellant concededly is) takes
registered property free from liens and encumbrances other than
statutory liens and those recorded in the certificate of title. There
being no insolvency or liquidation, the claim of the appellee, as
unpaid vendor, did not acquire the character and rank of a
statutory lien coequal to the mortgagees recorded encumbrance,
and must remain subordinate to the latter.
The resolution of this petition, therefore, hinges on the
determination of whether an insolvency proceeding or other
liquidation proceeding of similar import may be considered to
have been conducted in the court below.
The respondent court ruled in the affirmative holding that:
There were no known creditors, other than the plaintiff and
defendant herein, and the proceedings in the present case may
ascertain and bindingly adjudicate the respective claims of the
plaintiff and the defendant, serving as a substantial compliance
with what the Supreme Court stated:
x x x it is thus apparent that the full application of Articles
2242 and 2249 demands that there must be first some proceeding
where the claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of a decedents
estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import. (de Barretto v. Villanueva, et al.,
G.R. No. L14938, December 29, 1962).
A careful considering of this petition leads us to agree with

the petitioner. The conclusions of the lower court are not
supported by the law and the facts.
The proceedings in the court below do not partake of the
nature of the insolvency proceedings or settlement of a
decedents estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the
estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedents
estate are both proceedings in rem which are binding
against the whole world. All persons having interest in the
subject matter involved, whether they were notified or not,
are equally bound. Consequently, a liquidation of similar
import or other
484

equivalent general liquidation must also necessarily be a

proceeding in rem so that all interested persons whether
known to the parties or not may be bound by such
proceeding.
In the case at bar, although the lower court found that
there were no known creditors other than the plaintiff and
the defendant herein, this can not be conclusive. It will not
bar other creditors in the event they show up and present
their claims against the petitioner bank, claiming that they
also have preferred liens against the property involved.
Consequently, Transfer Certificate of Title No. 101864
issued in favor of the bank which is supposed to be
indefeasible would remain constantly unstable and
questionable. Such could not have been the intention of
Article 2243 of the Civil Code although it considers claims
and credits under Article 2242 as statutory liens. Neither
does the De Barretto case sanction such instability. It
emphasized the following:
We are understandably loath (absent a clear precept of law so

commanding) to adopt a rule that would undermine the faith and
credit to be accorded to registered Torrens titles and nullify the
beneficient objectives sought to be obtained by the Land
Registration Act. No argument is needed to stress that if a person
dealing with registered land were to be held to take it in every
instance subject to all the fourteen preferred claims enumerated
in Article 2242 of the new Civil Code, even if the existence and
import thereof can not be ascertained from the records, all
confidence in Torrens titles would be destroyed, and credit
transactions on the faith of such titles would be hampered, if not
prevented, with incalculable results. Loans on real estate security
would become aleatory and risky transactions, for no prospective
lender could accurately estimate the hidden liens on the property
offered as security, unless he indulged in complicated, tedious
investigations. The logical result might well be a contraction of
credit to unforeseable proportions that could lead to economic
disaster.
Upon the other hand, it does not appear excessively
burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of Deeds should
they desire to protect their rights even outside of insolvency or
liquidation proceedings.
In fact, an annotation, as suggested above, would inure to

485
VOL. 124, SEPTEMBER 2, 1983 485

the benefit of the public, particularly those who may

subsequently wish to buy the property in question or who
have a business transaction in connection therewith. It
would facilitate the enforcement of a legal statutory right
which cannot be barred by laches. (See Manila Railroad Co.
v. Luzon Stevedoring Co., 100 Phil. 135).
Respondent Ramos admitted in the partial stipulation of
facts submitted by both parties that at the time of the loans
to the spouses, the petitioners bank had no actual or
constructive knowledge of any lien against the property in
question. The duplex apartment house was built for
P32,927.00. The spouses Tabligan borrowed P35,000.00 for
the construction of the apartment house. The bank could
not have known of any contractors lien because, as far as it
was concerned, it financed the entire construction even if
the stated purpose of the loans was only to complete the
construction.
Since the action filed by the private respondent is not
one which can be considered as equivalent general
liquidation having the same import as an insolvency or
settlement of the decedents estate proceeding, the well
established principle must be applied that a purchaser in
good faith and for value takes registered land free from
liens and encumbrances other than statutory liens and
those recorded in the Certificate of Title. It is an admitted
fact that at the time the deeds of real estate mortgage in
favor of the petitioner bank were constituted, the transfer
certificate of title of the spouses Tabligan was free from any
recorded lien and encumbrances, so that the only
registered liens in the title were deeds in favor of the
petitioner.
Prescinding from the foregoing, the private respondents
claim must remain subordinate to the petitioner banks
title over the property evidenced by TCT No. 101864.
WHEREFORE, the petition is granted. The decision of
the Court of First Instance of Manila, Branch VII is,
hereby, reversed and set aside. The complaint and the
counterclaim are dismissed.
SO ORDERED.
486

People vs. Almeda

Vasquez and Relova, JJ., concur.
Petition granted. Decision reversed and set aside.
Notes.A mortgage does not constitute just title on the

part of the mortgagee since ownership is retained by the
mortgagor. (Reyes vs. Sierra, 93 SCRA 472.)
The Philippine National Bank is estopped for having
reneged on its commitments to allow redemptioner to
redeem the mortgaged property foreclosed by the bank and
instead allowed another to buy the property. (Philippine
National Bank vs. Court of Appeals, 94 SCRA 357.)
The automatic rescission clause is not applicable to
contracts for redemption of the mortgage property when
foreclosed, but applies only to contracts to sell real estate
on installments. (Philippine National Bank vs. Court of
Appeals, 94 SCRA 357.)
Pres. Decree No. 385 mandates courts to place a
government financial institution in possession of a
foreclosed mortgaged property. (Philippine National Bank
vs. Adil, 118 SCRA 110.)
Foreclosure and sale of mortgaged chattel bars further
recovery by vendor of outstanding obligation of purchaser
not satisfied by the sale. (Zayas, Sr. vs. Luneta Motors Co.,
117 SCRA 726.)
o0o

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6/24/2017 PHILIPPINEREPORTSANNOTATEDVOLUME044

[No. 19190. November 29, 1922]

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff

1. BANKS AND BANKING "CREDIT" AND "LOAN,"

2. ID. "LOAN" AND "DISCOUNT" DISTINGUISHED.To

3. STATUTES INTERPRETATION AND

4. ID. ID. SECTION 35 OF ACT No. 2747 PROHIBITION

5. ID. ID. ID. ID.A loan to a partnership of which the

in section 35 of Act No. 2747 against indirect loans.

6. ID. ID. ID. PROHIBITION ON CORPORATION.When

7. ID. REPEAL EFFECT UPON VIOLATIONS OF THE

VOL. 44, NOVEMBER 29, 1922 127

People vs. Concepcion

jurisdiction to try, convict, and sentence offenders charged

8. CRIMINAL LAW ACT No. 2747 GOOD FAITH AS A

APPEAL from a judgment of the Court of First Instance of

By telegrams and a letter of confirmation to the manager of

Cagayan, to grant loans and discount negotiable documents

128 PHILIPPINE REPORTS ANNOTATED

On the facts recounted, Venancio Concepcion, as President

The questions presented are reduced to their simplest

VOL. 44, NOVEMBER 29, 1922 129

counsel is correct, for the exhibits in question speak of a

transaction. But in its last analysis, to discount a paper is

130 PHILIPPINE REPORTS ANNOTATED

a discount is always on doublename paper a loan is

VOL. 44, NOVEMBER 29, 1922 131

Various provisions of the Civil Code serve to establish the

In the case of People vs. Knapp ([1912], 206 N. Y., 373),

"We are of opinion the statute forbade the loan to his

132 PHILIPPINE REPORTS ANNOTATED

IV. Could Venancio Concepcion, President of the Philippine

VOL. 44, NOVEMBER 29, 1922 133

The answer is that when the corporation itself is forbidden

VI. Does the alleged good faith of Venancio Concepcion,

"It is fraud for directors to secure by means of their trust, any

On a review of the evidence of record, with reference to the

134 PHILIPPINE REPORTS ANNOTATED

charged in the information. The penalty imposed by the

Araullo, C. J., Johnson, Street, Avancea, Villamor,

262 SUPREME COURT REPORTS ANNOTATED

No. L17474. October 25, 1962.

REPUBLIC OF THE PHILIPPINES, plaintiffappellee, vs.

Contracts Loan of bulls for breeding purposes Nature of

Judgments Proceedings for administration and settlement of

APPEAL from a decision of the Court of First Instance of

The facts are stated in the opinion of the Court.

VOL. 6, OCTOBER 25, 1962 263

The Court of Appeals certified this case to this Court

264 SUPREME COURT REPORTS ANNOTATED

of the bulls corresponding yearly depreciation of 8% from

x x x sentencing the latter (defendant) to pay the sum of P3,

On 9 October 1958 the plaintiff moved ex parte for a writ of

VOL. 6, OCTOBER 25, 1962 265

quash the writ of execution the appellee prays that

x x x is liable for loss of the things, even if it should be through a

(2) If he keeps it longer than the period stipulated x x x

The original period of the loan was from 8 May 1948 to 7

1 Article 1933 of the Civil Code.

266 SUPREME COURT REPORTS ANNOTATED

appellant kept and used the bull until November 1953

and after the defendants death on 23 October 1951 his

Whenever a party to a pending case dies x x x it shall be the duty

The notice by the probate court and its publication in the