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Credit 6.b Pledge & 6.

c Mortgage part 1

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G.R. No. L-24893

August 23, 1926

One thousand piculs hemp now in the plantation bodega at Pantucan all belonging to the "Gulf Plantation, Incorporated," valued at P45,000. Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450. One launch "Peril" valued at P18,000; one auxiliary boat "Manuela," P9,000; one launch "Rigel," P800; one launch "New Kirk," P3,500 and cargo boats, P200. The instrument contains the following endorsement: Doc. stamps affixed P17.20 THE PROVINCIAL GOVERNMENT OF DAVAO OFFICE OF THE REGISTER OF DEEDS Received this 24th day of Feb., 1921, at 9.30 o'clock a. m. Entry No. 90, page 3, Volume Day Book (Provisional). THE PROVINCIAL GOVERNMENT OF DAVAO OFFICE OF THE REGISTER OF DEEDS Received this 24th day of Feb., 1921. at 9.30 o'clock a. m. March 25, 1922, an insolvency petition was filed to have the Gulf Plantation Company declared insolvent, and it was declared insolvent on September 16, 1922, and the court ordered the sheriff to take possession of all the assets of the insolvent estate. October 23, 1922, with the consent and approval of all creditors, including the Philippine National Bank, and assignee was appointed, and on October 27, 1922, he filed an inventory of all of the properties of the plantation company, March 17, 1923, the court made an order requiring the assignee to render an account and to give the creditors a copy. March 20, 1923, the assignee filed his account for the period between October 1, 1922, and February 28, 1923. On January 7, 1924, the assignee filed a further account covering the period from October 1, 1922, to November 30, 1923. Both of which accounts are still pending and waiting the approval of the court. November 28, 1923, the assignee filed a petition for authority to sell at public auction all of the properties of the insolvent estate, which application is also now pending and waiting the order of the court. November 3, 1922, the Philippine National Bank filed a petition, to which was attached a copy of Exhibit A and made a part of it, reciting the execution of the instrument and a breach of its conditions, and praying for the following order from the court: (a) That the mortgage or pledge executed in its favor by the Gulf Plantation, Inc., a copy of which is attached to this claim as appendix A be declared effective and matured;

Involuntary Insolvency of The Gulf Plantation Co. PACIFIC COMMERCIAL COMPANY, PHILIPPINE-AMERICAN DRUG COMPANY and STANDARD OIL COMPANY,petitioners-appellants, vs. PHILIPPINE NATIONAL BANK, creditor-appellee. H. B. Hughes, assignee. STATEMENT At Davao, Davao P. I., on august 24, 1918, the Gulf Plantation Company, a corporation, through its president executed to the Philippine National Bank a certain instrument known in the record as Exhibit A, in which the Plantation Company is named and styled as the pledgor, and the Philippine National Bank as the pledges, in which it is recited that the Gulf Plantation Company has obtained certain credits, loans, overdrafts, etc., from the pledgee, which the parties have mutually agreed should be guaranteed and secured, including costs, charges, and interest "of keeping the pledged property," and "all other expenditures of the pledgee incurred in connection with this pledge." In consideration thereof, all other valuable consideration received by the pledgor, and for the purpose of securing the payment of all sums not exceeding P165,000, the pledgor hypothecated and pledged to the pledgee and hereby delivered the possession, for the purpose of the pledge, of all the property itemized in schedule A on the back of this pledge. The pledgor agreed without demand to pledge and deliver to the pledgee any further and additional securities required, and to pay the taxes and keep the property insured. That, if the pledgor shall pay to the pledgee such sums of money as the pledgee, may advance under the terms of the pledge, then the pledged property may be turned to the pledgor, and "this pledge shall be of no further, otherwise, to remain in force, and the pledgee may dispose of the pledged property in the manner herein provided, or in accordance with the Chattel Mortgage Law, at the option of the pledgee." The pledgor appoints the pledgee as attorney-in-fact of the pledgor with full power and authority after any condition of the pledge may have been broken to enter the premises where the pledged property is located, and take possession of it by force, if necessary, and seize and take actual possession of it without an order of the court, and to sell, assign and deliver the property pledged, or any part thereof, at the option of the pledgee. Provision is then made for the application of the proceeds of any sale of the property under the pledge. The instrument was duly executed and acknowledged before a notary public as of the date it was signed. Schedule A, which is part of the instrument, is as follows: Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, Davao Province, P. I., planted to 236,000 hemp and 700 coconut trees, valued at P430,000. Forty-eight buildings of permanent materials valued at P5,500 situated on above lease. Two buildings of strong materials valued at P15,000.

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(b) That the assignee appointed in this insolvency proceeding, or if the latter has not yet been appointed, the sheriff of the Province of Davao be authorized to sell at public or private sale, after notice to the Philippine National Bank, all such interest, right or share as the Gulf Plantation, Inc., has or may have in the properties described in Exhibit A; (c) That should the proceeds of the sale of the properties mentioned in appendix A be greater than the sum of P165,000, this amount of P165,000 be delivered to the Philippine National Bank, and the balance to the assignee in insolvency; and (d) In the event that the proceeds of the sale of the properties mentioned in Appendix A is less than the sum of P165,000 that said proceeds be delivered to the Philippine National Bank, and for the balance of difference not paid of the debt of the insolvent corporation to the claimant company, the Philippine National Bank be admitted as an ordinary creditor in this insolvency proceeding. February 9, 1924, the bank, through the fiscal of Davao, and in compliance with an order of the court, filed objections to the approval of the accounts rendered by the assignee. In this situation, the court rendered a judgment in favor of the Philippine National Bank to the effect that it was entitled to the possession of all of the estate of the insolvent corporation, and that in the year 1919 the bank had appointed H. B. Hughes as its representative or administrator of the properties of the Plantation Company, and requiring the bank to pay certain preferred claims, including the income tax and the land tax, and that the bank was entitled to, and should have, possession of all the properties of the insolvent corporation, and to have the property sold and the proceeds of the sale applied to the satisfaction of the claim of the bank, and upon the payment of such preferred claims, to have the proceeds of the sale applied to the satisfaction of the claim of the bank, and that the creditors of the Plantation Company should share in any amount remaining after such application, and dismissed the case, without costs. From this judgment, the creditors appeal and assign the following errors: I. The lower court erred in not finding and holding that the so-called "agreement of pledge" executed by the insolvent Gulf Plantation Company in favor of the Philippine National Bank is null and void on account of its many defects. II. The lower court erred in not finding and holding that the Philippine National Bank has renounced its alleged preferred lien on the properties of the insolvent covered by the pledge, by giving its consent to the appointment of and assignee and by permitting said assignee to take possession of said properties. III. The lower court erred in not finding and holding that the claim of the Philippine National Bank is an ordinary claim.

IV. The lower court erred in holding that the Philippine National Bank is entitled to the possession of the properties of the insolvent. V. The lower court erred in holding that the mortgage in favor of the Philippine National Bank is effective and due. VI. The lower court erred in not overruling the opposition of the Philippine National Bank dated February 9, 1924, to the accounts submitted by the assignee. VIII. The lower court erred in dismissing the insolvency proceedings.

JOHNS, J.: In view of the numerous recitals made in it, what is known in the record as Exhibit A must be construed as a pledge in both form and substance. It is very apparent from the language used in the instrument that it was prepared on the customary blank form of a pledge for the taking of properties under a pledge. It will be noted that it was never received or filed for any purpose until the 24th of February, 1921, which was two years and a half after it was executed, and that it was then endorsed, only received in the "office of the register of deeds" with "Entry No. 90 page 3, Volume Day Book (Provisional)." That is to say, there is no evidence that it was ever received, filed or recorded anywhere or by anyone, either as a chattel mortgaged or a pledge of personal property. Hence, the receiving of it in the office of the register of deeds on February 24, 1921, is a nullity as to both a pledge and a chattel mortgage. The only witness for either party was Carlos Garcia, the manager of the bank at Davao, and he was called for the sole purpose of testifying as to the amount of the bank's claim, which he placed at about P60,000, and that it was due and owing. To make Exhibit A valid as a pledge, as to the personal property therein described , it was the duty of the bank to take the actual, physical possession of the property, and to continue and remain in such possessions, and to make it valid against creditors or the assignee, the bank must have been in such actual, physical possession at the time the Plantation Company was declared insolvent. Upon the question, there is no evidence in the record. Without it, Exhibit A is void as a pledge, and the bank would not have a preference, and would not now be entitled to the possession of the property of the Plantation Company, or to have it sold and the proceeds applied to the satisfaction of its claim. Upon the question of pledge, article 1863 of the Civil Code provides: In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, that the pledge, be placed in the possession of the creditor or, of a third person appointed by common consent.

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Section 4 of Act No. 1508, entitled "an Act providing for the mortgaging of personal property, and for the registration of the mortgages so executed," provides: A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides without the Philippine Islands, in the province in which the property is situated. That is to say, a chattel mortgage is not valid against any person except the mortgagor, his executors or administrators, without delivery of possession of the property, unless the mortgage is recorded in the office of the register of deeds of the province. It will be noted that, in the absence of such delivery of possession on the recording of the instrument in the office of the register of deeds, a chattel mortgages is valid only as to the mortgagor, his executors or administrators. Hence, it follows that, in the absence of such record and the delivery of possession a chattel mortgage is void as against the creditors or the assignee of an insolvent estate, and upon that question, there is no evidence in the record. If it was the purpose and intent of the bank to have Exhibit A received, filed and recorded as a chattel mortgage, it was not only its duty to so instruct the register of deeds, but it was its further duty to see that the instrument was received, filed and recorded as a chattel mortgage. Upon that point there is no evidence. Again, in the every nature of things, a pledge or chattel mortgage is confined and limited to personal property, and it cannot be extended or made to apply to real property. In what is known as schedule A, attached to Exhibit A, the property is described as lease No. 63 of 534 hectares of public land planted to 236,000 hemp and 700 coconut trees valued at P430,000, and forty-eight buildings of permanent materials valued at P5,500, and two buildings of strong materials valued at P15,000. It may well be doubted whether that kind of property could become the subject matter of a pledge or chattel mortgage. It will be noted that it is a pledge of a lease of public land which is planted to hemp and coconut trees, and of forty-eight buildings of permanent materials and of two buildings of strong materials, clearly indicating that the buildings were attached to the soil and as such would be real estate. It will also be noted that the pledge was executed in 1918, and it is very probable that the one thousand piculs of hemp have long since been sold. As to the twenty-three carabaos, thirty-eight bullocks and eighteen horses, there is no provision for the increase. Hence, the pledge, if valid for any purpose, should be confined and limited to the particular property described in the pledge, and would not include any increase.

That is to say, if it be a fact that at time the pledge was executed the bank took actual, physical possession of the property described in it, and continued to remain in such possession up to the time the petition for insolvency was filed, or that it was in such possession for more than thirty days prior to the filing of the petition, the pledge would then be valid as to the personal property, and the bank would then have a preference on that property for the amount found due and owing upon its claim. If be a fact that the bank was not in the actual, physical possession of the property at the time the insolvency petition was filed, and that the Plantation Company was in such possession as its own, then the bank would not have a preference over any other unsecured creditor. From what has been said, it follows that the judgment of the lower court is reversed, and the case remanded, with instructions for the assignee to proceed with the administration of the insolvent estate in the ordinary course of business and in the manner provided by law, and for such further proceedings as are not inconsistent with this opinion, with costs in favor of the appellant. So ordered. G.R. No. L-6342 January 26, 1954

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. LAUREANO ATENDIDO, defendants-appellant. BAUTISTA, ANGELO, J.: This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the defendant to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of 6% per annum from June 26, 1940, and the costs of action. On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of P3,000 payable in 120 days with interests at 6% per annum from the date of maturity. To guarantee the payment of the obligation the borrower pledged to the bank 2,000 cavanes of palay which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan, and to that effect the borrower endorsed in favor of the bank the corresponding warehouse receipt. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan matured the borrower failed to pay either the principal or the interest and so the present action was instituted. Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed that the warehouse receipt covering the palay which was given as security having been endorsed in blank in favor of the bank, and the palay having been lost or disappeared, he thereby became relieved of liability. And, by way of counterclaim, defendant claimed that, as a corollary to his theory, he is entitled to an indemnity which represents the difference between the value of the palay lost and the amount of his obligation.

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The case was submitted on an agreed statements of facts and thereupon the court rendered judgment as stated in the early part of this decision. Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court on the ground that the question involved is purely one of law. The only issue involved in this appeal is whether the surrender of the warehouse receipt covering the 2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the effect of transferring their title or ownership to said appellee, or it should be considered merely as a guarantee to secure the payment of the obligation of appellant. In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt No. S-1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was not that of a final transfer of that warehouse receipt but merely as a guarantee to the fulfillment of the original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose (of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover, the 2,000 cavanes of palay were not in the first place in the actual possession of plaintiff corporation, although symbolically speaking the delivery of the warehouse receipt was actually done to the bank." We hold this finding to be correct not only because it is in line with the nature of a contract of pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the stipulations embodied in the contract signed by appellant when he secured the loan from the appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse receipt were given to appellee only as a guarantee to secure the fulfillment by appellant of his obligation. This clearly appears in the contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were given as a collateral security. The delivery of said palay being merely by way of security, it follows that by the very nature of the transaction its ownership remains with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By this we mean that if the obligation is not paid upon maturity the most that the pledgee can do is to sell the property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the property to the pledgee and to forestall any possible disposition thereof on the part of the pledgor. This is true notwithstanding the provisions to the contrary of the Warehouse Receipt Law. In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765) which involves a similar transaction, this Court held:

In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure the payment of a loan or debt, the transferee or endorsee does not automatically become the owner of the goods covered by the warehouse receipt or quedan but he merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or pledge, and that if the property covered by the quedans or warehouse receipts is lost without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor. Wherefore, the decision appealed from is affirmed, with costs against appellant. G.R. No. 97753 August 10, 1992 CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. REGALADO, J.: This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent bank. The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record: 1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280); CTD CTD Dates Serial Nos. Quantity Amount 22 Feb. 82 90101 to 90120 20 P80,000 26 Feb. 82 74602 to 74691 90 360,000 2 Mar. 82 74701 to 74740 40 160,000 4 Mar. 82 90127 to 90146 20 80,000 5 Mar. 82 74797 to 94800 4 16,000

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5 Mar. 82 89965 to 89986 22 88,000 5 Mar. 82 70147 to 90150 4 16,000 8 Mar. 82 90001 to 90020 20 80,000 9 Mar. 82 90023 to 90050 28 112,000 9 Mar. 82 89991 to 90000 10 40,000 9 Mar. 82 90251 to 90272 22 88,000 Total 280 P1,120,000 ===== ======== 2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products from the latter (Original Record, p. 208). 3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50). 4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561). 5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 6062). 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68). 7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564). 9. No copy of the requested documents was furnished herein defendant. 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566). 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131). 12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees. After trial, the court a quo rendered its decision dismissing the instant complaint.
3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4 The instant petition is bereft of merit. A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse. SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

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This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum. (Sgd. Illegible) (Sgd. Illegible)

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz. xxx xxx xxx Atty. Calida:

AUTHORIZED SIGNATURES 5 Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows: . . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6 We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz? witness: a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount. Atty. Calida: q And no other person or entity or company, Mr. Witness? witness: a None, your Honor. 7 xxx xxx xxx Atty. Calida: q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned? witness: a Angel dela Cruz is the depositor. 8 xxx xxx xxx On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in

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order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11 Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12 The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon

the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16 If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 19 Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos: . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession

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of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide: Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26 On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares: Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect

or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question. Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28 On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29The issues agreed upon by them for resolution in this case are: 1. Whether or not the CTDs as worded are negotiable instruments. 2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex "C"). 3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any. 4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein. 5. Whether or not plaintiff is entitled to the proceeds of the CTDs. 6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other. As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31 Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32 To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the

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proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33 Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself. Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.) xxx xxx xxx The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36 Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor. WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED. SO ORDERED. G.R. No. L-18500 October 2, 1922

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffsappellants, vs. GLICERIO JAVELLANA, defendant-appellant. Montinola, Montinola and Hontiveros for plaintiffs-appellants. J. M. Arroyo and Fisher and DeWitt for defendant-appellant. AVANCEA, J.: On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent per annum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a small comb with twenty-two diamonds, and two diamond rings, which the contracting parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A and 1) wherein the amount appears to be P1,875, which includes the 25 per cent interest on the sum of P1,500 for the term of one year. The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M. Villaseor, being unable to pay the loan, obtained from the defendant an extension, with the condition that the loan was to continue, drawing interest at the rate of 25 per cent per annum, so long as the security given was sufficient to cover the capital and the accrued interest. In the month of August, 1919, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the house of the defendant and offered to pay the loan and redeem the jewels, taking with him, for this purpose, the sum of P11,000, but the defendant then informed them that the time for the redemption had already elapsed. The plaintiffs renewed their offer to redeem the jewelry by paying the loan, but met with the same reply. These facts are proven by the testimony of the plaintiffs, corroborated by Carlos M. Dreyfus. The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their value, upon the payment by them of the sum they owe the defendant, with the interest thereon. The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he requested the plaintiff, Eusebio M. Villaseor, to secure the money, pay the loan and redeem the jewels, as he needed money to purchase a certain piece of land; that one month thereafter, the plaintiff, Filomena Sarmiento, went to his house and offered to sell him the jewels pledged for P3,000; that the defendant then told her to come back on the next day, as he was to see his brother, Catalino Javellana, and ask him if he wanted to take the jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento, went back to the house of the defendant who then paid her the sum of P1,125, which was the balance remaining of the P3,000 after deducting the plaintiff's loan.

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It appearing that the defendant possessed these jewels originally, as a pledge to secure the payment of a loan stated in writing, the mere testimony of the defendant to the effect that later they were sold to him by the plaintiff, Filomena Sarmiento, against the positive testimony of the latter that she did not make any such sale, requires a strong corroboration to be accepted. We do not find the testimony of Jose Sison to be of sufficient value as such corroboration. This witness testified to having been in the house of the defendant when Filomena went there to offer to sell the defendant the jewels, as well as on the third day when she returned to receive the price. According to this witness, he happened to be in the house of the defendant, having gone there to solicit a loan, and also accidentally remained in the house of the defendant for three days, and that that was how he happened to witness the offer to sell, as well as the receipt of the price on the third day. But not only do we find that the defendant has not sufficiently established, by his evidence, the fact of the purchase of the jewels, but also that there is a circumstance tending to show the contrary, which is the fact that up to the trial of this cause the defendant continued in possession of the documents, Exhibits A and 1, evidencing the loan and the pledge. If the defendant really bought these jewels, its seems natural that Filomena would have demanded the surrender of the documents evidencing the loan and the pledge, and the defendant would have returned them to plaintiff. Our conclusion is that the jewels pledged to defendant were not sold to him afterwards. Another point on which evidence was introduced by both parties is as to the value of the jewels in the event that they were not returned by the defendant. In view of the evidence of record, we accept the value of P12,000 fixed by the trial court. From the foregoing it follows that, as the jewels in question were in the possession of the defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendant having subsequently extended the term of the loan indefinitely, and so long as the value of the jewels pledged was sufficient to secure the payment of the capital and the accrued interest, the defendant is bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs have the right to demand the same upon the payment by them of the sum of P1,5000, plus the interest thereon at the rate of 25 per cent per annum from August 28, 1911. The judgment appealed from being in accordance with this findings, the same is affirmed without special pronouncement as to costs. So ordered. Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur. RESOLUTION April 4, 1923

AVANCEA, J.: The defendant contends that the plaintiffs' action for the recovery of the jewels pledged has prescribed. Without deciding whether or not the action to recover the thing pledged may prescribe in any case, it not being necessary for the purposes of this opinion, but supposing that it may, still the defendant's contention is untenable. In the document evidencing the loan in question there is stated: "I transfer by way of pledge the following jewels." That this is a valid contract of pledge there can be no question. As a matter of fact the defendant does not question it, but take s it for granted. However, it is contended that the obligation of the defendant to return the jewels pledged must be considered as not stated in writing, for this obligation is not expressly mentioned in the document. But if this contract of pledge is in writing, it must necessarily be admitted that the action to enforce the right, which constitutes the essence of this contract, is covered by a written contract. The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is essential in all contracts of pledge. This constitutes, precisely, the consideration of the debtor in this accessory contract, so that if this obligation of the creditor to return to thing pledged, and the right of the debtor to demand the return thereof, are eliminated, the contract would not be a contract of pledge. It would be a donation. If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time for the prescription of this action is ten years, according to section 43 of the Code of Civil Procedure. The defendant contends that the time of prescription of the action of the plaintiffs to recover the thing pledged must be computed from August 28, 1911, the date of the making of the contract of loan secured by this pledge. The term of this loan is one year. However, it is contended that the action of the plaintiff to recover the thing pledged accrued on the very date of the making of the contract, inasmuch as from that date they could have recovered the same by paying the loan even before the expiration of the period fixed for payment. This view is contrary to law. Whenever a term for the performance of an obligation is fixed, it is presumed to have been established for the benefit of the creditor as well as that of the debtor, unless from its tenor or from other circumstances it should appear that the term was established for the benefit of one or the other only (art. 1128 of the Civil Code.) In this case it does not appear, either from any circumstance, or from the tenor of the contract, that the term of one year allowed the plaintiffs to pay the debt was established in their favor only. Hence it must be presumed to have been established for the benefit of the defendant also. And it must be so, for this is a case of a loan, with interest, wherein the term benefits the plaintiffs by the use of the money, as well as the defendant by the interest. This being so, the plaintiffs had no right to pay the loan before the lapse of one year, without the consent of the defendant, because such a payment in advance would have deprived the latter of the benefit of the stipulated interest. It follows from this that appellant is in error when he contents that the plaintiffs could have paid the loan and recovered the thing pledged from the date of the execution of the contract and, therefore, his theory that the action of the plaintiffs to recover the thing pledged accrued from the date of the execution of the contract is not tenable. 1awph!l.net

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It must, therefore, be admitted that the action of the plaintiffs for the recovery of the thing pledged did not accrue until August 31, 1912, when the term fixed for the loan expired. Computing the time from that date to that of the filing of the complaint in this cause, October 9, 1920, it appears that the ten years fixed by the law for the prescription of the action have not yet elapsed. On the other hand, the contract of loan with pledge is in writing and the action of the defendant for the recovery of the loan does not prescribe until after ten years. It is unjust to hold that the action of the plaintiffs for the recovery of the thing pledged, after the payment of the loan, has already prescribed while the action of the defendant for the recovery of the loan has not yet prescribed. The result of this would be that the defendant might have collected the loan and at the same time kept the thing pledged. The motion for reconsideration is denied. Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur. Separate Opinions STREET, J., concurring: I agree, Prescription cannot become effective against the right of the pledgor to redeem so long as the written contract evidencing the debt remains in the hands of the pledgee as evidence of a valid and unbarred debt. The pledgor may always claim at least as long a period within which to redeem as is allowed to the creditor to enforce his debt. (Gilmer vs. Morris, 80 Ala., 78; 60 Am. Rep., 85, 89.) G.R. No. L-21069 October 26, 1967

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950). The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15). Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code, which recites: Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance, the defense was once more overruled, and the case decided in the terms set down at the start of this opinion. Thereupon, Velayo resorted to this Court on appeal.

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee, vs. RODOLFO R. VELAYO, defendant-appellant. Villaluz Law Office for plaintiff-appellee. Rodolfo R. Velayo for and in his own behalf as defendant-appellant. REYES, J.B.L., J.: Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72): It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter.

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There was no understanding that, should the same be sold at public auction and the value thereof should be short of the undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a deficiency judgment for the balance should the collateral not command the price equal to the undertaking. It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been sold for only the amount of P235.00, the liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00. We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code. The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable. It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933. WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as to his liability for the 1954 premium in the sum of P120.93, and

interest at 12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So ordered. G.R. No. 138053 May 31, 2000 CORNELIO M. ISAGUIRRE, petitioner, vs. FELICITAS DE LARA, respondent. GONZAGA-REYES, J.: In this petition for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998 decision1 of the Court of Appeals2 and its Resolution promulgated on March 5, 1999. The antecedent facts of the present case are as follows: Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales Application over a parcel of land identified as portion of Lot 502, Guianga Cadastre, filed with the Bureau of Lands on January 17, 1942 and with an area of 2,324 square meters. Upon his death, Alejandro de Lara was succeeded by his wife respondent Felicitas de Lara, as claimant. On November 19, 1954, the Undersecretary of Agriculture and Natural Resources amended the sales application to cover only 1,600 square meters. Then, on November 3, 1961, by virtue of a decision rendered by the Secretary of Agriculture and Natural Resources dated November 19, 1954, a subdivision survey was made and the area was further reduced to 1,000 square meters. On this lot stands a two-story residentialcommercial apartment declared for taxation purposes under TD 43927 in the name of respondent's sons Apolonio and Rodolfo, both surnamed de Lara. Sometime in 1953, respondent obtained several loans from the Philippine National Bank. When she encountered financial difficulties, respondent approached petitioner Cornelio M. Isaguirre, who was married to her niece, for assistance. On February 10, 1960, a document denominated as "Deed of Sale and Special Cession of Rights and Interests" was executed by respondent and petitioner, whereby the former sold a 250 square meter portion of Lot No. 502, together with the two-story commercial and residential structure standing thereon, in favor of petitioner, for and in consideration of the sum of P5,000. Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against petitioner for recovery of ownership and possession of the two-story building.3 However, the case was dismissed for lack of jurisdiction. On August 21, 1969, petitioner filed a sales application over the subject property on the basis of the deed of sale. His application was approved on January 17, 1984, resulting in

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the issuance of Original Certificate of Title No. P-11566 on February 13, 1984, in the name of petitioner. Meanwhile, the sales application of respondent over the entire 1,000 square meters of subject property (including the 250 square meter portion claimed by petitioner) was also given due course, resulting in the issuance of Original Certificate of Title No. P13038 on June 19, 1989, in the name of respondent.4 Due to the overlapping of titles, petitioner filed an action for quieting of title and damages with the Regional Trial Court of Davao City against respondent on May 17, 1990. The case was docketed as Civil Case No. 20124-90. After trial on the merits, the trial court rendered judgment on October 19, 1992, in favor of petitioner, declaring him to be the lawful owner of the disputed property. However, the Court of Appeals reversed the trial court's decision, holding that the transaction entered into by the parties, as evidenced by their contract, was an equitable mortgage, not a sale.5 The appellate court's decision was based on the inadequacy of the consideration agreed upon by the parties, on its finding that the payment of a large portion of the "purchase price" was made after the execution of the deed of sale in several installments of minimal amounts; and finally, on the fact that petitioner did not take steps to confirm his rights or to obtain title over the property for several years after the execution of the deed of sale. As a consequence of its decision, the appellate court also declared Original Certificate of Title No. P-11566 issued in favor of petitioner to be null and void. On July 8, 1996, in a case docketed as G.R. No. 120832, this Court affirmed the decision of the Court of Appeals and on September 11, 1996, we denied petitioner's motion for reconsideration. On May 5, 1997, respondent filed a motion for execution with the trial court, praying for the immediate delivery of possession of the subject property, which motion was granted on August 18, 1997. On February 3, 1998, respondent moved for a writ of possession, invoking our ruling in G.R. No. 120832. Petitioner opposed the motion, asserting that he had the right of retention over the property until payment of the loan and the value of the improvements he had introduced on the property. On March 12, 1998, the trial court granted respondent's motion for writ of possession. Petitioner's motion for reconsideration was denied by the trial court on May 21, 1998. Consequently, a writ of possession dated June 16, 1998, together with the Sheriff's Notice to Vacate dated July 7, 1998, were served upon petitioner. Petitioner filed with the Court of Appeals a special civil action for certiorari and prohibition with prayer for a temporary restraining order or preliminary injunction to annul and set aside the March 12, 1998 and May 21, 1998 orders of the trial court, including the writ of possession dated June 16, 1998 and the sheriff's notice to vacate dated July 7, 1998. 6 The appellate court summarized the issues involved in the case as follows: (1) whether or not the mortgagee in an equitable mortgage has the right to retain possession of the property pending actual payment to him of the amount of indebtedness by the mortgagor; and (b) whether or not petitioner can be considered a builder in good faith with respect to the improvements he made on the property before the transaction was declared to be an equitable mortgage.

The Court of Appeals held that petitioner was not entitled to retain possession of the subject property. It said that . . . the mortgagee merely has to annotate his claim at the back of the certificate of title in order to protect his rights against third persons and thereby secure the debt. There is therefore no necessity for him to actually possess the property. Neither should a mortgagee in an equitable mortgage fear that the contract relied upon is not registered and hence, may not operate as a mortgage to justify its foreclosure. In Feliza Zubiri v. Lucio Quijano, 74 Phil 47, it was ruled "that when a contract . . . is held as an equitable mortgage, the same shall be given effect as if it had complied with the formal requisites of mortgage. . . . by its very nature the lien thereby created ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage, as long as the land remains in the hands of the petitioner (mortgagor) and the rights of innocent parties are not affected. Proceeding from the foregoing, petitioner's imagined fears that his lien would be lost by surrendering possession are unfounded. In the same vein, there is nothing to stop the mortgagor de Lara from acquiring possession of the property pending actual payment of the indebtedness to petitioner. This does not in anyway endanger the petitioner's right to security since, as pointed out by private respondents, the petitioner can always have the equitable mortgage annotated in the Certificate of Title of private respondent and pursue the legal remedies for the collection of the alleged debt secured by the mortgage. In this case, the remedy would be to foreclose the mortgage upon failure to pay the debt within the required period. It is unfortunate however, that the Court of Appeals, in declaring the transaction to be an equitable mortgage failed to specify in its Decision the period of time within which the private respondent could settle her account, since such period serves as the reckoning point by which foreclosure could ensue. As it is, petitioner is now in a dilemma as to how he could enforce his rights as a mortgagee. . . . Hence, this Court, once and for all resolves the matter by requiring the trial court to determine the amount of total indebtedness and the period within which payment shall be made. Petitioner's claims that he was a builder in good faith and entitled to reimbursement for the improvements he introduced upon the property were rejected by the Court of Appeals. It held that petitioner knew, or at least had an inkling, that there was a defect or flaw in his mode of acquisition. Nevertheless, the appellate court declared petitioner to have the following rights: . . . He is entitled to reimbursement for the necessary expenses which he may have incurred over the property, in accordance with Art. 526 and Art. 452 of the Civil Code.

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Moreover, considering that the transaction was merely an equitable mortgage, then he is entitled to payment of the amount of indebtedness plus interest, and in the event of non-payment to foreclose the mortgage. Meanwhile, pending receipt of the total amount of debt, private respondent is entitled to possession over the disputed property. The case was finally disposed of by the appellate court in the following manner: WHERFORE, the Petition is hereby DISMISSED, and this case is ordered remanded to the Regional Trial Court of Davao City for further proceedings, as follows: 1) The trial court shall determine a) The period within which the mortgagor must pay his total amount of indebtedness. b) The total amount of indebtedness owing the petitioner-mortgagee plus interest computed from the time when the judgment declaring the contract to be an equitable mortgage became final. c) The necessary expenses incurred by petitioner over the property. 7 On March 5, 1999, petitioner's motion for reconsideration was denied by the appellate court.8 Hence, the present appeal wherein petitioner makes the following assignment of errors: A. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE RTC ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ISSUING A WRIT OF POSSESSION IN FAVOR OF RESPONDENT. A.1 The RTC patently exceeded the scope of its authority and acted with grave abuse of discretion in ordering the immediate delivery of possession of the Property to respondent as said order exceeded the parameters of the final and executory decision and constituted a variance thereof. B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS NOT ENTITLED TO THE POSSESSION OF THE PROPERTY PRIOR TO THE PAYMENT OF RESPONDENT'S MORTGAGE LOAN. C. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER WAS NOT A BUILDER IN GOOD FAITH.

D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS ENTITLED TO INTEREST COMPUTED ONLY FROM THE TIME WHEN THE JUDGMENT DECLARING THE CONTRACT TO BE AN EQUITABLE MORTGAGE BECAME FINAL.9 Basically, petitioner claims that he is entitled to retain possession of the subject property until payment of the loan and the value of the necessary and useful improvements he made upon such property. 10 According to petitioner, neither the Court of Appeals' decision in G.R. CV No. 42065 nor this Court's decision in G.R. No. 120832 ordered immediate delivery of possession of the subject property to respondent. The dispositive portion of the March 31, 1995 decision of the Court of Appeals in G.R. CV No. 42065, which was affirmed by this Court, provides that IN VIEW OF ALL THE FOREGOING, the judgment appealed from is REVERSED and SET ASIDE and a new one entered: (1) dismissing the complaint; (2) declaring the "Document of Sale and Special Cession of Rights and Interests" (Exhibit B) dated February 10, 1960, to be an equitable mortgage not a sale; (3) upholding the validity of OCT No. P-13038 in the name of Felicitas de Lara; and (3) declaring null and void OCT No. P-11566 in the name of plaintiff Cornelio Isaguirre. All other counterclaims for damages are likewise dismissed. Costs against the appellee. 11 Petitioner argues that the abovementioned decision merely settled the following matters: (1) that the transaction between petitioner and respondent was not a sale but an equitable mortgage; (2) that OCT No. P-13038 in the name of respondent is valid; and (3) that OCT No. P-11566 in the name of petitioner is null and void. Since the aforementioned decision did not direct the immediate ouster of petitioner from the subject property and the delivery thereof to respondent, the issuance of the writ of possession by the trial court on June 16, 1998 constituted an unwarranted modification or addition to the final and executory decision of this Court in G.R. No. 120832. 12 We do not agree with petitioner's contentions. On the contrary, the March 31, 1995 decision of the appellate court, which was affirmed by this Court on July 8, 1996, served as more than adequate basis for the issuance of the writ of possession in favor of respondent since these decisions affirmed respondent's title over the subject property. As the sole owner, respondent has the right to enjoy her property, without any other limitations than those established by law. 1 Corollary to such right, respondent also has the right to exclude from the possession of her property any other person to whom she has not transmitted such property. 14 It is true that, in some instances, the actual possessor has some valid rights over the property enforceable even against the owner thereof, such as in the case of a tenant or lessee. 15 Petitioner anchors his own claim to possession upon his declared status as a mortgagee. In his Memorandum, he argues that

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4.8 It was respondent who asserted that her transfer of the Property to petitioner was by way of an equitable mortgage and not by sale. After her assertion was sustained by the Courts, respondent cannot now ignore or disregard the legal effects of such judicial declaration regarding the nature of the transaction. xxx xxx xxx 4.13 Having delivered possession of the Property to petitioner as part of the constitution of the equitable mortgage thereon, respondent is not entitled to the return of the Property unless and until the mortgage loan is discharged by full payment thereof. Petitioner's right as mortgagee to retain possession of the Property so long as the mortgage loan remains unpaid is further supported by the rule that a mortgage may not be extinguished even though then mortgagor-debtor may have made partial payments on the mortgage loan: Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or the creditor. Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. Neither can the creditor's heir who has received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. (Emphasis supplied.) xxx xxx xxx 4.14 To require petitioner to deliver possession of the Property to respondent prior to the full payment of the latter's mortgage loan would be equivalent to the cancellation of the mortgage. Such effective cancellation would render petitioner's rights ineffectual and nugatory and would constitute unwarranted judicial interference. xxx xxx xxx 4.16 The fact of the present case show that respondent delivered possession of the Property to petitioner upon the execution of the Deed of Absolute Sale and Special Cession of Rights and Interest dated 10 February 1960. Hence, transfer of possession of the Property to petitioner was an essential part of whatever agreement the parties entered into, which, in this case, the Supreme Court affirmed to be an equitable mortgage. xxx xxx xxx

4.19 Petitioner does not have the mistaken notion that the mortgagee must be in actual possession of the mortgaged property in order to secure the debt. However, in this particular case, the delivery of possession of the Property was an integral part of the contract between petitioner and respondent. After all, it was supposed to be a contract of sale. If delivery was not part of the agreement entered into by the parties in 1960, why did respondent surrender possession thereof to petitioner in the first place? 4.20 Now that the Courts have ruled that the transaction was not a sale but a mortgage, petitioner's entitlement to the possession of the Property should be deemed as one of the provisions of the mortgage, considering that at the time the contract was entered into, possession of the Property was likewise delivered to petitioner. Thus, until respondent has fully paid her mortgage loan, petitioner should be allowed to retain possession of the subject property. 16 Petitioner's position lacks sufficient legal and factual moorings. A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation. 17 It is constituted by recording the document in which it appears with the proper Registry of Property, although, even if it is not recorded, the mortgage is nevertheless binding between the parties. 18 Thus, the only right granted by law in favor of the mortgagee is to demand the execution and the recording of the document in which the mortgage is formalized. 19 As a general rule, the mortgagor retains possession of the mortgaged property since a mortgage is merely a lien and title to the property does not pass to the mortgagee. 20 However, even though a mortgagee does not have possession of the property, there is no impairment of his security since the mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. 21 If the debtor is unable to pay his debt, the mortgage creditor may institute an action to foreclose the mortgage, whether judicially or extrajudicially, whereby the mortgaged property will then be sold at a public auction and the proceeds therefrom given to the creditor to the extent necessary to discharge the mortgage loan. Apparently, petitioner's contention that "[t]o require [him] . . . to deliver possession of the Property to respondent prior to the full payment of the latter's mortgage loan would be equivalent to the cancellation of the mortgage" is without basis. Regardless of its possessor, the mortgaged property may still be sold, with the prescribed formalities, in the event of the debtor's default in the payment of his loan obligation. Moreover, this Court cannot find any justification in the records to uphold petitioner's contention that respondent delivered possession of the subject property upon the execution of the "Deed of Sale and Special Cession of Rights and Interests" on February 10, 1960 and that the transfer of possession to petitioner must therefore be considered an essential part of the agreement between the parties. This self-serving assertion of petitioner was directly contradicted by respondent in her pleadings. 22 Furthermore, nowhere in the Court of Appeals' decisions promulgated on March 31, 1995 (G.R. CV No. 42065) and on October 5, 1998 (G.R. SP No. 48310), or in our own decision promulgated on July 8, 1996 (G.R. No. 120832) was it ever established that the mortgaged properties were delivered by respondent to petitioner.

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In Alvano v. Batoon, 2 this Court held that "[a] simple mortgage does not give the mortgagee a right to the possession of the property unless the mortgage should contain some special provision to that effect." Regrettably for petitioner, he has not presented any evidence, other than his own gratuitous statements, to prove that the real intention of the parties was to allow him to enjoy possession of the mortgaged property until full payment of the loan. Therefore, we hold that the trial court correctly issued the writ of possession in favor of respondent. Such writ was but a necessary consequence of this Court's ruling in G.R. No. 120832 affirming the validity of the original certificate of title (OCT No. P-13038) in the name of respondent Felicitas de Lara, while at the same time nullifying the original certificate of title (OCT No. P-11566) in the name of petitioner Cornelio Isaguirre. Possession is an essential attribute of ownership; thus, it would be redundant for respondent to go back to court simply to establish her right to possess subject property. Contrary to petitioner's claims, the issuance of the writ of possession by the trial court did not constitute an unwarranted modification of our decision in G.R. No. 120832, but rather, was a necessary complement thereto. 24 It bears stressing that a judgment is not confined to what appears upon the face of the decision, but also those necessarily included therein or necessary thereto. 25 With regard to the improvements made on the mortgaged property, we confirm the Court of Appeals' characterization of petitioner as a possessor in bad faith. Based on the factual findings of the appellate court, it is evident that petitioner knew from the very beginning that there was really no sale and that he held respondent's property as mere security for the payment of the loan obligation. Therefore, petitioner may claim reimbursement only for necessary expenses; however, he is not entitled to reimbursement for any useful expenses 26 which he may have incurred. 27 Finally, as correctly pointed out by the Court of Appeals, this case should be remanded to the Regional Trial Court of Davao City for a determination of the total amount of the loan, the necessary expenses incurred by petitioner, and the period within which respondent must pay such amount. 28 However, no interest is due on the loan since there has been no express stipulation in writing. 29 WHEREFORE, the assailed Decision of the Court of Appeals dated October 5, 1998 and its Resolution dated March 5, 1999 are hereby AFFIRMED. Respondent is entitled to delivery of possession of the subject property. This case is hereby REMANDED to the trial court for determination of the amount of the loan, the necessary expenses incurred by petitioner and the period within which the respondent must pay the same. SO ORDERED. G.R. No. 112160 February 28, 2000

OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner, vs. COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES and VICENTE MAOSCA,respondents. PURISIMA, J.: At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to review and set aside the Decision1 of the Court of Appeals in CA-G.R. CV No. 25242, which reversed the Decision2 of Branch 59 of the Regional Trial Court of Makati City in Civil Case No. M-028; the dispositive portion of which reads: WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE and a new one is hereby entered DISMISSING the complaint of the spouses Osmundo and Angelina Canlas. On the counterclaim of defendant Asian Savings Bank, the plaintiffs Canlas spouses are hereby ordered to pay the defendant Asian Savings Bank the amount of P50,000.00 as moral and exemplary damages, plus P15,000.00 as and for attorney's fees. With costs against appellees. SO ORDERED.3 The facts that matter: Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private respondent, Vicente Maosca, decided to venture in business and to raise the capital needed therefor. The former then executed a Special Power of Attorney authorizing the latter to mortgage two parcels of land situated in San Dionisio, (BF Homes) Paranaque, Metro Manila, each lot with semi-concrete residential house existing thereon, and respectively covered by Transfer Certificate of Title No. 54366 in his (Osmundo's) name and Transfer Certificate of Title No. S-78498 in the name of his wife Angelina Canlas. Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente Maosca, for and in consideration of P850,000.00, P500,000.00 of which payable within one week, and the balance of P350,000.00 to serve as his (Osmundo's) investment in the business. Thus, Osmundo Canlas delivered to Vicente Maosca the transfer certificates of title of the parcels of land involved. Vicente Maosca, as his part of the transaction, issued two postdated checks in favor of Osmundo Canlas in the amounts of P40,000.00 and P460,000.00, respectively, but it turned out that the check covering the bigger amount was not sufficiently funded.4

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On September 3, 1982, Vicente Maosca was able to mortgage the same parcels of land for P100,000.00 to a certain Attorney Manuel Magno, with the help of impostors who misrepresented themselves as the spouses, Osmundo Canlas and Angelina Canlas.5 On September 29, 1982, private respondent Vicente Maosca was granted a loan by the respondent Asian Savings Bank (ASB) in the amount of P500,000.00, with the use of subject parcels of land as security, and with the involvement of the same impostors who again introduced themselves as the Canlas spouses.6 When the loan it extended was not paid, respondent bank extrajudicially foreclosed the mortgage. On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent bank that the execution of subject mortgage over the two parcels of land in question was without their (Canlas spouses) authority, and request that steps be taken to annul and/or revoke the questioned mortgage. On January 18, 1983, petitioner Osmundo Canlas also wrote the office of Sheriff Maximo O. Contreras, asking that the auction sale scheduled on February 3, 1983 be cancelled or held in abeyance. But respondents Maximo C. Contreras and Asian Savings Bank refused to heed petitioner Canlas' stance and proceeded with the scheduled auction sale.7 Consequently, on February 3, 1983 the herein petitioners instituted the present case for annulment of deed of real estate mortgage with prayer for the issuance of a writ of preliminary injunction; and on May 23, 1983, the trial court issued an Order restraining the respondent sheriff from issuing the corresponding Certificate of Sheriff's Sale. 8 For failure to file his answer, despite several motions for extension of time for the filing thereof, Vicente Maosca was declared in default.9 On June 1, 1989, the lower court a quo came out with a decision annulling subject deed of mortgage and disposing, thus: Premises considered, judgment is hereby rendered as follows.1wphi1.nt 1. Declaring the deed of real estate mortgage (Exhibit "L") involving the properties of the plaintiffs as null and void; 2. Declaring the public auction sale conducted by the defendant Sheriff, involving the same properties as illegal and without binding effect; 3. Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of P20,000.00 representing attorney's fees; 4. On defendant ASB's crossclaim: ordering the cross-defendant Vicente Maosca to pay the defendant ASB the sum of P350,000.00, representing the amount which he received as proceeds of the loan secured by the void mortgage, plus interest at the

legal rate, starting February 3, 1983, the date when the original complaint was filed, until the amount is fully paid; 5. With costs against the defendants. SO ORDERED.10 From such Decision below, Asian Savings Bank appealed to the Court of Appeals, which handed down the assailed judgment of reversal, dated September 30, 1983, in CA-G.R. CV No. 25242. Dissatisfied therewith, the petitioners found their way to this Court via the present Petition; theorizing that: I RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE MORTGAGE OF THE PROPERTIES SUBJECT OF THIS CASE WAS VALID. II RESPONDENT COURT OF APPEALS ERRED IN HIOLDING THAT PETITIONERS ARE NOT ENTITLED TO RELIEF BECAUSE THEY WERE NEGLIGENT AND THEREFORE MUST BEAR THE LOSS. III RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT ASB EXERCISED DUE DILIGENCE IN GRANTING THE LOAN APPLICATION OF RESPONDENT. IV RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT ASB DID NOT ACT WITH BAD FAITH IN PROCEEDING WITH THE FORECLOSURE SALE OF THE PROPERTIES. V RESPONDENT COURT OF APPEALS ERRED IN AWARDING RESPONDENT ASB MORAL DAMAGES.11 The Petition is impressed with merit.

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Art. 1173 of the Civil Code, provides: Art. 1173. The fault or negligence of the obligor consist in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104) The degree of diligence required of banks is more than that of a good father of a family;12 in keeping with their responsibility to exercise the necessary care and prudence in dealing even on a registered or titled property. The business of a bank is affected with public interest, holding in trust the money of the depositors, which bank deposits the bank should guard against loss due to negligence or bad faith, by reason of which the bank would be denied the protective mantle of the land registration law, accorded only to purchasers or mortgagees for value and in good faith.13 In the case under consideration, from the evidence on hand it can be gleaned unerringly that respondent bank did not observe the requisite diligence in ascertaining or verifying the real identity of the couple who introduced themselves as the spouses Osmundo Canlas and Angelina Canlas. It is worthy to note that not even a single identification card was exhibited by the said impostors to show their true identity; and yet, the bank acted on their representations simply on the basis of the residence certificates bearing signatures which tended to match the signatures affixed on a previous deed of mortgage to a certain Atty. Magno, covering the same parcels of land in question. Felizado Mangubat, Assistant Vice President of Asian Savings Bank, thus testified inter alia: xxx xxx xxx

A: That is just the basis of accepting the signature, because at that time the loan have been approved already on the basis of the financial statement of the client the Bank Statement. Wneh (sic) it was approved we have to base it on the Financial statement of the client, the signatures were accepted only for the purpose of signing the mortgage not for the approval, we don't (sic) approve loans on the signature. ATTY. CLAROS: Would you agree that as part of ascertaining the identify of the parties particularly the mortgage, you don't consider also the signature, the Residence Certificate, the particular address of the parties involved. A: Q: I think the question defers (sic) from what you asked a while ago. Among others?

A: We have to accept the signature on the basis of the other signatures given to us it being a public instrument. ATTY. CARLOS: You mean to say the criteria of ascertaining the identity of the mortgagor does not depend so much on the signature on the residence certificate they have presented. A: We have to accept that. xxx xxx xxx

Q: According to you, the basis for your having recommended for the approval of MANASCO's (sic) loan particularly that one involving the property of plaintiff in this case, the spouses OSMUNDO CANLAS and ANGELINA CANLAS, the basis for such approval was that according to you all the signatures and other things taken into account matches with that of the document previously executed by the spouses CANLAS? Q: That is the only basis for accepting the signature on the mortgage, the basis for the recommendation of the approval of the loan are the financial statement of MAOSCA? A: Yes; among others the signature and TAX Account Number, Residence Certificate appearing on the previous loan executed by the spouses CANLAS, I am referring to EXHIBIT 5, mortgage to ATTY. MAGNO, those were made the basis.

A: We accepted the signature on the basis of the mortgage in favor of ATTY. MAGNO duly notarized which I have been reiterrting (sic) entitled to full faith considering that it is a public instrument. ATTY. CARLOS: What other requirement did you take into account in ascertaining the identification of the parties particularly the mortgagor in this case. A: Q: Residence Certificate. Is that all, is that the only requirement?

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A: We requested for others but they could not produce, and because they presented to us the Residence Certificate which matches on the signature on the Residence Certificate in favor of Atty. Magno.14 Evidently, the efforts exerted by the bank to verify the identity of the couple posing as Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank to observe more than the diligence of a good father of a family. The negligence of respondent bank was magnified by the fact that the previous deed of mortgage (which was used as the basis for checking the genuineness of the signatures of the supposed Canlas spouses) did not bear the tax account number of the spouses,15 as well as the Community Tax Certificate of Angelina Canlas.16 But such fact notwithstanding, the bank did not require the impostors to submit additional proof of their true identity. Under the doctrine of last clear chance, which is applicable here, the respondent bank must suffer the resulting loss. In essence, the doctrine of last clear chance is to the effect that where both parties are negligent but the negligent act of one is appreciably later in point of time than that of the other, or where it is impossible to determine whose fault or negligence brought about the occurrence of the incident, the one who had the last clear opportunity to avoid the impending harm but failed to do so, is chargeable with the consequences arising therefrom. Stated differently, the rule is that the antecedent negligence of a person does not preclude recovery of damages caused by the supervening negligence of the latter, who had the last fair chance to prevent the impending harm by the exercise of due diligence. 17 Assuming that Osmundo Canlas was negligent in giving Vicente Maosca the opportunity to perpetrate the fraud, by entrusting to latter the owner's copy of the transfer certificates of title of subject parcels of land, it cannot be denied that the bank had the last clear chance to prevent the fraud, by the simple expedient of faithfully complying with the requirements for banks to ascertain the identity of the persons transacting with them. For not observing the degree of diligence required of banking institutions, whose business is impressed with public interest, respondent Asian Savings Bank has to bear the loss sued upon. In ruling for respondent bank, the Court of Appeals concluded that the petitioner Osmundo Canlas was a party to the fraudulent scheme of Maosca and therefore, estopped from impugning the validity of subject deed of mortgage; ratiocinating thus: xxx xxx xxx

When he was introduced as "Leonardo Rey" for the first time Osmundo should have corrected Maosca right away. But he did not. Instead, he even allowed Maosca to avail of his (Osmundo's) membership privileges at the Metropolitan Club when Maosca invited two officers of the defendant bank to a luncheon meeting which Osmundo also attended. And during that meeting, Osmundo did not say who he really is, but even let Maosca introduced him again as "Leonardo Rey", which all the more indicates that he connived with Maosca in deceiving the defendant bank. Finally after the loan was finally approved, Osmundo accompanied Maosca to the bank when the loan was released. At that time, a manger's check for P200,000.00 was issued in the name of Oscar Motorworks, which Osmundo admits he owns and operates. Collectively, the foregoing circumstances cannot but conjure to a single conclusion that Osmundo active participated in the loan application of defendant Asian Savings Bank, which culminated in his receiving a portion of the process thereof: 18 A meticulous and painstaking scrutiny of the Records on hand, reveals, however, that the findings arrived at by the Court of Appeals are barren of any sustainable basis. For instance, the execution of the deeds of mortgages constituted by Maosca on subject pieces of property of petitioners were made possible not by the Special Power of Attorney executed by Osmundo Canlas in favor of Maosca but through the use of impostors who misrepresented themselves as the spouses Angelina Canlas and Osmundo Canlas. It cannot be said therefore, that the petitioners authorized Vicente Maosca to constitute the mortgage on their parcels of land. What is more, Osmundo Canlas was introduced as "Leonardo Rey" by Vicente Maosca, only on the occasion of the luncheon meeting at the Metropolitan Club. 19 Thereat, the failure of Osmundo Canlas to rectify Maosca's misrepresentations could not be taken as a fraudulent act. As well explained by the former, he just did not want to embarrass Maosca, so that he waited for the end of the meeting to correct Maosca. 20 Then, too, Osmundo Canlas recounted that during the said luncheon meeting, they did not talk about the security or collateral for the loan of Maosca with ASB.21 So also, Mrs. Josefina Rojo, who was the Account Officer of Asian Savings Bank when Maosca applied for subject loan, corroborated the testimony of Osmundo Canlas, she testified: xxx xxx xxx

Thus, armed with the titles and the special power of attorney, Maosca went to the defendant bank and applied for a loan. And when Maosca came over to the bank to submit additional documents pertinent to his loan application, Osmundo Canlas was with him, together with a certain Rogelio Viray. At that time, Osmundo Canlas was introduced to the bank personnel as "Leonardo Rey".

QUESTION: Now could you please describe out the lunch conference at the Metro Club in Makati? ANSWER: Mr. Mangubat, Mr. Maosca and I did not discuss with respect to the loan application and discuss primarily his business.

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xxx QUESTION:

xxx

xxx

So, what is the main topic of your discussion during the meeting?

ANSWER: The main topic war then, about his business although, Mr. Leonardo Rey, who actually turned out as Mr. Canlas, supplier of Mr. Maosca. QUESTION: I see . . . other than the business of Mr. Maosca, were there any other topic discussed? ANSWER: QUESTION: ANSWER: YES.

Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on the property mortgaged;26 a mortgage, constituted by an impostor is void.27 Considering that it was established indubitably that the contract of mortgage sued upon was entered into and signed by impostors who misrepresented themselves as the spouses Osmundo Canlas and Angelina Canlas, the Court is of the ineluctible conclusion and finding that subject contract of mortgage is a complete nullity. WHEREFORE, the Petition is GRANTED and the Decision of the Court of Appeals, dated September 30, 1993, in CA-G.R. CV No. 25242 SET ASIDE. The Decision of Branch 59 of the Regional Trial Court of Makati City in Civil Case No. M-028 is hereby REINSTATED. No pronouncement as to costs. SO ORDERED.1

And what was the topic: G.R. No. L-13683 General Economy then. xxx xxx x x x22 PAZ SAMANILLA, petitioner-appellee, vs. CENEN A. CAJUCOM, ET AL., respondents-appellants. R. M. Ordiz de Guzman, L. P. de Guzman, Jr. and Lorenzo de Guzman, Sr. for appellee. Agustin C. Bagasao for appellants. REYES, J.B.L., J.: Appeal interposed by respondents Cenen A. Cajucom and Jose A. Cajucom from the order of the Court of First Instance of Nueva Ecija in Land Registration Case No. 210, G.L.R.O. Rec. No. N-6010, requiring them to surrender Original Certificate of Title No. O-966 within ten days either to the Register of Deeds or to the Court for the annotation of a mortgage executed by them in favor of petitioner Paz Samanilla. The case arose out of a petition presented by appellee Samanilla in said registration case alleging that respondents Cajucom had executed in her favor, on December 20, 1955, a real estate mortgage over their rights and participation on the parcel of land covered by Original Certificate of Title No. O-966 to secure a loan of P10,000.00; that sometime in February, 1956, respondents borrowed the title from her on the excuse that they needed it to segregate from the land the portion claimed by other persons; and that thereafter, petitioner asked for the return of the title so that she could register her mortgage, but respondents refused. Attached to the petition were the deed of mortgage and the affidavits of petitioner and a certain Antonio G. Javier, who allegedly was the one who borrowed the title from petitioner in behalf of respondents. Respondents opposed the petition, claiming that the mortgage in question was void ab initio for want of consideration, and that the issues should be litigated in an ordinary civil March 28, 1960

Verily, Osmundo Canlas was left unaware of the illicit plan of Maosca, explaining thus why he (Osmundo) did not bother to correct what Maosca misrepresented and to assert ownership over the two parcels of land in question. Not only that; while it is true that Osmundo Canlas was with Vicente Maosca when the latter submitted the documents needed for his loan application, and when the check of P200,000.00 was released, the former did not know that the collateral used by Maosca for the said loan were their (Canlas spouses') properties. Osmundo happened to be with Maosca at the time because he wanted to make sure that Maosca would make good his promise to pay the balance of the purchase price of the said lots out of the proceeds of the loan.23 The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not estop him from assailing the validity of the mortgage because the said amount was in payment of the parcels of land he sold to Maosca.24 What is decisively clear on record is that Maosca managed to keep Osmundo Canlas uninformed of his (Maosca's) intention to use the parcels of land of the Canlas spouses as security for the loan obtained from Asian Savings Bank. Since Vicente Maosca showed Osmundo Canlas several certificates of title of lots which, according to Maosca were the collaterals, Osmundo Canlas was confident that their (Canlases') parcels of land were not involved in the loan transactions with the Asian Savings Bank.25 Under the attendant facts and circumstances, Osmundo Canlas was undoubtedly negligent, which negligence made them (petitioners) undeserving of an award of attorney's fees.

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action. The opposition notwithstanding, the lower court entered an order on June 12, 1956 finding the petition well-taken and ordering respondents to surrender their title either to the Register of Deeds or to the Court. From this order, respondents appealed to the Court of Appeals, which forwarded the case to us for raising purely question of law. The appeal has no merit. Appellants' sole objection to the registration of the deed of mortgage is that the same was executed without any consideration. But there is a legal presumption of sufficient cause or consideration supporting a contract, even if such cause is not stated therein (Art. 1354, New Civil Code; Rule 123, sec. 69 [r], Rules of Court). This presumption appellants cannot overcome by a simple assertion of lack of consideration. Especially may not the presumption be so lightly set aside when the contract itself states that consideration was given, and the same has been reduced into a public instrument with all due formalities and solemnities as in this case. As held by this Court. Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a matter of right. By executing the mortgage the mortgagor is understood to have given his consent to its registration, and he cannot be permitted to revoke it unilaterally. The validity and fulfillment of contracts cannot be left to the will of one of the contracting parties (Article 1254 of the Civil Code)." (Gonzales vs. Basa, Jr., et al., 73 Phil., 704) To overcome the presumption of consideration, appellants must show the alleged lack of consideration of the mortgage by preponderance of evidence in a proper action. Appellants assert that they cannot be compelled to surrender their title for registration of the mortgage in question until they are given an opportunity to show its invalidity in an ordinary civil action, because registration is an essential element of a real estate mortgage and the surrender of their title would complete this requirement of registration. The argument is fallacious, for a mortgage, whether registered or not, is binding between the parties, registration being necessary only to make the same valid against third persons (Art. 2125, New Civil Code). In other words, registration only operates as a notice of the mortgage to others, but neither adds to its validity nor convert an invalid mortgage into a valid one between the parties. Appellants still have the right to show that the mortgage in question is invalid for lack of consideration in an ordinary action and there ask for the avoidance of the deed and the cancellation of its registration. But until such action is filed and decided, it would be too dangerous to the rights of the mortgagee to deny registration of her mortgage, because her rights can so easily be defeated by a transfer or conveyance of the mortgaged property to an innocent third person. In Gurbax Singh Pabla & Co., et al. vs. Reyes, et al., 92 Phil., 177; 48 Off. Gaz., 4365, this Court had the occasion to rule that "if the purpose of registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decidedafter, not before, registration. It must follow as a necessary consequence that registration must first be allowed and validity or effect litigated afterwards". Appellants cite the case of Government of the Philippine Islands vs. Payva, 44 Phil., 629. However, the appellee correctly points out that the same is inapplicable to this case

because the only question raised and decide therein was whether an order of the registration court requiring the holder of a duplicate certificate of title for the purpose of annotating an attachment, lien, or adverse claim under sec. 72 of Act 496 is appealable or not, and we held that it was, because it resolves important questions as to the respective rights of the parties. It should be remembered that the Land Registration Court may summarily pass upon the validity of adverse claims sought to be registered under sections 72 and 110 of the Land Registration Act, if all the parties agree to submit the precise question to the court (see Gurbax Singh Pabla Co. vs. Reyes, supra); and when it is thus submitted, the losing party may appeal the court's ruling, as held in the Payva case. But appellants herein, by opposing appellee's petition on the ground that their defense of invalidity o the mortgage sought to be registered is contentious and should be litigated in a separate action, precisely refused to submit said question to the Land Registration Court. The court, then, acted correctly in ordering the recording without passing upon the validity of the mortgage in question. The order appealed from is affirmed, without prejudice to appellants' right to bring a separate action to question the validity of the mortgage in question and ask for the cancellation of its registration. Costs against appellants. G.R. No. L-26371 September 30, 1969

MOBIL OIL PHILIPPINES, INC., plaintiff-appellant, vs. RUTH R. DIOCARES, ET AL., defendants-appellees. FERNANDO, J.: It may very well be, as noted by jurists of repute, that to stress the element of a promise as the basis of contracts is to acknowledge the influence of natural law. 1 Nonetheless, it does not admit of doubt that whether under the civil law or the common law, the existence of a contract is unthinkable without one's word being plighted. So the New Civil Code provides: "A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service." 2 So it is likewise under American law. Thus: "A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty." 3 The law may go further and require that certain formalities be executed. Thus, for a mortgage to be validly constituted, "it is indispensable, ..., that the document in which it appears be recorded in the Registry of Property." The same codal provision goes on: "If the instrument is not recorded, the mortgage is nevertheless binding between the parties." 4 The question before us in this appeal from a lower court decision, one we have to pass upon for the first time, is the effect, if any, to be given to a mortgage contract admittedly not registered, only the parties being involved in the suit. The lower court was of

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the opinion that while it "created a personal obligation [it] did not establish a real estate mortgage." 5 It did not decree foreclosure therefor. Plaintiff-appellant appealed. We view the matter differently and reverse the lower court. The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the lower court order of February 25, 1966, subject of this appeal. Thus: "In its complaint plaintiff alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T. Diocares entered into a contract of loan and real estate mortgage wherein the plaintiff extended to the said defendants a loan of P45,000.00; that said defendants also agreed to buy from the plaintiff on cash basis their petroleum requirements in an amount of not less than 50,000 liters per month; that the said defendants will pay to the plaintiff 9-1/2% per annum on the diminishing balance of the amount of their loan; that the defendants will repay the said loan in monthly installments of P950.88 for a period of five (5) years from February 9, 1965; that to secure the performance of the foregoing obligation they executed a first mortgage on two parcels of land covered by Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds of Bacolod City. The agreement further provided that in case of failure of the defendants to pay any of the installments due and purchase their petroleum requirements in the minimum amount of 50,000 liters per month from the plaintiff, the latter has the right to foreclose the mortgage or recover the payment of the entire obligation or its remaining unpaid balance; that in case of foreclosure the plaintiff shall be entitled to 12% of the indebtedness as damages and attorney's fees. A copy of the loan and real estate mortgage contract executed between the plaintiff and the defendants is attached to the complaint and made a part thereof. The complaint further alleges that the defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance of P43,098.24, excluding interest, on their indebtedness. The said defendants also failed to buy on cash basis the minimum amount of petroleum which they agreed to purchase from the plaintiff. The plaintiff, therefore, prayed that the defendants be ordered to pay the amount of P43,098.24, with interest at 9-1/2% per annum from the date it fell due, and in default of such payment that the mortgaged properties be sold and the proceeds applied to the payment of defendants' obligation." 6 Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their indebtedness as set forth above, denying merely the alleged refusal to pay, the truth, according to them, being that they sought for an extension of time to do so, inasmuch as they were not in a position to comply with their obligation. They further set forth that they did request plaintiff to furnish them with the statement of accounts with the view of paying the same on installment basis, which request was, however, turned down by the plaintiff. Then came a motion from the plaintiff for a judgment on the pleadings, which motion was favorably acted on by the lower court. As was stated in the order appealed from: "The answer of the defendants dated October 21, 1965 did not raise any issue. On the contrary, said answer admitted the material allegations of the complaint. The plaintiff is entitled to a judgment on the pleadings." 7 As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads thus: "The Court cannot, however, order the foreclosure of the mortgage of

properties, as prayed for, because there is no allegation in the complaint nor does it appear from the copy of the loan and real estate mortgage contract attached to the complaint that the mortgage had been registered. The said loan agreement although binding among the parties merely created a personal obligation but did not establish a real estate mortgage. The document should have been registered. (Art. 2125, Civil Code of the Phil.)" 8 The dispositive portion is thus limited to ordering defendants "to pay the plaintiff the account of P43,098.24, with interest at the rate of 9-1/2% per annum from the date of the filing of the complaint until fully paid, plus the amount of P2,000.00 as attorneys' fees, and the costs of the suit." 9 Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no real estate mortgage was established and its consequent refusal to order the foreclosure of the mortgaged properties. As set forth at the outset, we find the appeal meritorious. The lower court should not have held that no real estate mortgage was established and should have ordered its foreclosure. The lower court predicated its inability to order the foreclosure in view of the categorical nature of the opening sentence of the governing article 10 that it is indispensable, "in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property." Note that it ignored the succeeding sentence: "If the instrument is not recorded, the mortgage is nevertheless binding between the parties." Its conclusion, however, is that what was thus created was merely "a personal obligation but did not establish a real estate mortgage." Such a conclusion does not commend itself for approval. The codal provision is clear and explicit. Even if the instrument were not recorded, "the mortgage is nevertheless binding between the parties." The law cannot be any clearer. Effect must be given to it as written. The mortgage subsists; the parties are bound. As between them, the mere fact that there is as yet no compliance with the requirement that it be recorded cannot be a bar to foreclosure.1awphl.nt A contrary conclusion would manifest less than full respect to what the codal provision ordains. The liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did, that no foreclosure would lie under the circumstances would be to render the provision in question nugatory. That we are not allowed to do. What the law requires in unambiguous language must be lived up to. No interpretation is needed, only its application, the undisputed facts calling for it. 11 Moreover to rule as the lower court did would be to show less than fealty to the purpose that animated the legislators in giving expression to their will that the failure of the instrument to be recorded does not result in the mortgage being any the less "binding between the parties." In the language of the Report of the Code Commission: "In article [2125] an additional provision is made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties." 12 We are not free to adopt then an interpretation, even assuming that the codal provision lacks the forthrightness and clarity

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that this particular norm does and, therefore, requires construction, that would frustrate or nullify such legislative objective. Nor is the reason difficult to discern why such an exception should be made to the rule that is indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands, and justice is served. There is thus full acknowledgment of the binding effect of a promise, which must be lived up to, otherwise the freedom a contracting party is supposed to possess becomes meaningless. It could be said of course that to allow foreclosure in the absence of such a formality is to offend against the demands of jural symmetry. What is "indispensable" may be dispense with. Such an objection is far from fatal. This would not be the first time when logic yields to what is fair and what is just. To such an overmastering requirement, law is not immune. WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that in default of the payment of the above amount of P43,028.94 with interests at the rate of 9-1/2% per annum from the date of the filing of the complaint, that the mortgage be foreclosed with the properties subject thereof being sold and the proceeds of the sale applied to the payment of the amounts due the plaintiff in accordance with law. With costs against defendants-appellees. [G.R. No. 147788. March 19, 2002]

The Facts

The factual antecedents of the case are summarized by the Court of Appeals thus: Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a 339,335 square meter or 33.9335 hectare parcel of agricultural land together with improvements located in Barangay Pulang Yantoc, Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant Norma Sulit, after being introduced by Candelaria Sanchez to Fr. Cruz, offered to purchase the land. Plaintiffs asking price for the land was P700,000.00, but Norma only had P25,000.00 which Fr. Cruz accepted as earnest money with the agreement that titles would be transferred to Norma upon payment of the balance of P675,000.00. Norma failed to pay the balance and proposed [to] Fr. Cruz to transfer the property to her but the latter refused, obviously because he had no reason to trust Norma. But capitalizing on the close relationship of Candelaria Sanchez with the plaintiffs, Norma succeeded in having the plaintiffs execute a document of sale of the land in favor of Candelaria who would then obtain a bank loan in her name using the plaintiffs land as collateral. On the same day, Candelaria executed another Deed of Absolute Sale over the land in favor of Norma. In both documents, it appeared that the consideration for the sale of the land was only P150,000.00. Pursuant to the sale, Norma was able to effect the transfer of the title to the land in her name under TCT No. T-248262. Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the amount of P655,000.00 representing the balance of the actual price of the land. In a Special Agreement dated September 1, 1978, Norma assumed Candelarias obligation, stipulating to pay the plaintiffs the said amount within six months on pain of fine or penalty in case of non-fulfillment. Unknown to the plaintiffs, Norma managed to obtain a loan from Bancom in the amount of P569,000.00 secured by a mortgage over the land now titled in her name. On account of Normas failure to pay the amount stipulated in the Special Agreement and her subsequent disappearance from her usual address, plaintiffs were prompted to file the herein complaint for the reconveyance of the land. Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared in default. On May 20, 1980, Bancom filed a motion for leave to intervene which was granted by the trial court. In its Answer in Intervention, Bancom claimed priority as mortgagee in good faith; and that its contract of mortgage with Norma had been executed before the annotation of plaintiffs interest in the title. Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was foreclosed. At the subsequent auction sale, Bancom was declared the highest bidder and was issued the corresponding certificate of sale over the land. On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It ruled that the contract of sale between plaintiffs and Candelaria was absolutely

EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners, vs. BANCOM FINANCE CORPORATION (NOW UNION BANK OF THE PHILIPPINES),respondent. DECISION PANGANIBAN, J.: An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The purported buyer, not being the owner, cannot validly mortgage the subject property. Consequently, neither does the buyer at the foreclosure sale acquire any title thereto. Statement of the Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 30, 2001 Decision[1] of the Court of Appeals (CA) in CA-GR No. 58346. The decretal portion of the challenged Decision reads as follows: WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A new one is rendered declaring BANCOMs right to the subject land as a purchaser in good faith and for value, and ordering the cancellation of the Notice of Lis Pendens on TCT No. 248262-Bulacan. Without pronouncement as to costs.[2]

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simulated. Consequently, the second contract of sale, that is, between Candelaria and Norma, produced no legal effect. As for Bancom, the trial court held that the Bank was not a mortgagee in good faith thus it can not claim priority of rights over plaintiffs property.[3] Ruling of the Court of Appeals

IV Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank possesses a preferential right over petitioners on the subject land as a mortgagee in good faith.[6] The above issues can be summed up into two: (1) the validity of the Deeds of Sale and Mortgage and (2) the good faith of the mortgagee. This Courts Ruling

In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not simulated. Thus, the Contract of Mortgage between Sulit and respondent was likewise valid. Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because they did not seek to annul the same but instead executed a special agreement to enforce payment of the balance of the price in the amount of P665,000.00.[4] Furthermore, it upheld respondent as a mortgagee in good faith; ergo, it had a preferential right to the land. Hence, this Petition.[5] Issues

The Petition is meritorious. First Issue: Validity of the Sale and the Mortgage

In their Memorandum, petitioners raise the following issues for this Courts consideration: I Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners intended to enter into a sale of the property in question and that the declarations of Petitioner Fr. Edilberto Cruz in Court belied the court a quos finding that the Deeds of Sale in question were absolute simulations. II Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank was a mortgagee in good faith, despite the fact that respondent Bancom was in truth and in fact a mortgagee in bad faith over the subject property. III Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the title [to] the property did not disclose any irregularity that would arouse suspicion by respondent bank as to the condition of the subject land despite the fact that questions and circumstances abound which would render respondent bank not a mortgagee in good faith, and that the case of Sunshine Finance Investment Corporation vs. Intermediate Appellate Court applies to the instant case.

Petitioners claim that the Deed of Sale[7] they executed with Sanchez, as well as the Deed of Sale[8] executed between Sanchez and Sulit, was absolutely simulated; hence, null and void. On the other hand, echoing the appellate court, respondent contends that petitioners intended to be bound by those Deeds, and that the real estate mortgage over the subject property was valid. As a general rule, when the terms of a contract are clear and unambiguous about the intention of the contracting parties, the literal meaning of its stipulations shall control. But if the words appear to contravene the evident intention of the parties, the latter shall prevail over the former.[9] The real nature of a contract may be determined from the express terms of the agreement, as well as from the contemporaneous and subsequent acts of the parties thereto.[10] On the other hand, simulation takes place when the parties do not really want the contract they have executed to produce the legal effects expressed by its wordings.[11] Simulation or vices of declaration may be either absolute or relative. Article 1345 of the Civil Code distinguishes an absolute simulation from a relative one while Article 1346 discusses their effects, as follows: Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter when the parties conceal their true agreement. Art. 1346. An absolutely simulated 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 order or public policy binds the parties to their agreement. In Rongavilla v. Court of Appeals,[12] we held that a deed of sale, in which the stated consideration had not in fact been paid, was a false contract; that is void ab initio. Furthermore, Ocejo v. Flores,[13] ruled that a contract of purchase and sale is null

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and void and produces no effect whatsoever where it appears that [the] same is without cause or consideration which should have been the motive thereof, or the purchase price which appears thereon as paid but which in fact has never been paid by the purchaser to the vendor. Although the Deed of Sale between petitioners and Sanchez stipulated a consideration of P150,000, there was actually no exchange of money between them. Petitioner Edilberto Cruz narrated how the transaction came about: ATTY. CABRERA: Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma Sulit with whom you are transacting? Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring the title from us, they can borrow money from the Bank. So it is a way of acquiring the title from us, sir.
[14]

Q And so you transferred the property in favor of Norma Sulit? A Q Yes, sir. I am showing to you this document which has already been marked when the representative of the Register of Deeds produced the pertinent documents before the court as Exhibit C, is this that document that you executed transferring the property in the name of Norma Sulit? Yes, sir, this is it. There is a consideration of P150,000.00 stated in this Exhibit C, were you paid by Norma Sulit the amount of P150,000.00 appearing in this Exhibit C?

A Q

ATTY BUYCO: The question is leading, Your Honor. COURT: Witness may answer. A No amount was given, sir. We prepared this document to transfer the title [to] her name only.[17]

Q. This deed of sale marked Exhibit D which you just identified, stipulates a consideration of P150,000.00. The question, Father, is - did you receive the P150,000.00? ATTY. AGRAVANTE Objection, your Honor, the document is the best evidence. ATTY. CABRERA This is an action to annul a certain contract. COURT He received the consideration stated in the contract. The witness may answer. WITNESS A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.

Respondent never offered any evidence to refute the foregoing testimonies. [18] On the contrary, it even admitted that the stipulated consideration of P150,000 in the two Deeds of Sale had never been actually paid by Sanchez to petitioners;[19] neither by Sulit to the former.[20] Another telling sign of simulation was the complete absence of any attempt on the part of the buyers -- Sanchez and Sulit -- to assert their alleged rights of ownership over the subject property.[21] This fact was confirmed by respondent which, however, tried to justify the non-occupancy of the land by Sanchez and Sulit. Supposedly, because the two failed to pay the purchase price of the land, they could not force petitioners to vacate it. [22] The records clearly show that the two Deeds of Absolute Sale were executed over the same property on the same date, June 21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged by Sulit to Federal Insurance Company for P500,000. The mortgage was cancelled when she again mortgaged the property to respondent for P569,000 on August 22, 1979. It is also undisputed that petitioners did not receive any portion of the proceeds of the loan. Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral to secure a loan from a bank.[23] Being merely a subterfuge, these agreements could not have been the source of any consideration for the supposed sales.[24] Indeed, the execution of the two documents on the same day sustains the position of petitioners that the Contracts of Sale were absolutely simulated, and that they received no consideration therefor.[25]

ATTY. CABRERA Q If you did not receive this P150,000.00 stated in this deed of sale that you and your brother executed from Candelaria Sanchez, did you receive the said amount from Norma Sulit or anybody else for that matter? Not a single centavo, sir.[15]

His claim was corroborated by Sanchez. She likewise said that the Deed of Sale[16] she executed with Sulit, for which she did not receive any consideration was only for the purpose of placing the title to the property in the latters name. She testified as follows:

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The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of simulation that rendered the whole transaction void and without force and effect, pursuant to Article 1409[26] of the Civil Code.[27] The fact that she was able to secure a Certificate of Title to the subject property in her name did not vest her with ownership over it.[28] A simulated deed of sale has no legal effect; consequently any transfer certificate of title (TCT) issued in consequence thereof should be cancelled. [29] A simulated contract is not a recognized mode of acquiring ownership.[30] Second Issue: Good Faith of Mortgagee

This rule is, however, subject to the right of a person deprived of land through fraud to bring an action for reconveyance, provided the rights of innocent purchasers for value and in good faith are not prejudiced. An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 38 of the same Act, [32] to include an innocent lessee, mortgagee or any other encumbrancer for value.[33] Respondent claims that, being an innocent mortgagee, it should not be required to conduct an exhaustive investigation on the history of the mortgagors title before it could extend a loan.[34] Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands.[35] A banking institution is expected to exercise due diligence before entering into a mortgage contract.[36] The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.[37] In Rural Bank of Compostela v. CA,[38] we held that a bank that failed to observe due diligence was not a mortgagee in good faith. In the words of the ponencia: x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks. Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest, keeping in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence which amounts to lack of good faith by which they would be denied the protective mantle of the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees of the same character and description. (Citations omitted) Recently, in Adriano v. Pangilinan,[39] we said that the due diligence required of banks extended even to persons regularly engaged in the business of lending money secured by real estate mortgages. The evidence before us indicates that respondent bank was not a mortgagee in good faith.[40] First, at the time the property was mortgaged to it, it failed to conduct an ocular inspection.[41] Judicial notice is taken of the standard practice for banks before they approve a loan: to send representatives to the premises of the land offered as collateral and to investigate the ownership thereof.[42] As correctly observed by the RTC, respondent, before constituting the mortgage over the subject property, should have taken into consideration the following questions: 1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978?

Petitioners argue that respondent was not a mortgagee in good faith because, at the time it registered the real estate mortgage over the subject property, their adverse claim and notice of lis pendens had already been annotated on the TCT (on October 30, 1979 and December 10, 1979, respectively). On the other hand, respondent maintains that petitioners were the ones in bad faith, because they already had knowledge of the existence of the mortgage over the property when they caused the annotation of their adverse claim and notice oflis pendens. As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate of title and is no longer required to look behind the certificate in order to determine the actual owner.[31] To do so would be contrary to the evident purpose of Section 39 of Act 496 which we quote hereunder: Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the same free of all encumbrances except those noted on said certificate, and any of the following encumbrances which may be subsisting, namely: First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or of the Philippine Islands which the statutes of the Philippine Islands cannot require to appear of record in the Registry. Second. Taxes within two years after the same became due and payable. Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof, where the certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral thereof, have been determined. But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to pass with the land until cut off or extinguished by the registration of the servient estate, or in any other manner.

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2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the same date, June 21, 1978 when she supposedly acquired it from the plaintiffs? 3) Being agricultural land, didnt it occur to the intervenors that there would be tenants to be compensated or who might pose as obstacles to the mortgagees exercise of acts of dominion? 4) In an area as big as that property, [why] did they not verify if there were squatters? 5) What benefits or prospects thereof could the ultimate owner expect out of the property? Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could have discovered that possession of the land was neither with Candelaria nor with Norma.[43] Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in the title of Sulit and to examine the condition of the property she sought to mortgage.[44] It should not have simply relied on the face of the Certificate of Title to the property, as its ancillary function of investing funds required a greater degree of diligence.[45]Considering the substantial loan involved at the time, it should have exercised more caution.[46] Moreover, the subject property, being situated in Bulacan, could have been easily and conveniently inspected by respondent. A person who deliberately ignores a significant fact that would create suspicion in an otherwise reasonable person is not an innocent purchaser for value.[47] Second, respondent was already aware that there was an adverse claim and notice of lis pendens annotated on the Certificate of Title when it registered the mortgage on March 14, 1980. Unless duly registered, a mortgage does not affect third parties like herein petitioners, as provided under Section 51 of PD NO. 1529,[48] which we reproduce hereunder: SEC. 51. Conveyance and other dealings by registered owner. - An owner of registered land may convey, mortgage, lease, charge or otherwise deal with the same in accordance with existing laws. He may use such forms of deeds, mortgages, leases or other voluntary instruments [as] are sufficient in law. But no deed, mortgage, lease, or other voluntary instrument except a will, purporting to convey or affect registered land, shall take effect as a conveyance or bind the land, but shall operate only as a contract between the parties and as evidence of authority to the clerk or register of deeds to make registration. The act of registration shall be the operative act to convey and affect the land, and in all cases under this Act the registration shall be made in the office of the register of deeds for the province or city, where the land lies.

True, registration is not the operative act for a mortgage to be binding between the parties. But to third persons, it is indispensible.[49] In the present case, the adverse claim and the notice of lis pendens were annotated on the title on October 30, 1979 and December 10, 1979, respectively; the real estate mortgage over the subject property was registered by respondent only on March 14, 1980. Settled in this jurisdiction is the doctrine that a prior registration of a lien creates a preference. [50] Even a subsequent registration of the prior mortgage will not diminish this preference, which retroacts to the date of the annotation of the notice of lis pendens and the adverse claim.[51] Thus, respondents failure to register the real estate mortgage[52] prior to these annotations, resulted in the mortgage being binding only between it and the mortgagor, Sulit. Petitioners, being third parties to the mortgage, were not bound by it.[53] Contrary to respondents claim that petitioners were in bad faith because they already had knowledge of the existence of the mortgage in favor of respondent when they caused the aforesaid annotations, petitioner Edilberto Cruz said that they only knew of this mortgage when respondent intervened in the RTC proceedings.[54] On the question of who has a preferential right over the property, the long-standing rule, as provided by Article 2085[55] of the Civil Code,[56] is that only the absolute owner of the property can constitute a valid mortgage on it. In case of foreclosure, a sale would result in the transmission only of whatever rights the seller had over of the thing sold. [57] In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void.[58] Thus, they did not convey any rights that could ripen into valid titles.[59] Necessarily, the subsequent real estate mortgage constituted by Sulit in favor of respondent was also null and void, because the former was not the owner thereof. There being no valid real estate mortgage, there could also be no valid foreclosure or valid auction sale, either. At bottom, respondent cannot be considered either as a mortgagee or as a purchaser in good faith. This being so, petitioners would be in the same position as they were before they executed the simulated Deed of Sale in favor of Sanchez. They are still the owners of the property.[60] WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The Decision of the RTC of Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No costs. SO ORDERED. G.R. No. 98334 May 8, 1992 MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY SAVINGS BANK (formerly Cebu City Savings and Loan Association, Inc.) and TEOTIMO ABELLANA, petitioners, vs. COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO, respondents.

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REGALADO, J.: The core issue in this case is whether or not a mortgagor, whose property has been extrajudicially foreclosed and sold at the corresponding foreclosure sale, may validly execute a mortgage contract over the same property in favor of a third party during the period of redemption. The present appeal by certiorari assails the decision of respondent Court of Appeals in CA-G.R. CV No. 12678 where it answered the question posed by the foregoing issue in the negative and modified the decision 2 of the then Court of First Instance of Cebu in Civil Case No. R-18616 wherein the validity of said subsequent mortgage was assumed and the case was otherwise disposed of on other grounds. The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found by respondent Court of Appeals, are as follows: On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over lot 4731 of the Cebu City Cadastre and embraced under TCT No. 14272 from Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the previous mortgage in favor of Cebu City Development Bank, went to Teotimo Abellana, president of defendant Association, to obtain a loan of P30,000.00. Prior thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan application for Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered as security for the Thirty Thousand (P30,000.00) Pesos loan from defendant association. Subsequently, they executed a promissory note in favor of defendant association. Both documents indicated that the principal obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year with interest at twelve (12%) percent per annum. When the loan became due and demandable without plaintiff paying the same, defendant association caused the extrajudicial foreclosure of the mortgage on March 16, 1976. After the posting and publication requirements were complied with, the land was sold at public auction on April 19, 1976 to defendant association being the highest bidder. The certificate of sale was issued on April 20, 1976 and registered on May 10, 1976 with the Register of Deeds of Cebu. On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT No. 14272 was cancelled and in lieu thereof TCT No. 68041 was issued in the name of defendant association. 3 xxx xxx xxx On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the court a quo for the annulment of the sale at public auction conducted on April 19, 1976, as well as the corresponding certificate of sale issued pursuant thereto.
1

In their complaint, private respondents, as plaintiffs therein, assailed the validity of the extrajudicial foreclosure sale of their property, claiming that the same was held in violation of Act No. 3135, as amended, and prayed, inter alia, for the cancellation of Transfer Certificate of Title No. 68041 issued in favor of therein defendant City Savings and Loan Association, Inc., now known as City Savings Bank and one of the petitioners herein. In its answer, the defendant association therein denied the material allegations of the complaint and averred, among others, that the present private respondent spouses may still avail of their right of redemption over the land in question. On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the validity of the loan and the real estate mortgage, but annulling the extrajudicial foreclosure sale inasmuch as the same failed to comply with the notice requirements in Act No. 3135, as amended, under the following dispositive part: WHEREFORE, the foregoing premises considered and upon the view taken by the Court of this case, judgment is hereby rendered, as follows: 1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No. 4731 of the Cadastral Survey of Cebu; 2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry of Deeds of the City of Cebu in the name of defendant Cebu City Savings and Loan Association, Inc. the corresponding issuance of a new transfer certificate to contain all the annotations made in TCT No. 14272 of the plaintiffs Pascuala Sabellano, married to Andres Dolino; 3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and Loan Association, Inc. the unpaid balance of the loan, plus interest; and reimbursing said defendant the value of any necessary and useful expenditures on the property after deducting any income derived by said defendant from the property. For this purpose, defendant Association is given 15 days from receipt hereof within which to submit its statement of the amount due it from the plaintiffs Dolino, with notice to them. The payment to be made by the plaintiffs shall be within ninety (90) days from their receipt of the order approving the amount due the defendant Cebu City Savings and Loan Association, Inc. No award of damages or costs to either party. SO ORDERED. 4 Not satisfied therewith, herein private respondents interposed a partial appeal to respondent court with respect to the second and third paragraphs of the aforequoted

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decretal portion, contending that the lower court erred in (1) declaring that the mortgage executed by the therein plaintiff spouses Dolino is valid; (2) permitting therein Cebu City Savings and Loan Association, Inc. to collect interest after the same foreclosure proceedings and auction sale which are null and void from the beginning; (3) not ordering the forfeiture of the capital or balance of the loan with usurious interest; and (4) not sentencing therein defendant to pay damages and attorney's fees to plaintiffs. 5 On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the decision of the lower court, with this adjudication: WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby MODIFIED declaring as void and ineffective the real estate mortgage executed by plaintiffs in favor of defendant association. With this modification, the decision is AFFIRMED in other respects. 6 Herein petitioners then filed a motion for reconsideration which was denied by respondent court in its resolution dated March 5, 1991, hence the present petition which, in synthesis, postulates that respondent court erred in declaring the real estate mortgage void, and also impugns the judgment of the trial court declaring ineffective the extrajudicial foreclosure of said mortgage and ordering the cancellation of Transfer Certificate of Title No. 68041 issued in favor of the predecessor of petitioner bank. 7 The first submission assailing the judgment of respondent Court of Appeals is meritorious. Said respondent court declared the real estate mortgage in question null and void for the reason that the mortgagor spouses, at the time when the said mortgage was executed, were no longer the owners of the lot, having supposedly lost the same when the lot was sold to a purchaser in the foreclosure sale under the prior mortgage. This holding cannot be sustained. Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint nor was the same raised during the trial, hence that issue should not have been taken cognizance of by the Court of Appeals. An issue which was neither averred in the complaint nor ventilated during the trial in the court below cannot be raised for the first time on appeal as it would be offensive to the basic rule of fair play, justice and due process. 8 Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its modificatory judgment on its ratiocination of that issue, we are inclined to liberalize the rule so that we can in turn pass upon the correctness of its conclusion. We may consider such procedure as analogous to the rule that an unassigned error closely related to an error properly assigned, or upon which the determination of the question properly assigned is dependent, may be considered by an appellate court. 9 We adopt this approach since, after all, both lower courts agreed upon the invalidity of the extrajudicial foreclosure but differed only on the matter of the validity of the real estate mortgage upon which the extrajudicial foreclosure was based.

In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter dictum laid down in the course of the disquisition in Dizon vs. Gaborro, et al. which we shall analyze. 10 For, as explicitly stated therein by the Court, "(t)he 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 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 . . . ." Said documents were executed by the parties and the payments were made by Gaborro for the debt of Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said creditor bank. The trial court held that the true agreement between the parties therein was that Gaborro would assume and pay the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro was given the possession and enjoyment of the properties in question until Dizon shall have reimbursed him for the amount paid to the creditor banks. Accordingly, the trial court ordered the reformation of the documents to the extent indicated and such particular relief was affirmed by the Court of Appeals. This Court held that the agreement between the parties is one of those innominate contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and to do" certain rights and obligations, but partaking of the nature of antichresis. Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed but with the following pronouncements: 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. xxx xxx xxx 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. Rosenberg's, Inc., 32 Phil. 72; Pabico vs. Pauco, 43

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Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-12735, Oct. 30, 1959). xxx xxx xxx 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 has only an inchoate right to 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 for redemption. (Riosa vs. Verzosa, 26 Phil. 86, 89; Gonzales vs. 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 same during the period of redemption. And these are the only rights that Dizon could legally transfer, cede and conveyunto 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 latter's 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. (Emphasis ours.) It was apparently the second reason stated by the Court in said case which was relied upon by respondent court in the present case on which to premise its conclusion. Yet, as demonstrated by the relevant excerpts above quoted, not only was that obiter therein unnecessary since evidently no sale was concluded, but even inaccurate, if not inconsistent, when considered in the context of the discussion in its entirety. If, as admitted, the purchaser at the foreclosure sale merely acquired an inchoate right to the property which could ripen into ownership only upon the lapse of the redemption period without his credit having been discharged, it is illogical to hold that during that same period of twelve months the mortgagor was "divested" of his ownership, since the absurd result would be that the land will consequently be without an owner although it remains registered in the name of the mortgagor.

That is why the discussion in said case carefully and felicitously states that what is divested from the mortgagor is only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely clarifying that the mortgagor does not have the unconditional power to absolutely sell the land since the same is encumbered by a lien of a third person which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only after the lapse of the period of redemption. Even on that score, it may plausibly be argued that what is delimited is not the mortgagor'sjus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted. At any rate, even the foregoing considerations and arguments would have no application in the case at bar and need not here be resolved since what is presently involved is a mortgage, not a sale, to petitioner bank. Such mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien thereon. There is no obstacle to the legal creation of such a lien even after the auction sale of the property but during the redemption period, since no distinction is made between a mortgage constituted over the property before or after the auction sale thereof. Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the judgment under which the property was sold. 11 Of course, while in extrajudicial foreclosure the sale contemplated is not under a judgment but the proceeding pursuant to which the mortgaged property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter with the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the mortgagor. In either case, what bears attention is that since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, there would be compliance with the requisites of Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage thereon. Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of petitioner bank was executed by respondent spouses during the period of redemption. We reiterate that during said period 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. 12 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 master's deed. 13 To repeat, 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. 14

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Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the judgment or mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination from his title thereto of the lien created by the levy on attachment or judgment or the registration of a mortgage thereon. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been attempted. Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of the encumbrance of the lien foreclosed. 15 We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the extrajudicial foreclosure and the sale of the property to petitioner bank. The court below spelled out at length in its decision the facts which it considered as violative of the provisions of Act No. 3135, as amended, by reason of which it nullified the extrajudicial foreclosure proceeding and its effects. Such findings and ruling of the trial court are already final and binding on petitioners and can no longer be modified, petitioners having failed to appeal therefrom. An appellee who has not himself appealed cannot obtain from the appellate court any affirmative relief other than the ones granted in the decision of the court below. 16 He cannot impugn the correctness of a judgment not appealed from by him. He cannot assign such errors as are designed to have the judgment modified. All that said appellee can do is to make a counter-assignment of errors or to argue on issues raised at the trial only for the purpose of sustaining the judgment in his favor, even on grounds not included in the decision of the court a quo nor raised in the appellant's assignment of errors or arguments. 17 WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment of the trial court, is REVERSED and SET ASIDE. The judgment of said trial court in Civil Case No. R-18616, dated January 12, 1983, is hereby REINSTATED. SO ORDERED. [G.R. No. 118342. January 5, 1998]

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA P. CAPERAL,respondents. DECISION DAVIDE, JR., J.: These two consolidated cases stemmed from a complaint [1] filed against the Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over a 44-hectare 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 pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pre-trial order:[2] 1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13, 1974 from the Government; 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; 5. Without foreclosure proceedings, whether judicial or extra-judicial, 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;

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS and LYDIA CUBA, respondents. [G.R. No. 118367. January 5, 1998]

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8.

After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband; Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;

9.

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 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 atP1,067,500. 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 expenses she incurred for lawyers fees and in view of the finding that she was entitled to exemplary damages. In its decision of 31 January 1990, [4] the trial court disposed as follows: WHEREFORE, judgment is hereby rendered in favor of plaintiff:

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she entered with the DBP a temporary arrangement whereby in consideration for the deferment of the Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain payments as stated in temporary Arrangement dated February 23, 1982; 11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984, and which was received by plaintiff Lydia Cuba; 12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the fishpond in question; 13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to dispose of the property; 14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina Caperal on August 16, 1984; 15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food. Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pretrial order. [3] 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 the contrary is null and void.

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 extra-judicial foreclosure, plaintiffs leasehold rights and

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interest over the fishpond land in question under her Fishpond Lease Agreement No. 2083 (new); 2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the Development Bank of the Philippines relative to said sale (Exhs. 16 and 26) as void and ineffective; 3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the 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 SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS (P1,067,500.00), as and for actual damages; 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 THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to defendant Development Bank of the Philippines under their Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought an increase in the amount of damages, while the latter questioned the findings of fact and law of the lower court. In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the deed of assignment was null and void and that defendant Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA - cession presupposes plurality of debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBA in assigning her property rights in payment of her debts, which amounted to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It, however, deleted the amount of exemplary damages and reduced the award of moral damages from P100,000 to P50,000 and attorneys fees, fromP100,000 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. Since their motions for reconsideration were denied, [6] DBP and CUBA filed separate petitions for review. In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and 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. 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,

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there was a provision that: In the event of foreclosure of the mortgage securing this notes, I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any. [7] Simultaneous with the execution of the notes was the execution of Assignments of Leasehold Rights [8] where CUBA assigned her leasehold rights and interest on a 44hectare 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. In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment to guarantee an obligation is in effect a mortgage. We find no merit in 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, was but a security and not a satisfaction of indebtedness.[10]

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

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The title to the real estate property [sic] and all improvements thereon shall remain in the name of the Vendor until after the purchase price, advances and interest shall have been fully paid. (Emphasis supplied). It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of 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 of title which confers ownership on the assignee. [12] 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 in this case. As held by this Court in some cases,[13] 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 foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] to pay their loan amortizations.[14] This only goes to show that DBP was aware of the necessity of foreclosure proceedings. In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled 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. Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as amended.[15] 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, but must be proved with reasonable degree of certainty.[16] 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.[17] It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne.[18] In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000 which represented the value of the alleged lost articles of CUBA and P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the adjoining house. This award was affirmed by the Court of Appeals. We find that the alleged loss of personal belongings and equipment was not proved by clear evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of those items before DBP took over the fishpond in question. As pointed out by DBP, there was not inventory of the alleged lost items before the loss which is normal in a project which sometimes, if not most often, is left to the care of other persons. Neither was a single receipt or record of acquisition presented. Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the damages resulting from DBPs take-over of the fishpond. Yet, it was only in September 1985 when her son and a caretaker went to the fishpond and the adjoining house that she came to know of the alleged loss of several articles. Such claim for losses of property, having been made before knowledge of the alleged actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for actual damages. With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which died when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss was not duly proved; besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October 1979,[19] she declared:

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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 take-over 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 by way of example or correction for the public good. [20] There being an award of exemplary damages, attorneys fees are also recoverable. [21] WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum commissorium and the award of actual damages; and by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the 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.