G.R. No.

158622 The loan was in the total amount of P700 million, divided into two (2) kinds of loan
SPOUSES ROBERT ALAN L. and NANCY LEE LIMSO, Petitioners, accommodations: a revolving credit line of P300 million, and a seven-year long-term loan of
vs. P400 million.3
PHILIPPINE NATIONAL BANK and THE REGISTER OF DEEDS OF DAVAO To secure the loan, real estate mortgages were constituted on four (4) parcels of land registered
CITY, Respondents. with the Registry of Deeds of Davao City.4 The parcels of land covered by TCT Nos. T-147820,
x-----------------------x T-151138, and T-147821 were registered in the name of Davao Sunrise, while the parcel of land
G.R. No. 169441 covered by TCT No. T-140122 was registered in the name of Spouses Limso.5
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES In 1995, Spouses Limso sold the parcel of land covered by TCT No. T-140122 to Davao
ROBERT ALAN and NANCY LIMSO, Petitioners, Sunrise.6
vs. Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested
HON. JESUS V. QUITAIN, in his capacity as Presiding Judge of Regional Trial Court, that their loan be restructured. After negotiations, Spouses Limso, Davao Sunrise, and Philippine
Davao City, Branch 15 and PHILIPPINE NATIONAL BANK, Respondents. National Bank executed a Conversion, Restructuring and Extension Agreement. 7
x-----------------------x The principal obligation in the restructured agreement totalled ₱1.067 billion. This included
G.R. No. 172958 ₱217.15 million unpaid interest.8
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION represented by its The restructured loan was divided into two (2) parts. Loan I was for the principal amount of
President ROBERT ALAN L. LIMSO, and SPOUSES ROBERT ALAN and NANCY LEE ₱583.18 million, while Loan II was for the principal amount of ₱483.78 million. 9 The restructured
LIMSO, Petitioners, loan was secured by the same real estate mortgage over four (4) parcels of land in the original
vs. loan agreement. All the properties were registered in the name of Davao Sunrise. 10
HON. JESUS V. QUITAIN, in his capacity as Presiding Judge of Regional Trial Court, The terms of the restructured loan agreement state:
Davao City, Branch 15 and PHILIPPINE NATIONAL BANK, Respondents. SECTION 1. TERMS OF THE CONVERSION, RESTRUCTURING AND EXTENSION
x-----------------------x 1.01 The Conversion/Restructuring/Extension. Upon compliance by the Borrowers with the
G.R. No. 173194 conditions precedent provided herein, the Obligations shall be converted, restructured and/or its
PHILIPPINE NATIONAL BANK, Petitioner, term extended effective January 1, 1999 (the "Effectivity Date") in the form of term loans (the
vs. "Loans") as follows:
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES (a) The Credit Line portion of the Obligations is hereby converted and
ROBERT ALAN LIMSO and NANCY LEE LIMSO, Respondents. restructured into a Seven-Year Long Term Loan (the "Loan I") in the
x-----------------------x principal amount of ₱583.18 Million;
G.R. No. 196958 (b) The original term of the Loan is hereby extended for another four (4)
PHILIPPINE NATIONAL BANK, Petitioner, years (from September 1, 2001 to December 31, 2005), and interest portion
vs. of the Obligations (including the interest accruing on the Credit Line and
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES Loan up to December 31, 1998 estimated at ₱49.83 Million) are hereby
ROBERT ALAN L. LIMSO and NANCY LEE LIMSO, Respondents. capitalized. Accordingly, both the Loan and Interest portions of the
x-----------------------x Obligations are hereby consolidated into a Term Loan (the "Loan II") in the
G.R. No. 197120 aggregate principal amount of ₱483.78 Million;
DAVAO SUNRISE INVESTMENT AND DEVELOPMENT CORPORATION and SPOUSES SECTION 2. TERMS OF LOAN I
ROBERT ALAN AND NANCY LEE LIMSO, Petitioners, 2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding
vs. PESOS: FIVE HUNDRED EIGHTY THREE MILLION ONE HUNDRED
PHILIPPINE NATIONAL BANK, Respondent. EIGHTY THOUSAND (₱583,180,000.00).
x-----------------------x 2.02 Promissory Note. Loan I shall be evidenced by a promissory note (the
G.R. No. 205463 "Note I") to be issued by the Borrowers in favor of the Bank in form and
IN THE MATTER OF THE PETITION EX-PARTE FOR THE ISSUANCE OF THE WRIT OF substance satisfactory to the Bank.
POSSESSION UNDER LRC RECORD NO. 12973, 18031 AND LRC RECORD NO. 317, 2.03 Principal Repayment. The Borrowers agree to repay Loan I within a
PHILIPPINE NATIONAL BANK, period of seven (7) years (inclusive of a one (1) year grace period) in
DECISION monthly amortizations with the first amortization to commence on January
LEONEN, J.: 2000 and a balloon payment on or before the end of the 7th year on
There is no mutuality of contract when the interest rate in a loan agreement is set at the sole December 2005.
discretion of one party. Nor is there any mutuality when there is no reasonable means by which 2.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan I
the other party can determine the applicable interest rate. These types of interest rates from the Effective Date, until the date of full payment thereof at the rate per
stipulated in the loan agreement are null and void. However, the nullity of the stipulated interest annum to be set by the Bank. The interest rate shall be reset by the Bank
rate does not automatically nullify the provision requiring payment of interest. Certainly, it does every month.
not nullify the obligation to pay the principal loan obligation. (b) The interest provided in clause (a) above shall be payable
These consolidated cases arose from three related actions filed before the trial courts of Davao monthly in arrears to commence on January, 1999.
City. SECTION 3. TERMS OF LOAN II
In 1993, Spouses Robert Alan L. Limso and Nancy Lee Limso (Spouses Limso)1 and Davao 3.01 Amount of Loan II. Loan II shall be in the principal amount not
Sunrise Investment and Development Corporation (Davao Sunrise) took out a loan secured by exceeding PESOS: FOUR HUNDRED EIGHTY THREE MILLION SEVEN
real estate mortgages from Philippine National Bank.2 HUNDRED EIGHTY THOUSAND (₱483,780,00.00).
 3.02 Promissory Note. Loan II shall be evidenced by a promissory note (the
"Note II") to be issued by the Borrowers in favor of the Bank in form and
substance satisfactory to the Bank.
3.03 Principal Repayment. The Borrowers agree to repay Loan II within a
period of seven (7) years (inclusive of a one (1) year grace period) in
monthly amortizations with the first amortization to commence on January
2000 and a balloon payment on or before December 2005.
3.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan II
from the Effective Date, until the date of full payment thereof at the rate per
annum to be set by the Bank. The interest rate shall be reset by the Bank
every month.
(b) The interest provided in clause (a) above shall be payable
monthly in arrears to commence on January 1999.11 (Emphasis
provided)
Spouses Limso and Davao Sunrise executed promissory notes, both dated January 5, 1999, in
Philippine National Bank’s favor. The promissory notes bore the amounts of ₱583,183,333.34
and ₱483,811,798.93.12 The promissory note for Loan II includes interest charges because one
of the preambular clauses of the Conversion, Restructuring and Extension Agreement states
that:
WHEREAS, the Borrowers acknowledge that they have outstanding obligations (the
"Obligations") with the Bank broken down as follows:
(i) Credit Line – ₱583.18 Million (as of September 30, 1998);
(ii) Loan – ₱266.67 Million (as of September 30, 1998); and
(iii) Interest – ₱217.15 Million (as of December 31, 1998)[.]13
Spouses Limso and Davao Sunrise encountered financial difficulties. Despite the restructuring of
their loan, they were still unable to pay.14 Philippine National Bank sent demand letters. Still,
Spouses Limso and Davao Sunrise failed to pay.15
On August 21, 2000, Philippine National Bank filed a Petition for Extrajudicial Foreclosure of
Real Estate Mortgage before the Sheriff’s Office in Davao City. 16 The Notice of Foreclosure was
published. The bank allegedly complied with all the other legal requirements under Act No.
3135.17 The auction sale was held on October 26, 2000. Ball Park Realty Corporation, through
its representative Samson G. To, submitted its bid in the amount of
₱1,521,045,331.49.18 Philippine National Bank’s bid was in the amount of ₱1,521,055,331.49.
Thus, it was declared the highest bidder.19
After the foreclosure sale, but before the Sheriff could issue the Provisional Certificate of
Sale,20 Spouses Limso and Davao Sunrise filed a Complaint for Reformation or Annulment of
contract against Philippine National Bank, Atty. Marilou D. Aldevera, in her capacity as Ex-Officio
Provincial Sheriff of Davao City, and the Register of Deeds of Davao City.21 The Complaint was
filed on October 30, 2000, raffled to Branch 17 of the Regional Trial Court of Davao City, and
docketed as Civil Case No. 28,170-2000.22 It prayed for:
[the] declaration of nullity of unilateral imposition and increases of interest rates, crediting of
illegal interests collected to [Spouses Limso and Davao Sunrise’s] account; elimination of all
uncollected illegal interests; reimposition of new interest rates at 12% per annum only from date
of filing of Complaint, total elimination of penalties; elimination also of attorney’s fees or its
reduction; declaration of nullity of auction sale and the foreclosure proceedings; reduction of
both loan accounts; reformation or annulment of contract, reconveyance, damages and
injunction and restraining order.23
Immediately after the Complaint was filed, the Executive Judge24 of the Regional Trial Court of
Davao City issued a 72-hour restraining order preventing Philippine National Bank from taking
possession and selling the foreclosed properties.25
Spouses Limso subsequently filed an amended Complaint.26 The prayer in the amended
Complaint stated:
PRAYER
WHEREFORE, it is respectfully prayed that judgment issue in favor of plaintiffs and against the
defendants:
ON THE TEMPORARY RESTRAINING ORDER
1. That, upon the filing of the above-entitled case, a TEMPORARY
RESTRAINING ORDER be maintained enjoining the defendants from
executing the provisional Certificate of Sale and final Deed of Absolute Sale;
confirmation of such sale; taking immediate possession thereof and from
selling to third parties those properties covered by TCT Nos. T-147820, T-
147821,T-246386 and T-247012 and its improvements nor to mortgage or
pledge the same prior to the final outcome of the above-entitled case,
including other additional acts of foreclosure;.
2. That, plaintiffs’ application for the issuance of the [Writ of Preliminary
Injunction] be concluded within the 20 days lifetime period of the [Temporary
Restraining Order], and
AFTER TRIAL ON THE MERITS
3. To declare the injunction as final;
4. Declaring that the unilateral increases of interest rates imposed by the
defendant bank over and above the stipulated interest rates provided for in
the Promissory Notes, be also considered as null and void and thereafter
lowering the same to 12% per annum only, from the date of the filing of the
Complaint;
5. Declaring also that all illegally imposed interest rates and penalty
charges be considered eliminated and/or deducted from any account
balance of plaintiffs;
6. Declaring also either the complete elimination of attorney’s fees, or in the
alternative, reducing the same to P500,000.00 only;
7. Declaring the reduction of the loan account balance to P827,012,149.50
only;
8. That subsequent thereto, ordering a complete reformation of the loan
agreement and Real Estate Mortgage which will now embody the lawful
terms and conditions adjudicated by this Honorable Court, or in the
alternative, ordering its annulment, as may be warranted under the provision
of Article 1359 of the New Civil Code;
9. Ordering the defendant Register of Deeds to refrain from issuing a new
title in favor of third parties, and to execute the necessary documents
necessary for the reconveyance of the properties now covered by TCT Nos.
T-147820, T-147821, T-246386 and T-247012 from the defendant bank in
favor of the plaintiffs upon payment of the recomputed loan accounts;
10. Ordering also the defendant bank to pay to the plaintiffs the sum of at
least P500,000.00 representing business losses and loss of income by the
later [sic] arising from the improvident and premature institution of
extrajudicial foreclosure proceedings against the plaintiffs;
11. Ordering again the defendant bank to pay to the plaintiffs the sum of
P400,000.00 as attorney’s fees and the additional sum of P100,000.00 for
expenses incident to litigation; and
12. To pay the costs and for such other reliefs just and proper under the
circumstances.27(Underscoring in the original)
Through the Order28 dated November 20, 2000, Branch 17 of the Regional Trial Court of Davao
City denied Spouses Limso’s application for the issuance of a writ of preliminary injunction.29
Spouses Limso moved for reconsideration. On December 4, 2000, Branch 17 of the Regional
Trial Court of Davao City set aside its November 20, 2000 Order and issued a writ of preliminary
injunction.30
Philippine National Bank then moved for reconsideration of the trial court’s December 4, 2000
Order. The bank’s Motion was denied on December 21, 2000. Hence, Philippine National Bank
filed before the Court of Appeals a Petition for Certiorari assailing the December 4, 2000 and
December 21, 2000 Orders of the trial court. This was docketed as CA G.R. SP. No. 63351.31
In the meantime, Branch 17 continued with the trial of the Complaint for Reformation or
Annulment of Contract with Damages.32
On January 10, 2002, the Court of Appeals issued the Decision33 in CA G.R. SP. No. 63351
setting aside and annulling the Orders dated December 4, 2000 and December 21, 2000 and
dissolving the writ of preliminary injunction.34
Spouses Limso and Davao Sunrise moved for reconsideration of the Court of Appeals’ January
2, 2002 Resolution in CA G.R. SP No. 63351 but the motion was denied.35 They then filed a
Petition for Review on Certiorari before this court.36 Their Petition was docketed as G.R. No.
152812, which was denied on procedural grounds.37
In view of the dissolution of the writ of preliminary injunction, Acting Clerk of Court and Ex-officio
Provincial Sheriff Rosemarie T. Cabaguio issued the Sheriff’s Provisional Certificate of Sale
dated February 4, 2002 in the amount of ₱1,521,055,331.49.38 However, the Sheriff’s
Provisional Certificate of Sale39 did not state the applicable redemption period and the
redemption price payable by the mortgagor or redemptioner.40
On the same date, Philippine National Bank presented the Sheriff’s Provisional Certificate of
Sale to the Register of Deeds of Davao City in order that the title to the foreclosed properties
could be consolidated and registered in Philippine National Bank’s name. The presentation was
recorded in the Primary Entry Book of Davao City’s Registry of Deeds under Act No. 496 and
entered as Entry Nos. 4762 to 4765.41
On February 5, 2002, the registration of the Certificate of Sale was elevated en consulta by Atty.
Florenda T. Patriarca (Atty. Patriarca) , Acting Register of Deeds of Davao City, to the Land
Registration Authority in Manila. This was docketed as Consulta No. 3405. 42
Acting on the consulta, the Land Registration Authority issued the Resolution dated May 21,
2002, which states:43
"WHEREFORE, in view of the foregoing, the Sheriff’s Provisional Certificate of Sale dated
February 4, 2002 is registrable on TCT Nos. T-147820, T-147386, T-247012 provided all other
registration requirements are complied with."44
Meanwhile, on March 25, 2002, the Spouses Limso filed a Petition for Declaratory Relief with
Prayer for Temporary Restraining Order/Injunction on March 25, 2002 against Philippine
National Bank, Atty. Rosemarie T. Cabaguio, in her capacity as Ex-Officio Provincial Sheriff, and
the Register of Deeds of Davao City (Petition for Declaratory Relief). The Sheriff’s Provisional
Certificate of Sale allegedly did not state any redemption price and period for redemption. This
case was raffled to Branch 14 of the Regional Trial Court of Davao City and docketed as Civil
Case No. 29,036-2002.45
The Petition for Declaratory Relief was filed while the Complaint for Reformation or Annulment
with Damages was still pending before Branch 17 of the Regional Trial Court of Davao City.
Spouses Limso subsequently filed an Amended Petition for Declaratory Relief, alleging:
6. That Petitioners with the continuing crisis and the unstable interest rates imposed by
respondent PNB admittedly failed to pay their loan, the demand letters were sent to both
debtors-mortgagors separately, one addressed to the Petitioners and another addressed to
DSIDC, the last of which was dated April 12, 2000 xxx;
7. That on August 21, 200(0), respondent PNB filed a Petition for Extrajudicial Foreclosure of the
mortgaged properties against the petitioners-mortgagors-debtors and DSIDC;
8. That on October 26, 2000, the mortgaged properties were auctioned with the respondent PNB
as the highest bidder;
9. That on February 4, 2002, a Sheriff’s Provisional Certificate of Sale was issued by respondent
Sheriff who certified xxxx
10. That the said Sheriff’s Provisional Certificate of Sale did not contain a provision usually
contained in a regular Sheriff’s Provisional Certificate of Sale as regards the period of
redemption and the redemption price to be raised within the ONE (1) YEAR redemption period in
accordance with Act 3135, under which same law the extrajudicial petition for sale was
conducted as mentioned in the Certificate;
11. That the Sheriff’s Provisional Certificate of Sale has not yet been registered with the office of
respondent Register of Deeds yet; that petitioners and DSIDC are still in actual possession of
the subject properties;
12. That sometime in the middle part of year 2000, Republic Act No. 8791 otherwise known as
General Banking Laws of 2000 was approved and finally passed on April 12, 2000 and took
effect sometime thereafter;
13. That among the provisions of the said law particularly, Section 47 dealt with Foreclosure of
Real Estate Mortgage, quoted verbatim hereunder as follows:
"Sec. 47. Foreclosure of Real Estate Mortgage. – In the event of foreclosure, whether judicially
or extrajudicially, or any mortgage on real estate which is security for any loan or other credit
accommodation granted, the mortgagor or debtor whose real property has been sold for the full
or partial payment of his obligation shall have the right within one year after the sale of the real
estate, to redeem the property by paying the amount due under the mortgage deed, with interest
thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or
institution from the sale and custody of said property less the income derived therefrom.
However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial
foreclosure shall have the right to enter upon and take possession of such property immediately
after the date of the confirmation of the auction sale and administer the same in accordance with
law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
pursuant to this provision shall be given due course only upon the filing by the petitioner of a
bond in an amount fixed by the court conditioned that he will pay all the damages which the bank
may suffer by the enjoining or the restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration."
14. That it is clear and evident that the absence of provisions as to redemption period and price
in the Sheriff’s Provisional Certificate of Sale issued by respondent Sheriff, that respondent PNB
and Sheriff intended to apply the provisions of Section 47 of Republic Act No. 8791 which
reduced the period of redemption of a juridical person whose property is being sold pursuant to
an extrajudicial foreclosure sale until but not after the registration of the Certificate of Sale with
the applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier;
15. That Petitioners in this subject mortgage are Natural Persons who are principal mortgagors-
debtors and at the same time registered owners of some properties at the time of the mortgage;
16. That the provisions of Republic Act No. 8791 do not make mention nor exceptions to this
situation where the Real Estate Mortgage is executed by both Juridical and Natural Persons;
hence, the need to file this instant case of Declaratory Relief under Rule 63 of the Revised Rules
of Court of the Philippines;
....
PRAYER
WHEREFORE, it is respectfully prayed that judgment in favor of petitioners and against the
respondent-PNB;
1. That upon the filing of the above-entitled case, a TEMPORARY RESTRAINING INJUNCTION
be issued immediately ordering a status quo, enjoining the Register of Deeds and defendant-
PNB from registering the subject Provisional Certificate of Sale from consolidating the title of the
property covered by Transfer Certificate of Title Nos. T-147820, T-147821, T-246386, T-24712
and Land Improvement, Etc.
2. That petitioners’ application of the issuance of the Writ of Preliminary Injunctions be
considered and granted within 20 days lifetime period of the TRO.
AFTER TRIAL ON THE MERITS
3. To declare the injunction as final;
4. Ordering the Register of Deeds to refrain from registering the Sheriff’s Certificate of Sale and
further from consolidating the titles of the said properties in its name and offering to sell the
same to interested buyers during the pendency of the above entitled case, while setting the date
of hearing on the propriety of the issuance of such Writ of Preliminary Injunction.
ON THE MAIN CASE
5. To declare the petitioners’ right as principal mortgagors/owner jointly with a juridical person to
redeem within a period of 1 year the properties foreclosed by respondent PNB still protected and
covered by Act 3135.
6. To declare the provisions on Foreclosure of Real Estate Mortgage under Republic Act 8791 or
General Banking Laws of 2000 discriminating and therefore unconstitutional.
OTHER RELIEFS AND REMEDIES are likewise prayed for.46
Branch 14 of the Regional Trial Court of Davao City issued a temporary restraining order47 on
April 10, 2002. This temporary restraining order enjoined the Register of Deeds from registering
the Sheriff’s Provisional Certificate of Sale.48
The temporary restraining order was issued without first hearing the parties to the case. Hence,
the temporary restraining order was recalled by the same trial court in the Order49 dated April 16,
2002.
During the hearing for the issuance of a temporary restraining order in the Petition for
Declaratory Relief, Spouses Limso presented several exhibits, which included: Philippine
National Bank’s demand letter dated April 12, 2000; Philippine National Bank’s letter to the
Acting Register of Deeds of Davao City dated February 4, 2002 requesting the immediate
registration of the Sheriff’s Provisional Certificate of Sale; and the Notice of Foreclosure dated
September 5, 2000.50
Counsel for Philippine National Bank objected to the purpose of the presentation of the exhibits
and argued that since Spouses Limso were Davao Sunrise’s co-debtors, they "were notified as a
matter of formality[.]"51
On May 3, 2002, Branch 14 granted the prayer for the issuance of the writ of preliminary
injunction enjoining the registration of the Sheriff’s Provisional Certificate of Sale. 52
Branch 14 reasoned as follows:
This Court finds no merit in the claims advanced by private respondent Bank for the following
reasons:
1. That the primary ground why the Court of Appeals dissolved the
preliminary injunction granted by Branch 17 of this Court was because the
ground upon which the same was issued was based on a pleading which
was not verified;
2. That Civil Case No. 28,170-2000 and Civil Case No. 29,036-2002 while
involving substantially the same parties, the same do not involved [sic] the
same issues as the former involves nullity of unilateral imposition and
increases of interest rates, etc. nullity of foreclosure proceedings, reduction
of both loan accounts, reformation or annulment of contract, reconveyance
and damages, whereas the issues raised in the instant petition before this
Court is the right and duty of the petitioners under the last paragraph of Sec.
47, Republic Act No. 8791 and whether the said section of said law is
applicable to the petitioners considering that the mortgage contract was
executed when Act No. 3135 was the controlling law and was in fact made
part of the contract;
3. That the petition, contrary to the claim of private respondent Bank, clearly
states a cause of action; and
4. That since petitioners are parties to the mortgage contract they, therefore,
have locus standi to file the instant petition.
If Section 7 of Republic Act 8791 were made to apply to the petitioners, the latter would have a
shorter period of three (3) months to exercise the right of redemption after the registration of the
Certificate of Sale, hence, the registration of the Sheriff’s Provisional Certificate of Sale would
cause great and irreparable injury to them as their rights to the properties sold at public auction
would be lost forever if the registration of the same is not enjoined. 53
Spouses Limso posted an injunction bond that was approved by the trial court in the Order dated
May 6, 2002. Thus, the writ of preliminary prohibitory injunction was issued. 54
Philippine National Bank moved for reconsideration of the Orders dated May 3, 2002 and May 6,
2002.55
Around this time, Judge William M. Layague (Judge Layague), Presiding Judge of Branch 14,
was on leave.56Philippine National Bank’s Motion for Reconsideration was granted by the Pairing
Judge, Judge Jesus V. Quitain (Judge Quitain),57 and the writ of preliminary prohibitory
injunction was dissolved in the Order dated May 23, 2002.58
On May 30, 2002, Philippine National Bank’s lawyers went to the Register of Deeds of Davao
City "to inquire on the status of the registration of the Sheriff’s Provisional Certificate of Sale." 59
Philippine National Bank’s lawyers were informed that the documents they needed "could not be
found and that the person in charge thereof, Deputy Register of Deeds Jorlyn Paralisan, was
absent."60
Philippine National Bank contacted Jorlyn Paralisan at her residence. She informed Philippine
National Bank that the documents they were looking for were all inside Atty. Patriarca’s office.61
Subsequently, Atty. Patriarca informed the representatives of Philippine National Bank that the
Register of Deeds "would not honor certified copies of [Land Registration Authority] resolutions
even if an official copy of the [Land Registration Authority] Resolution was already received by
that Office through mail."62
On May 31, 2002, Philippine National Bank’s representatives returned to the Register of Deeds
of Davao City and learned that Atty. Patriarca, the Acting Register of Deeds, had not affixed her
signature, which was necessary to complete the registration of the Sheriff’s Certificate of Sale. 63
Subsequently, Judge Layague reinstated the writ of preliminary prohibitory injunction in the
Order64 dated June 24, 2002.
Aggrieved, Philippine National Bank filed before the Court of Appeals a Petition for Certiorari,
Prohibition and Mandamus with Prayer for Temporary Restraining Order and Writ of Preliminary
Injunction, both Prohibitory and Mandatory, docketed as CA G.R. SP No. 71527. The Petition
assailed the June 24, 2002 Order of Branch 14 of the Regional Trial Court, which reinstated the
writ of preliminary prohibitory injunction.65
On July 3, 2002, Philippine National Bank inspected the titles and found that correction fluid had
been applied over Atty. Patriarca’s signature on the titles.66
Also on July 3, 2002, Philippine National Bank filed before the Regional Trial Court of Davao City
a Petition for Issuance of the Writ of Possession under Act No. 3135, as amended, and Section
47 of Republic Act No. 8791.67This was docketed as Other Case No. 124-2002 and raffled to
Branch 15 of the Regional Trial Court of Davao City, presided by Judge Quitain. 68
Davao Sunrise filed a Motion to Expunge and/or Dismiss Petition for Issuance of Writ of
Possession dated July 12, 2002.69 In the Motion to Expunge, Davao Sunrise pointed out that
Branch 1470 (in the Petition for Declaratory Relief docketed as Civil Case No. 29,036-2002)
issued a writ of preliminary injunction "enjoining the Provincial Sheriff, the Register of Deeds of
Davao City[,] and [Philippine National Bank] from registering the Sheriff’s Provisional Certificate
of Sale and, if registered, enjoining [Philippine National Bank] to refrain from consolidating the
title of the said property in its name and/or offering to sell the same to interested buyers during
the pendency of the case."71
On July 18, 2002, Spouses Limso filed a Motion to Intervene72 in Other Case No. 124-2002.73
In the Resolution dated August 13, 2002, the Court of Appeals granted the temporary restraining
order prayed for by Philippine National Bank (in CA G.R. SP No. 71527) enjoining the
implementation of Judge Layague’s Orders dated May 3, 2002 and June 24, 2002. These
Orders pertained to the writ of preliminary injunction enjoining the registration of the Sheriff’s
Provisional Certificate of Sale.74
Spouses Limso filed a Motion for Reconsideration with Prayers for the Dissolution of Temporary
Restraining Order and to Post Counter Bond.75
The Court of Appeals granted Philippine National Bank’s Petition for Certiorari in the
Decision76 dated December 11, 2002. The dispositive portion of the Decision states:
WHEREFORE, premises considered, the writ prayed for in the herein petition is GRANTED and
the assailed Orders of respondent judge dated May 3 and June 24, 2002 granting the writ of
preliminary injunction are SET ASIDE. Civil Case No. 29,036-2002 is hereby ordered
DISMISSED and respondent Register of Deeds of Davao City is hereby ordered to register
petitioner PNB’s Sheriff’s Provisional Certificate of Sale and cause its annotation on TCT Nos. T-
147820, T-147821, T-246386 and T-247012.77
Spouses Limso filed a Motion to Reconsider Decision and To Call Case For Hearing on Oral
Argument, which was opposed by Philippine National Bank.78 Oral arguments were conducted
on March 19, 2003.79
On June 10, 2003, the Court of Appeals denied Spouses Limso’s Motion for Reconsideration. 80
Spouses Limso then filed a Petition for Review on Certiorari81 before this court, questioning the
Decision in CA G.R. SP No. 71527, which ordered the Register of Deeds to register the Sheriff’s
Provisional Certificate of Sale. This was docketed as G.R. No. 158622. 82
With regard to the Complaint for Reformation or Annulment of Contract with Damages, Branch
17 of the Regional Trial Court of Davao City promulgated its Decision83 on June 19, 2002.
Branch 17 ruled in favor of Spouses Limso and Davao Sunrise. It found the interest rate
provisions in the loan agreement to be unreasonable and unjust because the imposable interest
rates were to be solely determined by Philippine National Bank. The arbitrary imposition of
interest rates also had the effect of increasing the total loan obligation of Spouses Limso and
Davao Sunrise to an amount that would be beyond their capacity to pay.84
The dispositive portion of the Decision in the Complaint for Reformation or Annulment with
Damages states:
WHEREFORE, finding the evidence of plaintiffs corporation through counsel, more than
sufficient, to constitute a preponderance to prove the various unilateral impositions of increased
interest rates by defendant bank, such usurious, unreasonable, arbitrary, unilateral imposition of
interest rates, are declared, null and void.
Accordingly, decision is issued in favor of the defendant bank, in a reduced amount based on
the following:
1. The amount of One Hundred Twenty Seven Million, One Hundred Fifty Thousand
(P127,150,000.00) Pesos, representing illegal interest rate, the amount of One
Hundred Seventy Six Million, Ninety Eight Thousand, Forty Five and 95/100
(P176,098,045.95) Pesos, representing illegal penalty charges and the amount of One
Hundred Thirty Six Million, Nine Hundred Thousand, Nine Hundred Twenty Eight and
85/100 (P136,900,928.85) Pesos, as unreasonable 10% Attorney’s fees or in the total
amount of Four Hundred Forty Million, One Hundred Forty Eight Thousand, Nine
Hundred Seventy Four and 79/100 (P440,148,974.79) Pesos, are declared null and
void, rescending [sic] and/or altering the loan agreement of parties, on the ground of
fraud, collusion, mutual mistake, breach of trust, misconduct, resulting to gross
inadequacy of consideration, in favor of plaintiffs corporation, whose total reduced and
remaining principal loan obligation with defendant bank, shall only be the amount of
Eight Hundred Eighty Two Million, Twelve Thousand, One Hundred Forty Nine and
50/100 (P882,012,149.50) Pesos, as outstanding remaining loan obligation of plaintiffs
corporation, with defendant bank, to be deducted from the total payments so far paid
by plaintiffs corporation with defendant bank as already stated in this decision.
2. That thereafter, the above-amount as ordered reduced, shall earn an interest of
12% per annum, the lawful rate of interest that should legitimately be imposed by
defendant bank to the outstanding remaining reduced principal loan obligation of
plaintiffs corporation.
3. Notwithstanding, defendant bank, is entitled to a reduced Attorney’s fees of Five
Hundred Thousand (P500,000.00) Pesos, as a reasonable Attorney’s fees, subject to
subsequent pronouncement as to the real status of defendant bank, on whether or
not, said institution is now a private agency or still a government instrumentality in its
capacity to be entitled or not of the said Attorney’s fees.
4. The prayer of defendant bank for award of moral damages and exemplary
damages, are denied, for lack of factual and legal basis.
SO ORDERED.85 (Emphasis in the original)
Philippine National Bank moved for reconsideration of the Decision, while Spouses Limso and
Davao Sunrise filed a Motion for partial clarification of the Decision. 86
Branch 17 of the Regional Trial Court of Davao City subsequently issued the Order87 dated
August 13, 2002 clarifying the correct amount of Spouses Limso and Davao Sunrise’s obligation,
thus:
WHEREFORE, finding the motion for reconsideration of defendant bank through counsel, to the
decision of the court, grossly bereft of merit, merely a reiteration and rehash of the arguments
already set forth during the hearing, including therein matters not proved during the trial on the
merits, and considered admitted, is denied.
To provide a clarification of the decision of this court, relative to plaintiffs motion for partial
clarification with comment of defendant bank through counsel, the correct remaining balance of
plaintiffs account with defendant bank, pursuant to the decision of this court, in pages 17 and 18,
dated June 19, 2002, is Two Hundred Five Million Eighty Four Thousand Six Hundred Eighty
Two Pesos & 61/100 (P205,084,682.61), as above-clarified.
SO ORDERED.88
Philippine National Bank appealed the Decision and Order in the Complaint for Reconstruction
or Annulment with Damages by filing a Notice of Appeal on August 16, 2002.89 The Notice of
Appeal was approved by the trial court in the Order dated September 25, 2002. 90 The appeal
was docketed as CA-G.R. CV No. 79732.91
On August 20, 2002,92 Spouses Limso and Davao Sunrise filed, in Other Case No. 124-2002
(Petition for Issuance of Writ of Possession), a Motion to Inhibit the Presiding Judge (referring to
Judge Quitain, before whom the Petition for Issuance of Writ of Possession was pending)
because his wife, Gladys Isla Quitain, was a long-time Philippine National Bank employee who
had retired.93 Spouses Limso and Davao Sunrise also heard rumors that Gladys Isla Quitain had
been serving as consultant for Philippine National Bank even after retirement.94 Davao Sunrise
also filed a Motion to Expunge and/or Dismiss Petition and argued that the person who signed
for Philippine National Bank was not authorized because no Board Resolution was attached to
the Verification and Certification against Forum Shopping.
In the Order95 dated March 21, 2003, Judge Quitain denied three motions:
(1) The Motion to Intervene filed by Spouses Robert Alan Limso and Nancy Limso;
(2) The Motion to Expunge and/or Dismiss Petition for the Issuance of Writ of
Possession filed by Davao Sunrise Investment and Development Corporation; and
(3) The Motion for Voluntary Inhibition filed by Davao Sunrise Investment and
Development Corporation.96
Judge Quitain denied the Motion to Inhibit on the ground that the allegations against him were
mere suspicions and conjectures.97 The Motion to Intervene was denied on the ground that
Spouses Limso have no interest in the case, not being the owners of the property. 98
The Motion to Expunge and/or Dismiss filed by Davao Sunrise was also denied for lack of merit.
Judge Quitain ruled that "PNB Vice President Leopoldo is clearly clothed with authority to
represent and sign in behalf of the petitioner [referring to Philippine National Bank] as shown by
the Verification and Certification of the said petition as well as the Secretary’s Certificate." 99
Spouses Limso and Davao Sunrise filed a Motion for Reconsideration100 of the Order dated
March 21, 2003. Judge Quitain denied the Motion for Reconsideration in an Order dated
September 1, 2003, only with regard to the Motion to Intervene and Motion for Voluntary
Inhibition. The Motion to Expunge and/or Dismiss was not mentioned in the September 1, 2003
Order.101
Spouses Limso and Davao Sunrise questioned the denial of the Motion for Inhibition by filing a
Petition for Certiorari before the Court of Appeals on September 26, 2003. This was docketed as
CA G.R. SP No. 79500.102 Spouses Limso and Davao Sunrise subsequently filed a
Supplemental Petition for Certiorari before the Court of Appeals on October 3, 2003. 103
In the meantime, Other Case No. 124-2002 (Petition for Issuance of Writ of Possession) was set
for an ex-parte hearing on October 10, 2003.104
However, on October 8, 2003, the Court of Appeals granted the prayer for the issuance of a
temporary restraining order in CA G.R. SP No. 79500 "enjoining public respondent Judge
Quitain from proceeding with Other Case No. 124-2002 for a period of sixty (60) days from
receipt by respondents thereof."105
The temporary restraining order was effective from October 10, 2003 to December 9, 2003. 106
On December 12, 2003, Judge Quitain issued the Order allowing Philippine National Bank to
present evidence ex-parte on December 18, 2003 despite the pendency of other incidents to be
resolved.107
Spouses Limso and Davao Sunrise filed an Urgent Motion for Cancellation of the December 18,
2003 hearing due to the pendency of CA G.R. SP No. 79500.108
Judge Quitain reset the hearing for Other Case No. 124-2002 to January 23, 2004. The hearing
was subsequently reset to January 30, 2004. In the January 30, 2004 hearing, Judge Quitain
heard the arguments of parties regarding the Urgent Motion to Cancel Hearing. 109
In the Order dated March 12, 2004, Judge Quitain "resolved the pending Urgent Motion to
Cancel Hearing and [Davao Sunrise’s] Motion to Re-schedule Newly Scheduled Hearing
Date."110
The March 12, 2004 Order also stated that "the Spouses Limso have no right to intervene
because they are no longer owners of the subject foreclosed property." 111
Spouses Limso treated the March 12, 2004 Order as a denial of their Motion for Reconsideration
regarding their Motion to Intervene. Thus, they, together with Davao Sunrise, filed a Petition for
Certiorari before the Court of Appeals, which was docketed as CA G.R. SP No. 84279.112
CA G.R. SP No. 84279 was denied by the Court of Appeals in the Decision113 dated September
20, 2004.
Spouses Limso and Davao Sunrise filed a Motion for Reconsideration114 dated September 13,
2004, which was denied in the Resolution115 dated July 8, 2005.
Spouses Limso and Davao Sunrise then filed a Petition for Review on Certiorari dated July 26,
2005 before this court. This was docketed as G.R. No. 168947.116
Despite the pendency of Spouses Limso and Davao Sunrise’s Motion for Reconsideration of the
Order denying Davao Sunrise’s Motion to Expunge and/or Dismiss, Philippine National Bank
filed a Motion for Reception of Evidence and/or Resume Hearing dated March 30, 2004 in Other
Case No. 124-2002.117
Judge Quitain granted the Motion "and set the hearing for reception of petitioner’s evidence on
06 April 2004 at 2:00 p.m."118
Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and Motion dated
April 5, 2004. They prayed for the cancellation of the hearing for the reason that the March 12,
2004 Order was not yet final and that Davao Sunrise had a pending Motion for Reconsideration
of the Order denying its Motion to Expunge and/or Dismiss.119
Judge Quitain cancelled the April 6, 2004 hearing due to the Manifestation and Motion filed by
Spouses Limso and Davao Sunrise.120
Spouses Limso filed a Motion for Reconsideration of the March 12, 2004 Order because it
addressed issues other than those raised in the Motion for Intervention.121
On April 20, 2004, Judge Quitain issued the Order and reset the case for hearing to May 7,
2004, even though the Motion for Reconsideration of the Order denying the Motion to Expunge
and/or Dismiss had not been acted upon.122
During the May 7, 2004 hearing, counsel for Spouses Limso and Davao Sunrise pointed out to
Judge Quitain the pendency of the Motion for Reconsideration of the Order denying the Motion
to Expunge and/or Dismiss.123
Judge Quitain issued the Order dated July 5, 2004 denying Spouses Limso and Davao Sunrise’s
Motion for Reconsideration to the March 12, 2004 Order (referring to the denial of Spouses
Limso’s Motion to Intervene).
Judge Quitain also set hearing dates on August 4 and 5, 2004 for the reception of Philippine
National Bank’s evidence. Once again, the hearings were scheduled even though the Motion to
Expunge and/or Dismiss had yet to be resolved.124
Davao Sunrise then filed a Motion to Transfer Case or in the Alternative to Dismiss the Same on
July 30, 2004. Davao Sunrise reiterated the arguments in its Motion to Expunge and/or
Dismiss.125
Subsequently, Spouses Limso and Davao Sunrise filed an Extremely Urgent Manifestation and
Motion dated August 3, 2004 asking that the hearings scheduled for August 4 and 5, 2004 be
cancelled, considering that Davao Sunrise’s Motion to Dismiss/Expunge the Petition was still
unresolved.126
On August 4, 2004, Judge Quitain took cognizance of the Extremely Urgent Manifestation and
Motion dated August 3, 2004 and a Very Urgent Motion for Intervention filed by a third party.
Thus, Judge Quitain cancelled the hearings scheduled on August 4 and 5, 2004, reset the
hearing to August 11, 2004, and "impressed upon the parties that he would be able to resolve all
pending incidents by that time."127
Spouses Limso and Davao Sunrise alleged that the pending incidents were hastily acted upon
by Judge Quitain, as follows:
[O]n 11 August 2004, at around 11:45 a.m., petitioners’ counsel was furnished a copy of public
respondent’s Order allegedly dated 06 August 2004 which declared as submitted for resolution
the following incidents, to wit: (a) petitioner DSIDC’s Motion to Transfer the Case to Branch 17;
(b) Petitioner DSIDC’s Motion to Postpone Hearing; (c) Motion for Intervention filed by a certain
Karlan Lou Ong; (d) petitioners’ (DSIDC and Spouses Limso) Extremely Urgent Manifestation
and Motion; and (e) Petitioner DSIDC’s Manifestation.
. . . And then, at around 2:10 p.m. of the same day, 11 August 2004, when petitioners’ counsel
was already in court for the said hearing, he was furnished by a staff of public respondent Judge
Quitain a copy of an Order dated 11 August 2004 and consisting of two (2) pages, the
dispositive portion of which reads as follows:
"WHEREFOREM(sic), the Court hereby resolves the following motions: 1) DSIDC’s motion to
transfer case to Branch 17 or dismiss the same is denied for lack of merit. 2) DSIDC’s (sic)
motion to postpone the hearing is denied for lack of merit. 3) The motion of Karla Ong to
intervene is denied for lack of merit. 4) The August 5 manifestation of DSIDC is
noted."128 (Emphasis in the original)
Spouses Limso and Davao Sunrise also claimed that the Order dated August 11, 2004 was
done hastily so that Philippine National Bank would be able to present its evidence without
objection.129
Spouses Limso and Davao Sunrise alleged that the August 11, 2004 Order contained factual
findings not supported by the record. When counsel for Spouses Limso and Davao Sunrise
pointed out the errors, Judge Quitain acknowledged the mistake and reset the August 11, 2004
hearing to August 27, 2004.130
Because of Judge Quitain’s actions, Spouses Limso and Davao Sunrise filed a Motion for
Compulsory Disqualification on the ground that Judge Quitain was biased in Philippine National
Bank’s favor.131
In the Order132 dated March 10, 2005, Judge Quitain denied the Motion for Compulsory
Disqualification.
Spouses Limso and Davao Sunrise moved for reconsideration of the March 10, 2005 Order,
while Philippine National Bank filed an Opposition to the Motion for Reconsideration.133
The August 11, 2004 Order also denied Davao Sunrise’s Motion to Transfer Case to Branch 17
or Dismiss the Same. Since the Motion to Transfer is a rehash of Davao Sunrise’s Motion to
Expunge and/or Dismiss Petition, the denial of the Motion to Transfer is tantamount to the denial
of Davao Sunrise’s Motion to Expunge and/or Dismiss.134The August 11, 2004 Order did not
specifically state that Spouses Limso and Davao Sunrise’s Motion for Reconsideration dated
March 28, 2003 was denied, but since the issues raised in the Motion to Reconsideration were
also raised in the Motion to Expunge, the August 11, 2004 Order also effectively denied the
Motion for Reconsideration.135
Thus, Spouses Limso and Davao Sunrise filed a Petition136 for Certiorari before the Court of
Appeals, which was docketed as CA G.R. SP No. 85847.137 Spouses Limso and Davao Sunrise
assailed the March 21, 2003 Order denying Davao Sunrise’s Motion to Expunge and/or Dismiss
Petition for Issuance of Writ of Possession, as well as the August 11, 2004 Order denying Davao
Sunrise’s Motion to Dismiss.138
On September 1, 2004, the Court of Appeals promulgated its Decision139 in CA G.R. No.
79500140 denying Spouses Limso and Davao Sunrise’s Petition, which assailed Judge Quitain’s
denial of their Motion to Inhibit.141 The Court of Appeals ruled that Judge Quitain’s reversal of
Judge Layague’s Orders "may constitute an error of judgment . . . but it is not necessarily an
evidence of bias and partiality."142
Spouses Limso and Davao Sunrise moved for reconsideration on September 23, 2004. The
Motion was denied in the Resolution143 dated August 11, 2005.144
While the cases between Spouses Limso, Davao Sunrise, and Philippine National Bank were
pending, Philippine National Bank, through counsel, filed administrative145 and criminal
complaints146 against Atty. Patriarca.
The administrative case against Atty. Patriarca was docketed as Administrative Case No. 02-
13.147
In the Resolution148 dated January 12, 2005, the Land Registration Authority found Atty.
Patriarca guilty of grave misconduct and dismissed her from the service. 149 Included in the
Resolution are the following pronouncements:
The registration of these documents became complete when respondent affixed her signature
below these annotations. Whatever information belatedly gathered thereafter relative to the
circumstances as to the registrability of these documents, respondent cannot unilaterally take
judicial notice thereof and proceed to lift at her whims and caprices what has already been
officially in force and effective, by erasing thereon her signature. With her years of experience in
the Registry, not to mention her being a lawyer, respondent should have taken the appropriate
steps in filing a query to this Authority regarding the matter or should have consulted Section
117 of PD 1529 in relation to Section 12 of Rule 43. The deplorable act of Respondent was
fraught with partiality to favor the DSIDC and Sps. Limso.150
Atty. Asteria E. Cruzabra (Atty. Cruzabra) replaced Atty. Patriarca as Register of Deeds of
Davao City.151 Philippine National Bank wrote a letter to Atty. Cruzabra, arguing "that the
Sheriff’s Provisional Certificate of Sale was already validly registered[,]"152 and the unauthorized
application of correction fluid153 to cover the original signature of the Acting Register of Deeds
"did not deprive the Bank of its rights under the registered documents." 154
Meanwhile, on February 10, 2005, as CA-G.R. CV No. 79732, which was an appeal from Civil
Case No. 28,170-2000 (Petition for Reformation and Annulment of Contract with Damages), was
still pending, Philippine National Bank filed the following applications before the Court of Appeals
Nineteenth Division:155
a. Application to Hold Davao Sunrise Investment and Development Corporation, the
Spouses Robert Alan L. Limso and Nancy Lee Limso and Wellington Insurance
Company, Inc. Jointly and Severally liable for Damages on the Injunction Bond; and
b. Application for the Appointment of PNB as Receiver[.]156
Spouses Limso and Davao Sunrise filed their opposition to Philippine National Bank’s
application on March 29, 2005.157 Philippine National Bank filed its Reply to the Opposition on
May 5, 2005.158
On March 2, 2006, the Court of Appeals denied Philippine National Bank’s applications,
reasoning that:
It is a settled rule that the procedure for claiming damages on account of an injunction wrongfully
issued shall be the same as that prescribed in Section 20 of Rule 57 of the Revised Rules of
Court. Section 20 provides:
Sec. 20. Claim for damages on account of improper, irregular or excessive attachment. - An
application for damages on account of improper, irregular or excessive attachment must be filed
before the trial or before appeal is perfected or before the judgment becomes executory, with
due notice to the attaching obligee or his surety or sureties, setting forth the facts showing his
right to damages and the amount thereof. Such damages may be awarded only after proper
hearing and shall be included in the judgment on the main case.
If the judgment of the appellate court be favorable to the party against whom the attachment was
issued, he must claim damages sustained during the pendency of the appeal by filing an
application in the appellate court with notice to the party in whose favor the attachment was
issued or his surety or sureties, before the judgment of the appellate court becomes executory.
The appellate court may allow the application to be heard and decided by the trial court.
Nothing herein contained shall prevent the party against whom the attachment was issued from
recovering in the same action the damages awarded to him from any property of the attaching
obligee not exempt from execution should the bond or deposit given by the latter be insufficient
or fail to fully satisfy the award.
Records show that when this Court annulled the RTC’s order of injunction, Davao Sunrise
thereafter elevated the matter to the Supreme Court. On July 24, 2002, the Supreme Court
denied its petition for having been filed out of time and an Entry of Judgment was issued on
Sept. 11, 2002.
PNB’s instant application however was filed only on February 17, 2005 and/or in the course of its
appeal on the main case – about two (2) years and five (5) months after the judgment annulling
the injunction order attained finality.
Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB
failed to file (before the court a quo) an application for damages against the bond before
judgment was rendered in the main case by the court a quo. Thus, even for this reason alone,
Davao Sunrise and its bondsman are relieved of further liability thereunder. 159 (Citations omitted)
The Court of Appeals also denied Philippine National Bank’s application to be appointed as
receiver for failure to fulfill the requirements to be appointed as receiver and for failure to prove
the grounds for receivership.160 It discussed that to appoint Philippine National Bank as receiver
would violate the rule that "neither party to a litigation should be appointed as receiver without
the consent of the other because a receiver should be a person indifferent to the parties and
should be impartial and disinterested."161 The Court of Appeals noted that Philippine National
Bank was not an impartial and disinterested party, and Davao Sunrise objected to Philippine
National Bank’s appointment as receiver.162
In addition, Rule 59, Section 1(a)163 of the 1997 Rules of Court requires that the "property or
fund involved is in danger of being lost, removed, or materially injured." The Court of Appeals
found that the properties involved were "not in danger of being lost, removed[,] or materially
injured."164 Further, Philippine National Bank’s application was premature since the loan
agreement was still pending appeal and "a receiver should not be appointed to deprive a party
who is in possession of the property in litigation."165
The dispositive portion of the Court of Appeals Resolution166 states:
WHEREFORE, above premises considered, the Philippine National Bank’s Application to Hold
Davao Sunrise Investment and Development Corporation, the Spouses Robert Alan L. Limso
and Nancy Lee Limso and Wellington Insurance Company, Inc. Jointly and Severally Liable for
Damages on the Injunction Bond and its Application for the Appointment of PNB as Receiver are
hereby both DENIED. And, for the reasons above set forth, the Plaintiff-Appellees’ Motion to
Dismiss is likewise DENIED.
With the filing of the Appellants’ and the Appellees’ respective Brief(s), this case is considered
SUBMITTED for Decision and ORDERED re-raffled to another justice for study and report.
SO ORDERED.167
Philippine National Bank filed a Motion for Reconsideration on March 28, 2006, which was
denied in the Resolution168 dated May 26, 2006.169
Thus, on July 21, 2006, Philippine National Bank filed before this
court a Petition for Review170 on Certiorari questioning the Court of
Appeals’ denial of its applications.171 This was docketed as G.R. No. 173194.172
On February 16, 2007, Philippine National Bank’s Ex-Parte Petition for Issuance of a Writ of
Possession docketed as Other Case No. 124-2002 was dismissed173 based on the following
grounds:
(1) For purposes of the issuance of the writ of possession, Petitioner should complete
the entire process in extrajudicial foreclosure . . .
(2) The records disclose the [sic] contrary to petitioner’s claim, the Certificate of Sale
covering the subject properties has not been registered with the Registry of Deeds of
Davao City as the Court finds no annotation thereof. As such, the sale is not
considered perfected to entitled petitioner to the writ of possession as a matter of
rights [sic].174
Philippine National Bank filed a Motion for Reconsideration with Motion for Evidentiary
Hearing.175
Acting on the Motion for Reconsideration, the trial court required the Registry of Deeds to
comment on the matter.176
The trial court eventually denied the Motion for Reconsideration.177
Philippine National Bank appealed the trial court Decision dismissing the Petition for Issuance of
a Writ of Possession by filing a Rule 41 Petition before the Court of Appeals, which was
docketed as CA-G.R. CV No. 01464-MIN.178
Meanwhile, when CA-G.R. CV No. 79732 was re-raffled,179 it was redocketed as CA-G.R. CV
No. 79732-MIN.180
In CA-G.R. CV No. 79732-MIN, the Court of Appeals resolved the issue of "whether or not there
has been mutuality between the parties, based on their essential equality, on the subject
imposition of interest rates on plaintiffs-appellees’ loan obligation, i.e., the original loan and the
restructured loan."181
On August 13, 2009, the Court of Appeals promulgated its Decision182 in CA-G.R. CV No.
79732-MIN. It held that there was no mutuality between the parties because the interest rates
were unilaterally determined and imposed by Philippine National Bank.183
The Court of Appeals further explained that the contracts between Spouses Limso and Davao
Sunrise, on one hand, and Philippine National Bank, on the other, did not specify the applicable
interest rates. The contracts merely stated the interest rate to be "at a rate per annum that is
determined by the bank[;]"184 "at the rate that is determined by the Bank to be the Bank’s prime
rate in effect at the Date of Drawdown[;]"185 and "at the rate per annum to be set by the Bank.
The interest rate shall be reset by the Bank every month."186 In addition, the interest rate would
depend on the prime rate, which was "to be determined by the bank[.]"187 It was also discussed
that:
But it even gets worse. After appellant bank had unilaterally determined the imposable interest
on plaintiffs-appellees loans and after the latter had been notified thereof, appellant bank
unilaterally increased the interest rates. Further aggravating the matter, appellant bank did not
increase the interest rate only once but on numerous occasions. Appellant bank unilaterally and
arbitrarily increased the already arbitrarily imposed interest rate within intervals of only seven (7)
days and/or one (1) month.
....
The interests imposed under the Conversion, Restructuring and Extension Agreement, is not a
valid imposition. DSIDC and Spouses Limso have no choice except to assent to the conditions
therein as they are heavily indebted to PNB. In fact, the possibility of the foreclosure of their
mortgage securities is right in their doorsteps. Thus it cannot be considered "contracts" between
the parties, as the borrower’s participation thereat has been reduced to an unreasonable
alternative that is to "take it or leave it." It has been used by PNB to raise interest rates to levels
which have enslaved appellees or have led to a hemorrhaging of the latter’s assets. Hence, for
being an exploitation of the weaker party, the borrower, the alleged letter-contracts should also
be struck down for being violative of the principle of mutuality of contracts under Article
1308.188 (Emphasis in the original)
Thus, the Court of Appeals nullified the interest rates imposed by Philippine National Bank:
We reiterate that since the unilateral imposition of rates of interest by appellant bank is not only outstanding indebtedness with the PNB when they filed their "Urgent Motion for Execution
violative of the principle of mutuality of contracts, but also were found to be unconscionable, Pending Appeal" of the August 13, 2002 Order of the lower court decreeing that appellees’
iniquitous and unreasonable, it is as if there was no express contract thereon. Thus, the interest remaining obligation with PNB is P205,084,682.61. They cannot now claim that PNB is the one
provisions on the (a) revolving credit line in the amount of three hundred (300) million pesos, (b) indebted to them in the amount of P15,915,588.89.202
seven-year long term loan in the amount of four hundred (400) million pesos; and (c) Philippine National Bank filed a Petition for Review on Certiorari203 assailing the Decision in CA-
Conversions, Restructuring and Extension Agreement, Real Estate Mortgage, promissory notes, G.R. CV No. 79732-MIN. Philippine National Bank argues that there was mutuality of contracts
and all other loan documents executed contemporaneous with or subsequent to the execution of between the parties, and that the interest rates imposed were valid in view of the escalation
the said agreements are hereby declared null and void. clauses in their contract.204 Philippine National Bank’s Petition for Review was docketed as G.R.
Such being the case, We apply the ruling of the Supreme Court in the case of United Coconut No. 196958.205
Planters Bank vs. Spouses Samuel and Odette Beluso which stated: Spouses Limso and Davao Sunrise also filed a Petition for Review206 on Certiorari questioning
"We see, however, sufficient basis to impose a 12% legal interest in favor of the ruling of the Court of Appeals in CA-G.R. CV No. 79732-MIN that their outstanding obligation
petitioner in the case at bar, as what we have voided is merely the was ₱803,185,411.11.207 Spouses Limso and Davao Sunrise argue that they "made
stipulated rate of interest and not the stipulation that the loan shall earn overpayments in the amount of P15,915,588.89."208 This was docketed as G.R. No. 197120.209
interest."189 (Citation omitted) On January 21, 2013, the Court of Appeals dismissed Philippine National Bank’s appeal
As to the trial court’s reduction of the penalty charges and attorney’s fees, the Court of Appeals docketed as CA-G.R. CV No. 01464-MIN (referring to the Petition for the Issuance of a Writ of
affirmed the trial court’s ruling and stated that Article 1229190 of the Civil Code allows for the Possession) on the ground that Philippine National Bank availed itself of the wrong
191
reduction of penalty charges that are unconscionable. The Court of Appeals discussed that: remedy.210 What the Philippine National Bank should have filed was a "petition for review under
The penalties imposed by PNB are clearly unconscionable. Any doubt as to this fact can be Rule 45 and not an appeal under Rule 41[.]"211
removed by simply glancing at the penalties charged by defendant-appellant which . . . already On March 15, 2013, the Philippine National Bank filed a Petition for Review on Certiorari212
amounted to an incredibly huge amount of P176,098,045.94 despite payments that already before this court, assailing the dismissal of its appeal before the Court of Appeals and praying
exceeded the amount of the loan as of 1998. that the Decision of the trial court—that the Sheriff’s Provisional Certificate of Sale was not
With respect to attorney’s fees, the Supreme Court had consistently and invariably ruled that signed by the Register of Deeds and was not registered—be reversed and set aside. The
even with the presence of an agreement between the parties, the court may nevertheless reduce Petition was docketed as G.R. No. 205463.213
attorney’s fees though fixed in the contract when the amount thereof appears to be G.R. No. 158622 was filed on July 1, 2003;214 G.R. No. 169441 was filed on September 14,
unconscionable or unreasonable. Again, the fact that the attorney’s fees imposed by PNB are 2005;215 G.R. No. 172958 was filed on June 26, 2006;216 G.R. No. 173194 was filed on July 21,
unconscionable and unreasonable can clearly be seen. The attorney’s fees imposed similarly 2006;217 G.R. No. 196958 was filed on June 17, 2011;218 G.R. No. 197120 was filed on June 22,
points to an incredibly huge sum of P136,900,928.85 as of October 30, 2000. Therefore, its 2011;219 and G.R. No. 205463 was filed on March 15, 2013.220
reduction in the assailed decision is well-grounded.192 (Citation omitted)
The dispositive portion of the Court of Appeals Decision states: Docket Original Case Assailed Order/Decision
WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of Number
the Regional Trial Court of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the
G.R. No. 158622 Petition for Declaratory Relief with Prayer for Court of Appeals Decision dated December 1
unilateral imposition of interest rates by defendant-appellant PNB as null and void appealed from
are AFFIRMED with the MODIFICATION that the obligation of plaintiffs-appellees arising from the Issuance of Preliminary Injunction and 2002 dismissing the Petition for Certiorari file
221
Application for Temporary Restraining Order by Philippine National Bank. The Petition for
the Loan and Revolving Credit Line and subsequent Conversion, Restructuring and Extension
Certiorari questioned the issuance of a writ o
Agreement as Loan I and Loan II shall earn interest at the legal rate of twelve percent (12%) per
preliminary injunction in favor of Spouses Lim
annum computed from September 1, 1993, until fully paid and satisfied.
and Davao Sunrise.222
SO ORDERED.193 (Emphasis in the original)
Philippine National Bank moved for reconsideration on September 3, 2009,194 arguing that the
G.R. No. 169441 Ex-Parte Petition223 for Issuance of Writ of Court of Appeals Decision dated September
interest rates were "mutually agreed upon[;]"195 that Spouses Limso and Davao Sunrise "never
196 Possession under Act No. 3135 filed by 2004 and Resolution dated August 11,
questioned the . . . interest rates[;]" and that they "acknowledged the total amount of their debt
Philippine National Bank, praying that it be 2005.224 Spouses Limso and Davao Sunrise
(inclusive of loan principal and accrued interest) to [Philippine National Bank] in the Conversion,
granted possession over four (4) parcels of land filed a Motion to Inhibit Judge Quitain, which
Restructuring and Extension Agreement which restructured their obligation to [Philippine
owned by Davao Sunrise was denied by Judge Quitain. Thus, Spouses
National Bank] in the amount of P1.067 Billion[.]"197
Limso and Davao Sunrise questioned the den
Spouses Limso and Davao Sunrise moved for partial reconsideration on September 9,
of their Motion before the Court of Appeals.22
2009, pointing out that their obligation to Philippine National Bank was only ₱205,084,682.61,
198

as stated in the trial court’s Order dated August 13, 2002 in Civil Case No. 28,170-2000. 199
G.R. No. 172958 Ex-Parte Petition226 for Issuance of the Writ of Court of Appeals Decision227 dated Septembe
Both Motions were denied by the Court of Appeals in the Resolution200 dated May 18, 2011.
Possession under Act No. 3135 filed by 1, 2005 and Resolution228 dated May 26, 200
The Court of Appeals held that Philippine National Bank’s Motion for Reconsideration raised
201 Philippine National Bank, praying that it be The Petition for Certiorari and Prohibition filed
issues that were a mere rehash of the issues already ruled upon.
granted possession over four (4) parcels of land by Spouses Limso and Davao Sunrise assail
With regard to Spouses Limso and Davao Sunrise’s Motion for Partial
owned by Davao Sunrise two Orders of Judge Quitain, which denied th
Reconsideration, the Court of Appeals ruled that:
Motion to Expunge and/or Dismiss Petition fo
Since the appellees did not appeal from the decision of the lower court, they are not entitled to
Issuance of Writ of Possession.229
any award of affirmative relief. It is well settled that an appellee who has not himself appealed
cannot obtain from the appellate court any affirmative relief other than those granted in the
G.R. No. 173194 Petition for Reformation or Annulment of Court of Appeals Resolution231dated March 2
decision of the court below. The appellee can only advance any argument that he may deem
Contract with Damages filed by Spouses Limso 2006, which denied Philippine National Bank
necessary to defeat the appellant’s claim or to uphold the decision that is being disputed. . . .
and Davao Sunrise230 (1) Application to Hold [Spouses Limso and
Thus, the lower court’s finding that the appellees have an unpaid obligation with PNB, and not
Davao Sunrise] and the Surety Bond Compa
the other way around, should stand. It bears stressing that appellees even acknowledged their
 With regard to G.R. No. 158622, counsel for Spouses Limso and Davao Sunrise explained:
Jointly and Severally Liable for Damages on Itthe
is clear, however, that the ruling of the Regional Trial Court of Davao City in Civil Case No.
Injunction Bond, and (2) Application for the 28,170-2000 and the Court of Appeals in CA G.R. No. 79732 already rendered Civil Case No.
Appointment of [Philippine National Bank] as29,036-2002 moot and academic. Under the premises, there is no need for this Honorable Court
Receiver. Also assailed was the Court of to rule on the propriety of the dismissal of the said action for Declaratory Relief as the loan
Appeals Resolution232 dated May 26, 2006, agreements --- from which the entire case stemmed --- had already been declared NULL AND
which denied the Motion for ReconsiderationVOID.257 (Emphasis in the original)
filed by Philippine National Bank. In the Resolution258 dated March 12, 2014, this court granted the Motion to Withdraw Petitions
with regard to G.R. Nos. 172958 and 158622. The prayer for the withdrawal of G.R. No. 169441
R. No. 196958 Petition for Reformation or Annulment of Court of Appeals Decision234 dated August 13,
was noted without action since G.R. No. 169441 was deemed closed and terminated in this
Contract with Damages filed by Davao Sunrise 2009 and Court of Appeals Resolution235 dated
court’s Resolution dated October 16, 2006.259
and Spouses Limso233 May 18, 2011 docketed as CA-G.R. CV No.
On April 2, 2014, Spouses Limso and Davao Sunrise filed an "Omnibus Motion for Leave [1] To
79732-Min. The decision dated August 13,
Intervene; [2] To File/ Admit Herein Attached Comment-in-Intervention; and [3] To Consolidate
2009 affirmed with modification the decision of
Cases"260 in G.R. No. 205463.
the trial court in Civil Case No. 28,170-
Spouses Limso and Davao Sunrise argue that they were allowed to participate in Other Case
2000.236 The Resolution dated May 18, 2011 in
No. 124-2002, and that Philippine National Bank was in bad faith when it did not furnish Nancy
CA-G.R. CV No. 79732-Min denied the Motion
Limso and Davao Sunrise copies of the Petition for Review it had filed. 261
for Reconsideration filed by Philippine National
In the Resolution262 dated April 2, 2014, this court gave due course to the Petition and required
Bank and also denied the Motion for Partial
the parties to submit their memoranda.
Reconsideration filed by Spouses Limso and
On April 15, 2014, Spouses Limso and Davao Sunrise filed a Motion to Dismiss the Petition in
Davao Sunrise.237 The Rule 41 appeal was
238 G.R. No. 173194 on the ground that the issues raised by Philippine National Bank are moot and
filed by Philippine National Bank.
academic. Spouses Limso and Davao Sunrise also reiterated that Philippine National Bank
availed of the wrong remedy.263
R. No. 197120 Petition239 for Reformation or Annulment of Court of Appeals Decision240 dated August 13,
In the Resolution264 dated July 9, 2014, this court recommended the consolidation of G.R. No.
Contract with Damages filed by Spouses Limso 2009 and Court of Appeals Resolution241 dated
205463 with G.R. Nos. 158622, 169441, 172958, 173194, 196958, and 197120.
and Davao Sunrise May 18, 2011. Spouses Limso and Davao
In the Resolution265 dated October 13, 2014, this court noted and granted the Omnibus Motion
Sunrise assailed the portion of the Court of
for Leave to Intervene filed by counsel for Nancy Limso and Davao Sunrise. 266 This court also
Appeals Decision stating that their outstanding
noted the memoranda filed by counsel for Philippine National Bank, the Office of the Solicitor
obligation was ₱803,185,411.11.242
General, and counsel for Spouses Limso and Davao Sunrise.267
244 The remaining issues for resolution are those raised in G.R. Nos. 173194, 196958, 197120, and
R. No. 205463 Ex-Parte Petition for Issuance of the Writ of Court of Appeals Decision dated January 21,
205463, which are:
Possession under Act No. 3135 filed by 2013 dismissing the appeal under Rule 41 filed
First, whether the Philippine National Bank’s Petition for Review on Certiorari in G.R. No.
Philippine National Bank, praying that it be by Philippine National Bank for being the wrong
173194 is the wrong remedy to assail the March 2, 2006 Court of Appeals Resolution, 268 which
granted possession over four parcels of land remedy.
denied Philippine National Bank’s (1) Application to Hold [Spouses Limso and Davao Sunrise]
owned by Davao Sunrise243
and the Surety Bond Company Jointly and Severally Liable for Damages on the Injunction Bond,
and (2) Application for the Appointment of [Philippine National Bank] as Receiver;
Second, whether Philippine National Bank committed forum shopping when it filed an ex-parte
In the Manifestation and Motion245 dated May 26, 2006, Davao Sunrise prayed that it be allowed Petition for the Issuance of a Writ of Possession and an Application to be Appointed as
to withdraw G.R. No. 169441 since the issues in the Petition had become moot and academic. Receiver;
In the Resolution246 dated August 7, 2006, this court consolidated G.R. Nos. 172958, 173194, Third, whether the Court of Appeals erred in ruling that the interest rates imposed by Philippine
and 169441, with G.R. No. 158622 as the lowest-numbered case. National Bank were usurious and unconscionable;
Davao Sunrise’s Manifestation and Motion dated May 26, 2006, which prayed that it be allowed Fourth, whether the Conversion, Restructuring and Extension Agreement executed in 1999
to withdraw G.R. No. 169441, was granted in the Resolution247 dated October 16, 2006. Thus, novated the original Loan and Credit Agreement executed in 1993;
G.R. No. 169441 was deemed closed and terminated as of October 16, 2006. 248 Fifth, whether the Court of Appeals erred in dismissing the appeal under Rule 41 filed by
In the Resolution249 dated March 7, 2007 in G.R. No. 173194, this court required respondents Philippine National Bank, which assailed the Court of Appeals Decision dated January 21, 2013
Spouses Limso and Davao Sunrise to file their comment. in CA-G.R. CV No. 01464-MIN, for being the wrong remedy;
In the Resolution250 dated July 4, 2011, G.R. No. 197120 was consolidated with G.R. No. Sixth, whether the Sheriff’s Provisional Certificate of Sale should be considered registered in
196958. view of the entry made by the Register of Deeds in the Primary Entry Book; and
On May 17, 2012, counsel for Spouses Limso and Davao Sunrise notified this court of the death Lastly, whether Philippine National Bank is entitled to a writ of possession.
of Robert Alan L. Limso.251 I
On October 9, 2013, Spouses Limso and Davao Sunrise filed a Motion to Withdraw Petitions in The Petition for Review in G.R. No. 173194 should be denied.
G.R. Nos. 172958, 169441 and 158622.252 Davao Sunrise and Spouses Limso, through counsel, The Petition docketed as G.R. No. 173194, filed by Philippine National Bank, questions the
explained that G.R. No. 169441 had been mooted by Judge Quitain’s voluntary inhibition from Court of Appeals Resolutions in CA- G.R. CV No. 79732-MIN dated March 2, 2006 and May 26,
hearing and deciding Other Case No. 124-2002.253 2006, which denied Philippine National Bank’s applications for damages on the injunction bond
After Judge Quitain had inhibited, Other Case No. 124-2002 was re-raffled to Branch 16 of the and to be appointed as receiver.269
Regional Trial Court of Davao City.254 Other Case No. 124-2002 was dismissed in the The assailed Resolutions in G.R. No. 173194 are interlocutory orders and are not appealable.
Order255 dated February 16, 2007. Since Other Case No. 124-2002 was dismissed, G.R. No. Rule 41, Section 1270 of the Rules of Court provides:
256
172958 was mooted as well.
SECTION 1. Subject of Appeal. — An appeal may be taken from a judgment or final order that
completely disposes of the case, or of a particular matter therein when declared by these Rules
to be appealable.
No appeal may be taken from:
....
(b) An interlocutory order;
....
In any of the foregoing circumstances, the aggrieved party may file an appropriate special civil
action as provided in Rule 65.
In addition, Rule 45, Section 1 of the Rules of Court provides:
SECTION 1. Filing of Petition with Supreme Court. — A party desiring to appeal by
certiorari from a judgment, final order or resolution of the Court of Appeals, the Sandiganbayan,
the Court of Tax Appeals, the Regional Trial Court or other courts, whenever authorized by law,
may file with the Supreme Court a verified petition for review on certiorari[.] (Emphasis supplied)
The difference between an interlocutory order and a final order was discussed in United
Overseas Bank v. Judge Ros:271
The word interlocutory refers to something intervening between the commencement and the end
of the suit which decides some point or matter but is not a final decision of the whole
controversy. This Court had the occasion to distinguish a final order or resolution from an
interlocutory one in the case of Investments, Inc. v. Court of Appeals, thus:
x x x A "final" judgment or order is one that finally disposes of a case, leaving nothing more to be
done by the Court in respect thereto, e.g., an adjudication on the merits which, on the basis of
the evidence presented on the trial, declares categorically what the rights and obligations of the
parties are and which party is in the right; or a judgment or order that dismisses an action on the
ground, for instance, of res judicata or prescription. Once rendered, the task of the Court is
ended, as far as deciding the controversy or determining the rights and liabilities of the litigants
is concerned. Nothing more remains to be done by the Court except to await the parties’ next
move (which among others, may consist of the filing of a motion for new trial or reconsideration,
or the taking of an appeal) and ultimately, of course, to cause the execution of the judgment
once it becomes "final" or, to use the established and more distinctive term, "final and
executory."
xxx xxx xxx
Conversely, an order that does not finally dispose of the case, and does not end the Court's task
of adjudicating the parties’ contentions and determining their rights and liabilities as regards
each other, but obviously indicates that other things remain to be done by the Court, is
"interlocutory" e.g., an order denying motion to dismiss under Rule 16 of the Rules, or granting
of motion on extension of time to file a pleading, or authorizing amendment thereof, or granting
or denying applications for postponement, or production or inspection of documents or
things, etc. Unlike a "final" judgment or order, which is appealable, as above pointed out, an
"interlocutory" order may not be questioned on appeal except only as part of an appeal that may
eventually be taken from the final judgment rendered in the case. 272 (Citations omitted)
The Resolutions denying Philippine National Bank’s applications were interlocutory orders since
the Resolutions did not dispose of the merits of the main case.
CA-G.R. CV No. 79732-MIN originated from Civil Case No. 28,170-2000, which involved the
issues regarding the interest rates imposed by Philippine National Bank. Hence, the denial of
Philippine National Bank’s applications did not determine the issues on the interest rates
imposed by Philippine National Bank.
The proper remedy for Philippine National Bank would have been to file a petition for certiorari
under Rule 65 or, in the alternative, to await the outcome of the main case and file an appeal,
raising the denial of its applications as an assignment of error.
In any case, we continue to resolve the arguments raised in G.R. No. 173194.
Philippine National Bank argues in its Petition for Review docketed as G.R. No. 173194 that its
application to hold the injunction bond liable for damages was filed on time. It points out that the
phrase "before the judgment becomes executory" found in Section 20273 of Rule 57 refers to the
judgment in the main case, which, in this case, refers to CA-G.R. CV No. 79732.274
Philippine National Bank also argues that the Court of Appeals erred in denying its application to
be appointed as receiver because although the Sheriff’s Provisional Certificate of Sale was not
registered, the Certificate of Sale "provides the basis for [Philippine National Bank] to claim
ownership over the foreclosed properties."275 As the highest bidder, Philippine National Bank
had the right to receive the rental income of the foreclosed properties. 276
Spouses Limso and Davao Sunrise filed their Comment,277 countering that the Court of Appeals
did not err in denying Philippine National Bank’s applications to hold the injunction bond liable for
damages and to be appointed as receiver.278 They cite San Beda College v. Social Security
System,279 where this court ruled that "the claim for damages for wrongful issuance of injunction
must be filed before the finality of the decree dissolving the questioned writ." 280
They highlight Philippine National Bank’s admission that the writ of preliminary injunction was
dissolved in January 2002, and that the Decision281 dissolving the writ attained finality on
September 11, 2002.282
Spouses Limso and Davao Sunrise further point out that while CA-G.R. CV No. 79732 was still
pending before the Court of Appeals, "the decree dissolving the questioned Writ of Preliminary
Injunction had already become final."283Thus, Philippine National Bank filed its application out of
time.284
They argue that in any case, Philippine National Bank cannot claim damages on the injunction
bond since it was unable to secure a judgment in its favor in Civil Case No. 28,170-2000.285
They further argue that the Court of Appeals was correct in denying Philippine National Bank’s
application to be appointed as receiver on the ground that Philippine National Bank is a party to
the case and hence, it cannot be appointed as receiver. 286
Spouses Limso and Davao Sunrise then allege that Philippine National Bank is guilty of forum
shopping. They argue that Philippine National Bank’s ex-parte Petition for the issuance of a writ
of possession, docketed as Other Case No. 124-2002, and the application to be appointed as
receiver have the same purpose: to obtain possession of the properties. 287
Philippine National Bank, through counsel, filed its Reply, countering that San Beda College was
decided when the 1964 Rules of Court was still in effect. 288 It argues that the cited case is no
longer applicable because the 1964 Rules was superseded by the 1997 Rules of Civil
Procedure.289 The applicable case is Hanil Development Co., Ltd. v. Intermediate Appellate
Court,290 where this court ruled that "the judgment against the attachment bond could be
included in the final judgment of the main case."291
Philippine National Bank also argued that under the 1997 Rules of Civil Procedure, the applicant
for damages does not have to be the winning party.292
Philippine National Bank further argues that it did not commit forum shopping since "there is no
identity of parties between CA G.R. CV No. 79732 . . . and Other Case No. 124-2002."293 The
causes of action and reliefs sought in the two cases are different. 294 It points out that its
application to be appointed as receiver is a provisional remedy under Rule 59 of the 1997 Rules
of Civil Procedure, while its prayer for the issuance of a writ of possession in Other Case No.
124-2002 is based on its right to possess the properties involved. 295
We rule that the Court of Appeals properly denied Philippine National Bank’s application to hold
the injunction bond liable for damages and be appointed as receiver. We also rule that no forum
shopping was committed by Philippine National Bank. However, the Court of Appeals erred in
ruling that Philippine National Bank filed its application to hold the injunction bond liable for
damages out of time.
The Court of Appeals, in its Resolution dated March 2, 2006, explained:
Records show that when this Court annulled the RTC’s order of injunction, Davao Sunrise
thereafter elevated the matter to the Supreme Court. On July 24, 2002, the Supreme Court
denied its petition for having been filed out of time and an Entry of Judgment was issued on
Sept[ember] 11, 2002.
PNB’s instant application however was filed only on February 17, 2005 and/or in the course of its
appeal on the main case – about two (2) years and five (5) months after the judgment annulling
the injunction order attained finality.
Clearly, despite that it already obtained a favorable judgment on the injunction matter, PNB
failed to file (before the court a quo) an application for damages against the bond before
judgment was rendered in the main case by the court a quo. Thus, even for this reason alone,
Davao Sunrise and its bondsman are relieved of further liability thereunder. 296 (Citations omitted)
The Petition referred to by the Court of Appeals in the quoted Resolution was docketed as G.R.
No. 152812 and was entitled Davao Sunrise Investment and Development Corporation, et al. v.
Court of Appeals, et al.297 G.R. No. 152812 originated from CA G.R. SP No. 63351.298 CA G.R.
SP No. 63351 was a Petition for Certiorari filed by Philippine National Bank, which questioned
the issuance of a writ of preliminary injunction in Civil Case No. 28,170-2000.299
In the Decision300 dated January 10, 2002, the Court of Appeals granted Philippine National
Bank’s Petition for Certiorari and held that:
In the case at bar, respondents’ claim to a right to preliminary injunction based on PNB’s
purported unilateral imposition of interest rates and subsequent increases thereof, is not a right
warranting the issuance of an injunction to halt the foreclosure proceedings. On the contrary, it is
petitioner bank which has proven its right to foreclose respondents’ mortgaged properties,
especially since respondents have admitted their indebtedness to PNB and merely questioning
the interest rates imposed by the bank. . . .
....
Above all, the core and ultimate issue raised in the main case below is the interest stipulation in
the loan agreements between the petitioner and private respondents, the validity of which is still
to be determined by the lower court. Injunctive relief cannot be made to rest on the assumption
that said interest stipulation is void as it would preempt the merits of the main case.
WHEREFORE, premises considered, the assailed Orders of respondent judge dated December
4 and 21, 2000 are hereby ANNULLED and SET ASIDE, and the Order dated November 20,
2000 denying private respondents prayer for the issuance of a writ of preliminary injunction is
REINSTATED.
SO ORDERED.301
Spouses Limso and Davao Sunrise assailed the Decision in CA-G.R. SP No. 63351 and filed
before this court a Petition for Review, docketed as G.R. No. 152812. However, the Petition for
Review was denied in the Resolution302dated July 24, 2002 for being filed out of time, and Entry
of Judgment303 was made on September 11, 2002.
The issuance of the writ of preliminary injunction in Civil Case No. 28,170-2000 was an
interlocutory order, and was properly questioned by Philippine National Bank through a Petition
for Certiorari.
However, the Court of Appeals erred in ruling that Philippine National Bank’s application was
filed out of time.
Section 20 of Rule 57 of the Rules of Civil Procedure provides: SECTION 20. Claim for
Damages on Account of Improper, Irregular or Excessive Attachment. — An application for
damages on account of improper, irregular or excessive attachment must be filed before the trial
or before appeal is perfected or before the judgment becomes executory, with due notice to the
attaching party and his surety or sureties, setting forth the facts showing his right to damages
and the amount thereof. Such damages may be awarded only after proper hearing and shall be
included in the judgment on the main case.
If the judgment of the appellate court be favorable to the party against whom the attachment was
issued, he must claim damages sustained during the pendency of the appeal by filing an
application in the appellate court, with notice to the party in whose favor the attachment was
issued or his surety or sureties, before the judgment of the appellate court becomes executory.
The appellate court may allow the application to be heard and decided by the trial court.
Nothing herein contained shall prevent the party against whom the attachment was issued from
recovering in the same action the damages awarded to him from any property of the attaching
party not exempt from execution should the bond or deposit given by the latter be insufficient or
fail to fully satisfy the award.
The judgment referred to in Section 20 of Rule 57 should mean the judgment in the main case.
In Carlos v. Sandoval:304
Section 20 essentially allows the application to be filed at any time before the
judgment becomes executory. It should be filed in the same case that is the main
action, and cannot be instituted separately. It should be filed with the court having
jurisdiction over the case at the time of the application. The remedy provided by law is
exclusive and by failing to file a motion for the determination of the damages on time
and while the judgment is still under the control of the court, the claimant loses his
right to damages.305 (Citations omitted)
In this case, Philippine National Bank filed its application306 during the pendency of the appeal
before the Court of Appeals. The application was dated January 12, 2005, 307 while the appeal in
the main case, docketed as CA-G.R. CV No. 79732-MIN, was decided on August 13,
2009.308 Hence, Philippine National Bank’s application to hold the injunction bond liable for
damages was filed on time.
The Court of Appeals properly denied Philippine National Bank’s application to be appointed as
a receiver.
Rule 59, Section 1 provides the grounds when a receiver may be appointed:
SECTION 1. Appointment of Receiver. — Upon a verified application, one or more receivers of
the property subject of the action or proceeding may be appointed by the court where the action
is pending, or by the Court of Appeals or by the Supreme Court, or a member thereof, in the
following cases:
(a) When it appears from the verified application, and such other proof as
the court may require, that the party applying for the appointment of a
receiver has an interest in the property or fund which is the subject of the
action or proceeding, and that such property or fund is in danger of being
lost, removed, or materially injured unless a receiver be appointed to
administer and preserve it;
(b) When it appears in an action by the mortgagee for the foreclosure of a
mortgage that the property is in danger of being wasted or dissipated or
materially injured, and that its value is probably insufficient to discharge the
mortgage debt, or that the parties have so stipulated in the contract of
mortgage;
(c) After judgment, to preserve the property during the pendency of an
appeal, or to dispose of it according to the judgment, or to aid execution
when the execution has been returned unsatisfied or the judgment obligor
refuses to apply his property in satisfaction of the judgment, or otherwise to
carry the judgment into effect;
(d) Whenever in other cases it appears that the appointment of a receiver is
the most convenient and feasible means of preserving, administering, or
disposing of the property in litigation.
During the pendency of an appeal, the appellate court may allow an application for the
appointment of a receiver to be filed in and decided by the court of origin and the receiver
appointed to be subject to the control of said court.
In Commodities Storage & Ice Plant Corporation v. Court of Appeals:309
The general rule is that neither party to a litigation should be appointed as receiver without the
consent of the other because a receiver should be a person indifferent to the parties and should
be impartial and disinterested. The receiver is not the representative of any of the parties but of
all of them to the end that their interests may be equally protected with the least possible
inconvenience and expense.310(Citations omitted)
The Court of Appeals cited Spouses Limso and Davao Sunrise’s
objection to Philippine National Bank’s application to be appointed as
receiver as one of the grounds why the application should fail. 311
Also, the Court of Appeals found that the mortgaged properties of Spouses Limso and Davao
Sunrise were earning approximately ₱12,000,000.00 per month. This proves that the properties
were being administered properly and did not require the appointment of a receiver. Also, to
appoint Philippine National Bank as receiver would be premature since the trial court’s Decision
was pending appeal.312
Philippine National Bank did not commit forum shopping when it filed an ex-parte Petition for the
issuance of a writ of possession and an application for appointment as receiver.
The elements of forum shopping are:
(a) identity of parties, or at least such parties as represent the same interests in both
actions;
(b) identity of rights asserted and relief prayed for, the relief being founded on the
same facts; and
(c) the identity of the two preceding particulars, such that any judgment rendered in
the other action will, regardless of which party is successful, amount to res judicata in
the action under consideration.313 (Citation omitted)
There is no identity of parties because the party to the Petition for Issuance of Writ of
Possession is Philippine National Bank only, while there are two parties to application for
appointment as receiver: Philippine National Bank on one hand, and Spouses Limso and Davao
Sunrise on the other.
The causes of action are also different. In the Petition for Issuance of Writ of Possession,
Philippine National Bank prays that it be granted a writ of possession over the foreclosed
properties because it is the winning bidder in the foreclosure sale.314 On the other hand,
Philippine National Bank’s application to be appointed as receiver is for the purpose of
preserving these properties pending the resolution of CA-G.R. CV No. 79732.315 While the
issuance of a writ of possession or the appointment as receiver would have the same result of
granting possession of the foreclosed properties to Philippine National Bank, Philippine National
Bank’s right to possess these properties as the winning bidder in the foreclosure sale is different
from its interest as creditor to preserve these properties.
II
There is no mutuality of contracts when the determination or imposition of interest rates is at the
sole discretion of a party to the contract. Further, escalation clauses in contracts are void when
they allow the creditor to unilaterally adjust the interest rates without the consent of the debtor.
The Petitions docketed as G.R. Nos. 196958 and 197120 assail the Decision in CA-G.R. CV No.
79732-MIN.316
Philippine National Bank argues that the principle of mutuality of contracts was not violated
because Spouses Limso and Davao Sunrise were notified as to the applicable interest rates,
and their consent was obtained before the effectivity of the agreement. 317 There was no
unilateral imposition of interest rates since the rates were dependent on the prevailing market
rates.318
Philippine National Bank also argues that Spouses Limso and Davao Sunrise were regularly
informed by Philippine National Bank of the interest rates imposed on their loan, as shown by
Robert Alan L. Limso’s signatures on the letters sent by Philippine National Bank. 319
Philippine National Bank further argues that loan agreements with escalation clauses, by their
nature, "would not indicate the exact rate of interest applicable to a loan precisely because it is
made to depend by the parties to external factors such as market indicators and/or government
regulations affecting the cost of money."320
Philippine National Bank cites Solidbank Corp., (now Metropolitan Bank and Trust Company) v.
Permanent Homes, Incorporated,321 where this court held that "contracts with escalation clause
do not violate the principle of mutuality of contracts."322
Philippine National Bank contends that the Conversion, Restructuring and Extension Agreement
novated the previous contracts with Spouses Limso and Davao Sunrise. In addition, the alleged
infirmities in the previous contracts were set aside upon the execution of the Conversion,
Restructuring and Extension Agreement. 323
On the other hand, Spouses Limso and Davao Sunrise argue that the Court of Appeals did not
err in ruling that the interest rates were imposed unilaterally. Spouses Limso and Davao Sunrise
allege that the interest rates were not stipulated in writing, in violation of Article 1956 of the Civil
Code.324 Also, the Court of Appeals did not err in reducing the penalties and attorney’s fees
since Article 2227 of the Civil Code states:325
Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.
Spouses Limso and Davao Sunrise add that the letters sent by Philippine National Bank to
Davao Sunrise were not agreements but mere notices that the interest rates were increased by
Philippine National Bank.326 Moreover, the letters were received by Davao Sunrise’s employees
who were not authorized to receive such letters.327 Some of the letters did not even appear to
have been received by anyone at all.328
Spouses Limso and Davao Sunrise allege that Philippine National Bank admitted that the
penalties stated in the agreements were in the nature of liquidated damages.329 Nevertheless,
Spouses Limso and Davao Sunrise question the Court of Appeals’ ruling insofar as it held that
their remaining obligation to Philippine National Bank is ₱803,185,411.11 as of September 1,
2008. According to Spouses Limso and Davao Sunrise, they have overpaid Philippine National
Bank in the amount of ₱15,915,588.89.330
Philippine National Bank counters that Davao Sunrise and Spouses Limso’s promissory notes
had a provision stating:
[T]he rate of interest shall be set at the start of every Interest Period. For this purpose, I/We
agree that the rate of interest herein stipulated may be increased or decreased for the
subsequent Interest Periods, with PRIOR NOTICE TO THE BORROWER in the event of
changes in the interest rate prescribed by law or the Monetary Board of Central Bank of the
Philippines or in the Bank’s overall cost of funds. I/We hereby agree that IN THE EVENT I/WE
ARE NOT AGREEABLE TO THE INTEREST RATE FIXED FOR ANY INTEREST PERIOD,
I/WE HAVE THE OPTION TO PREPAY THE LOAN OR CREDIT FACILITY WITHOUT
PENALTY within ten (10) calendar days from the Interest Setting Date.331 (Emphasis in the
original)
As to the letters sent by Philippine National Bank, these letters were received by the Chief
Finance Officer, Chairman, and President of Davao Sunrise. In addition, assuming that the
employees who allegedly received the letters were not authorized to do so, the unauthorized
acts were ratified by Spouses Limso and Davao Sunrise when they used the proceeds of the
loan.332
We rule that there was no mutuality of contract between the parties since the interest rates
imposed were based on the sole discretion of Philippine National Bank.333 Further, the
escalation clauses in the real estate mortgage "[did] not specify a fixed or base
interest[.]"334 Thus, the interest rates are invalid.
The principle of mutuality of contracts is stated in Article 1308 of the Civil Code as follows:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
The importance of the principle of mutuality of contracts was discussed in Juico v. China
Banking Corporation:335
The binding effect of any agreement between parties to a contract is premised on two settled
principles: (1) that any obligation arising from contract has the force of law between the parties;
and (2) that there must be mutuality between the parties based on their essential equality. Any
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise, invalid.336 (Citation omitted)
When there is no mutuality between the parties to a contract, it means that the parties were not
on equal footing when the terms of the contract were negotiated. Thus, the principle of mutuality
of contracts dictates that a contract must be rendered void when the execution of its terms is
skewed in favor of one party.337
The Court of Appeals also noted that since the interest rates imposed were at the sole discretion
of Philippine National Bank, and that Spouses Limso and Davao Sunrise were merely notified
when there were changes in the interest rates, Philippine National Bank violated the principle of
mutuality of contracts.338 The Court of Appeals ruled that:
We cannot subscribe to appellant bank’s allegation that plaintiffs-appellees agreed to these
interest rates by receiving various letters from PNB. Those letters cannot be construed as
agreements as a simple reading of those letters would show that they are mere notices
informing plaintiffs-appellees that the bank, through its top management, had already imposed
interest rates on their loan. The uniform wordings of the said letters go this way:
This refers to your existing credit facility in the principal amount of P850.0 MM granted by the
Philippine National Bank by and under the terms and conditions of that Credit Agreement dated
12.2.97 (Renewal of Credit Facility).
We wish to advise you that the top management has approved an interest rate of 20.756%
which will be used in computing the interest due on your existing peso and redenominated
availments against the credit facility for the period July 20 to August 19, 1998.
If you are amenable to this arrangement, please signify your conformity on the space provided
below and return to us the original copy of the document. If we receive no written objection by
the end of 10 days from date of receipt of this letter, we will take it to mean that you agree to the
new interest rate we quote. On the other hand, if you disagree with the quoted rate, you will have
to pay the loan in full within the same ten-day period otherwise, the entire loan will be considered
due and demandable.339 (Citation omitted)
The contents of the letter quoted by the Court of Appeals show that there was no room for
negotiation among Philippine National Bank, Spouses Limso, and Davao Sunrise when it came
to the applicable interest rate. Since there was no room for negotiations between the parties with
regard to the increases of the rates of interest, the principle of mutuality of contracts was
violated. There was no meeting of the minds between Spouses Limso, Davao Sunrise, and
Philippine National Bank because the increases in the interest rates were imposed on them
unilaterally.
Meeting of the minds between parties to a contract is manifested when the elements of a valid
contract are all present.340 Article 1318 of the Civil Code provides:
Article 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
When one of the elements is wanting, no contract can be perfected. 341 In this case, no consent
was given by Spouses Limso and Davao Sunrise as to the increase in the interest rates.
Consequently, the increases in the interest rates are not valid.
Even the promissory notes contained provisions granting Philippine National Bank the sole
discretion to set the interest rate:
[Promissory Note] NO. 0015138516350115 . . .
....
. . . I/We, jointly and severally, promise to pay to the order of the Philippine National Bank (the
‘Bank’) at its office in cm recto avenue davao city [sic], Philippines, the sum of PHILIPPINE
PESOS: 583,183,333.34 (P583,183,333.34) together with interest thereon for the current
Interest Period at a rate of to be set by mgt. [management]. Interest Period shall mean the
period commencing on the date hereof and having a duration not exceeding monthly (____)
days and each similar period thereafter commencing upon the expiry of the immediately
preceding Interest Period. The rate of interest shall be set at the start of every Interest Period.
For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board of the Central Bank of the
Philippines, or in the Bank’s overall cost of funds. I/We hereby agree that in the event I/We are
not agreeable to the interest rate fixed for any Interest Period, I/we shall have the option to
prepay the loan or credit facility without penalty within ten (10) calendar days from the Interest
Setting Date.342
Promissory Note No. 0015138516350116343 contained the same provisions, differing only as to
the amount of the obligation.
Assuming that Davao Sunrise and Spouses Limso agreed to the increase in interest rates, the
interest rates are still null and void for being unreasonable.344
This court has held that while the Usury Law was suspended by Central Bank Circular No. 905,
Series of 1982, unconscionable interest rates may be declared illegal. 345 The suspension of the
Usury Law did not give creditors an unbridled right to impose arbitrary interest rates. To
determine whether an interest rate is unconscionable, we are guided by the following
pronouncement:
In determining whether the rate of interest is unconscionable, the mechanical application of pre-
established floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration
of the parties’ contexts. Moreover, interest rates must be appreciated in light of the fundamental
nature of interest as compensation to the creditor for money lent to another, which he or she
could otherwise have used for his or her own purposes at the time it was lent. It is not the default
vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor’s unjust enrichment at the expense of another. 346
A reading of the interest provisions in the original agreement and the Conversion, Restructuring
and Extension Agreement shows that the interest rates imposed by Philippine National Bank
were usurious and unconscionable.
In the original credit and loan agreements executed in 1993, the interest provisions provide:
CREDIT AGREEMENT
....
1.04 Interest on Availments. (a) The Borrowers agree to pay interest on each availment from
date of each availment up to, but not including the date of full payment thereof at a rate per
annum that is determined by the Bank to be equivalent to the Bank’s prime rate less 1.0% in
effect as of the date of the relevant Availment, subject to quarterly review and to maintenance of
deposits with ADB of at least 5% of the amount availed in its savings and current account. Non
compliance of ADB requirement shall subject the credit line to regular interest rate which is the
prime rate plus applicable spread.347
LOAN AGREEMENT
....
1.03 Interest. (a) The Borrowers hereby agree to pay interest on the loan from the date of
Drawdown up to Repayment Date at the rate that is determined by the Bank to be the Bank’s
prime rate in effect at the Date of Drawdown less 1.0% and which shall be reset every 90 days
to coincide with interest payments.
(b) The determination by the Bank of the amount of interest due and payable hereunder shall be
conclusive and binding on the borrower in the absence of manifest error in the
computation.348(Emphasis supplied, underscoring in the original)
In the Conversion, Restructuring and Extension Agreement, the interest provisions state:
SECTION 2. TERMS OF LOAN I
....
2.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan I from the Effective
Date, until the date of full payment thereof at the rate per annum to be set by the Bank. The
interest rate shall be reset by the Bank every month.
....
SECTION 3. TERMS OF LOAN II
....
3.04 Interest. (a) The Borrowers agree to pay the Bank interest on Loan II from the Effective
Date, until the date of full payment thereof at the rate per annum to be set by the Bank. The
interest rate shall be reset by the Bank every month.349 (Emphasis supplied, underscoring in the
original)
From the terms of the loan agreements, there was no way for Spouses Limso and Davao
Sunrise to determine the interest rate imposed on their loan because it was always at the
discretion of Philippine National Bank.
Nor could Spouses Limso and Davao Sunrise determine the exact amount of their obligation
because of the frequent changes in the interest rates imposed.
As found by the Court of Appeals, the loan agreements merely stated that interest rates would
be imposed. However, the specific interest rates were not stipulated, and the subsequent
increases in the interest rates were all at the discretion of Philippine National Bank. 350
Also invalid are the escalation clauses in the real estate mortgage and promissory notes. The
escalation clause in the real estate mortgage states:
"(k) INCREASE OF INTEREST RATE:
"The rate of interest charged on the obligation secured by this mortgage as well as the interest
on the amount which may have been advanced by the mortgagee, in accordance with the
provisions hereof shall be subject during the life of this contract to such an increase within the
rate allowed by law, as the Board of Directors of the MORTGAGEE may prescribe for its
debtors."351
The escalation clause in the promissory notes352 states:
For this purpose, I/We agree that the rate of interest herein stipulated may be increased or
decreased for the subsequent Interest Periods, with prior notice to the Borrower in the event of
changes in interest rate prescribed by law or the Monetary Board or the Central Bank of the
Philippines, or in the Bank’s overall cost of funds.353
Banco Filipino Savings and Mortgage Bank v. Judge Navarro354 defined an escalation clause as
"one which the contract fixes a base price but contains a provision that in the event of specified
cost increases, the seller or contractor may raise the price up to a fixed percentage of the
base."355
This court has held that escalation clauses are not always void since they serve "to maintain
fiscal stability and to retain the value of money in long term contracts."356 However:
[A]n escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. A stipulation of such nature violates the
principle of mutuality of contracts. Thus, this Court has previously nullified the unilateral
determination and imposition by creditor banks of increases in the rate of interest provided in
loan contracts.
....
. . . [W]e hold that the escalation clause is . . . void because it grants respondent the power to
impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing
interest rates would not suffice. A detailed billing statement based on the new imposed interest
with corresponding computation of the total debt should have been provided by the respondent
to enable petitioners to make an informed decision. An appropriate form must also be signed by
the petitioners to indicate their conformity to the new rates. Compliance with these requisites is
essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have
the force of law between the parties, because such impositions are not based on the parties'
essential equality.357 (Citations omitted)
The interest rate provisions in Philippine National Bank’s loan agreements and real estate
mortgage contracts have been nullified by this court in several cases. Even the escalation
clauses in Philippine National Bank’s contracts were noted to be violative of the principle of
mutuality of contracts.358
The original loan agreement in this case was executed in 1993. Prior
to the execution of the original loan agreement, this court promulgated a Decision in 1991 ruling
that "the unilateral action of the [Philippine National Bank] in increasing the interest rate on the
private respondent’s loan, violated the mutuality of contracts ordained in Article 1308 of the Civil
Code[.]"359
In Philippine National Bank v. Court of Appeals,360 the interest rate provisions were nullified
because these allowed Philippine National Bank to unilaterally increase the interest rate. 361 The
nullified interest rate provisions were worded as follows:
"The Credit Agreement provided inter alia, that—
‘(a) The BANK reserves the right to increase the interest rate within the limits allowed by law at
any time depending on whatever policy it may adopt in the future: Provided, that the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest is reduced by law or by the Monetary Board. In either case, the adjustment in
the interest rate agreed upon shall take effect on the effectivity date of the increase or decrease
in the maximum interest rate.’
"The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only ‘within the limits allowed by law.’
The Real Estate Mortgage contract likewise provided that—
‘(k) INCREASE OF INTEREST RATE: The rate of interest charged on the obligation secured by
this mortgage as well as the interest on the amount which may have been advanced by the
MORTGAGEE, in accordance with the provision hereof, shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors of the
MORTGAGEE may prescribe for its debtors.’362
This court explained that:
Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the
rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect. 363
In a subsequent case364 also involving Philippine National Bank, this court likewise nullified the
interest rate provisions of Philippine National Bank and discussed:
In this case no attempt was made by PNB to secure the conformity of private respondents to the
successive increases in the interest rate. Private respondents’ assent to the increases cannot be
implied from their lack of response to the letters sent by PNB, informing them of the increases.
For as stated in one case, no one receiving a proposal to change a contract is obliged to answer
the proposal.365 (Citation omitted)
However, only the interest rate imposed is nullified; hence, it is deemed not written in the
contract. The agreement on payment of interest on the principal loan obligation remains. It is a
basic rule that a contract is the law between contracting parties.366 In the original loan agreement
and the Conversion, Restructuring and Extension Agreement, Spouses Limso and Davao
Sunrise agreed to pay interest on the loan they obtained from Philippine National Bank. Such
obligation was not nullified by this court. Thus, their obligation to pay interest in their loan
obligation subsists.367
Spouses Abella v. Spouses Abella368 involved a simple loan with an agreement to pay interest.
Unfortunately, the applicable interest rate was not stipulated by the parties. This court discussed
that in cases where the parties fail to specify the applicable interest rate, the legal rate of interest
applies. This court also discussed that the applicable legal rate of interest shall be the prevailing
rate at the time when the agreement was entered into:369
This is so because interest in this respect is used as a surrogate for the parties’ intent, as
expressed as of the time of the execution of their contract. In this sense, the legal rate of interest
is an affirmation of the contracting parties’ intent; that is, by their contract’s silence on a specific
rate, the then prevailing legal rate of interest shall be the cost of borrowing money. This rate,
which by their contract the parties have settled on, is deemed to persist regardless of shifts in
the legal rate of interest. Stated otherwise, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate at the time the agreement was executed and
shall not be susceptible to shifts in rate.370
Further, Spouses Abella cited Article 2212371 of the Civil Code and the ruling in Nacar v. Gallery
Frames,372 which both state that "interest due shall itself earn legal interest from the time it is
judicially demanded:"373
[T]he interest due on conventional interest shall be at the rate of 12% per annum from [date of
judicial demand] to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of
6% per annum.374
In this case, the Conversion, Restructuring and Extension Agreement was executed on January
28, 1999. Thus, the applicable interest rate on the principal loan obligation (conventional
interest) is at 12% per annum. With regard to the interest due on the conventional interest,
judicial demand was made on August 21, 2000 when Philippine National Bank filed a
Petition375 for Extrajudicial Foreclosure of Real Estate Mortgage.376 Thus, from August 21, 2000
to June 30, 2013, the interest rate on conventional interest shall be at 12%. From July 1, 2013
until full payment, the applicable interest rate on conventional interest shall be at 6%.
III
The Conversion, Restructuring and Extension Agreement novated the original agreement
executed in 1993. However, the nullified interest rate provisions in the original loan agreement
cannot be deemed as having been legitimized, ratified, or set aside.
Philippine National Bank argues that the Conversion, Restructuring and Extension Agreement
novated the original loan agreement and that the novation effectively set aside the infirmities in
the original loan agreement.377
The Civil Code provides that:
Article 1292. In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.
Novation has been defined as:
Novation may either be express, when the new obligation declares in unequivocal terms that the
old obligation is extinguished, or implied, when the new obligation is on every point incompatible
with the old one. The test of incompatibility lies on whether the two obligations can stand
together, each one with its own independent existence.
For novation, as a mode of extinguishing or modifying an obligation, to apply, the following
requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.378 (Citations omitted)
The original Credit Agreement379 was executed on September 1, 1993, 380 while the Conversion,
Restructuring and Extension Agreement381 was executed on January 28, 1999.382
Pertinent portions of the Conversion, Restructuring and Extension Agreement state:
WITNESSETH: That –
....
WHEREAS, the Borrowers [referring to DSIDC and spouses Limso] acknowledge that they have
outstanding obligations (the "Obligations") with the Bank broken down as follows:
(i) Credit Line – ₱583.18 Million (as of September 30, 1998);
(ii) Loan – ₱266.67 Million (as of September 30, 1998); and
(iii) Interest – ₱217.15 Million (as of December 31, 1998);
WHEREAS, at the request of the Borrowers, the Bank has approved (a) the conversion and
restructuring of the Credit Line portion of the Obligations into a term loan, (b) the extension of
the term of the Loan for another four (4) years, (c) the capitalization on accrued interest (up to
December 31, 1998) on the Obligations, (d) the waiver of the penalties charges (if any) accruing
on the Obligations, and (e) the partial release of chattel mortgage on stock inventories, subject
to the terms and conditions hereinafter set forth;
....
SECTION 2. TERMS OF LOAN I
2.01 Amount of Loan I. Loan I shall be in the principal amount not exceeding PESOS: FIVE
HUNDRED EIGHTY THREE MILLION ONE HUNDRED EIGHTY THOUSAND
(₱583,180,000.00)
....
SECTION 3. TERMS OF LOAN II
3.01 Amount of Loan II. Loan II shall be in the principal amount not exceeding PESOS: FOUR
HUNDRED EIGHTY THREE MILLION SEVEN HUNDRED EIGHTY THOUSAND
(₱483,780,000.00).383
In this case, the previous valid obligation of Spouses Limso and Davao Sunrise was the
payment of a loan in the total amount of ₱700 million, plus interest.
Upon the request of Spouses Limso and Davao Sunrise, Philippine National Bank agreed to
restructure the original loan agreement.384
Philippine National Bank summarized the Conversion, Restructuring and Extension Agreement
as follows:
(a) The conversion of the Revolving Credit Line into a Term Loan in the principal
amount of 583.18 Million and denominated as "Loan I".
(b) The Extension for another four (4) years of the original long term loan (from 01
September 2001 to 31 December 2005);
(c) The capitalization of the accrued interest on both the Revolving Credit Line and the
Long Term Loan up to 31 December 1998;
(d) The consolidation of the accrued interest and the outstanding obligation of the
original Long Term Loan to form "Loan 2" with the total principal amount of P483.82
Million;
(e) Waiver of penalty charges;
(f) Partial release of chattel mortgage on the stock inventories;
(g) Both "Loan I" and "Loan II" were made payable within seven (7) years in monthly
amortization and a balloon payment on or before December 2005. 385
When the loan agreement was restructured, the principal obligation of Spouses Limso and
Davao Sunrise became ₱1.067 billion.
The Conversion, Restructuring and Extension Agreement novated the original credit agreement
because the principal obligation itself changed.
Important provisions of the original agreement were altered. For example, the penalty charges
were waived and the terms of payment were extended.
Further, the preambular clauses of the Conversion, Restructuring and Extension Agreement
show that Spouses Limso and Davao Sunrise sought to change the terms of the original
agreement and that they themselves acknowledged their obligation to be ₱1.067 billion. They
are now estopped from claiming that their obligation should be based on the original agreement
when it was through their own actions that the loan was restructured.
Thus, the Court of Appeals in CA-G.R. CV No. 79732-MIN erred in not declaring that the
Conversion, Restructuring and Extension Agreement novated the original agreement and in
computing Spouses Limso and Davao Sunrise’s obligation based on the original agreement.
Since the Conversion, Restructuring and Extension Agreement novated the original credit
agreement, we modify the Court of Appeals Decision in that the outstanding obligation of
Spouses Limso and Davao Sunrise should be computed on the basis of the Conversion,
Restructuring and Extension Agreement.
In the Court of Appeals Decision dated August 13, 2009:
Computing the interest at 12% per annum on the principal amount of 700 Million Pesos, the
interest should be 84 Million Pesos per annum. Multiplying 84 Million Pesos by 15 years from
September 1, 1993 to September 1, 2008, the interest for the 15-year period would be One
Billion Two Hundred Sixty Million Pesos (P1,260,000,000.00). Then, by adding the interest of
P1,260,000,000.00 to the principal amount of 700 Million Pesos, the total obligation of plaintiffs-
appellees would be One Billion Nine Hundred Sixty Million Pesos (P1,960,000,000.00) by
September 1, 2008. And since plaintiffs-appellees has paid a total amount of One Billion One
Hundred Fifty Six Million Eight Hundred Fourteen Thousand Five Hundred Eighty Eight Pesos
and 89/100 (P1,156,814,588.89) to appellant PNB as of December 5, 1998, as per PNB’s official
computation of payments per official receipts, then, plaintiffs-appellees would still have an
outstanding balance of about Eight Hundred Three Million One Hundred Eighty Five Thousand
Four Hundred Eleven and 11/100 Pesos (P 803,185,411.11) as of September 1, 2008. The
amount of P 803,185,411.11 will earn interest at the legal rate of 12% per annum from
September 1, 2008 until fully paid.
....
WHEREFORE, the assailed Decision dated June 19, 2002 and Order dated August 13, 2002 of
the Regional Trial Court of Davao City, Branch 17 in Civil Case No. 28,170-2000 declaring the
unilateral imposition of interest rates by defendant-appellant PNB as null and void appealed from
are AFFIRMED with the MODIFICATION that the obligation of plaintiffs-appellees arising from
the Loan and Revolving Credit Line and subsequent Conversion, Restructuring and Extension
Agreement as Loan I and Loan II shall earn interest at the legal rate of twelve percent (12%) per
annum computed from September 1, 1993, until fully paid and satisfied.
SO ORDERED.386
Notably, in the body of the Court of Appeals Decision, Spouses Limso and Davao Sunrise’s
obligation was computed on the basis of the original loan agreement, while in the dispositive
portion, the Court of Appeals cited both the original loan agreement and the Conversion,
Restructuring and Extension Agreement.
The general rule is that:
Where there is a conflict between the dispositive part and the opinion of the court contained in
the text or body of the decision, the former must prevail over the latter on the theory that the
dispositive portion is the final order, while the opinion is merely a statement ordering
nothing.387 (Citation omitted)
To avoid confusion, we also rule that the interest rate provisions and the escalation clauses in
the Conversion, Restructuring and Extension Agreement are nullified insofar as they allow
Philippine National Bank to unilaterally determine and increase the imposable interest rates.
Article 1409388 of the Civil Code provides that void contracts cannot be ratified. Hence, the void
interest rate provisions in the original loan agreement could not have been ratified by the
execution of the Conversion, Restructuring and Extension Agreement.
IV
The proper remedy to assail a decision on pure questions of law is to file a petition for review on
certiorari under Rule 45, not an appeal under Rule 41 of the 1997 Rules of Civil Procedure.
One of the issues raised by Philippine National Bank in G.R. No. 205463 is the dismissal of its
appeal under Rule 41 by the Court of Appeals in its Decision dated January 21, 2013.389
Philippine National Bank, through counsel, argues that Rule 41 is the proper remedy because its
Petition raises questions of fact and of law.390 For example, the issue of whether there is an
annotation of encumbrance on the titles of the mortgaged properties is a question of fact. 391
Denying Philippine National Bank’s appeal under Rule 41, the Court of Appeals stated that:
[Philippine National Bank] simply takes issue against the conclusions made by the court a quo
which pertains to the matter of whether mere entry in the Primary Entry Book, sans the signature
of the registrar, already completes registration. It does not question the weight and probative
value of the fact that the signature of Atty. Patriarcha [sic] was previously entered in the records
then revoked by her. What PNB seeks, therefore, is a review of the decision of the court a quo
dismissing its petition, without delving into the weight of the evidence, but on the correctness of
the court a quo’s conclusions based on the evidence presented before it. This is clearly a
question of law.
....
To the mind of this Court, PNB seeks to harp repeatedly on the issue of the court a quo’s failure
to consider that the certificate of sale has been duly registered on February 4, 2002 upon mere
entry in the Primary Entry Book, even without the signature of the then register of deeds. Though
couched in different creative presentations, all the errors assigned by PNB point to one vital
question: What completes registration? To answer it, this Court is not asked to calibrate the
evidence presented, or gauge the truth or falsity, but to apply the appropriate law to the situation.
This is clearly a question of law.392 (Emphasis in the original)
In Land Bank of the Philippines v. Yatco Agricultural Enterprises,393 this court discussed the
difference between questions of law and questions of fact:
As a general rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure
questions of law. A question of law arises when the doubt or difference exists as to what the law
is on a certain state of facts. Negatively put, Rule 45 does not allow the review of questions of
fact. A question of fact exists when the doubt or difference arises as to the truth or falsity of the
alleged facts.
The test in determining whether a question is one of law or of fact is "whether the appellate court
can determine the issue raised without reviewing or evaluating the evidence, in which case, it is
a question of law[.]" Any question that invites calibration of the whole evidence, as well as their
relation to each other and to the whole, is a question of fact and thus proscribed in a Rule 45
petition.394 (Citations omitted)
Based on the foregoing, there was no error on the part of the Court of Appeals when it dismissed
Philippine National Bank’s Petition for being the wrong remedy. Indeed, Philippine National Bank
was not questioning the probative value of the evidence. Instead, it was questioning the
conclusion of the trial court that registration had not been perfected based on the evidence
presented.
V register the annotation.412 The Register of Deeds is not authorized "to make an appraisal of
The registration of the Sheriff’s Provisional Certificate of Sale was completed.
Philippine National Bank argues that the registration was completed, and restates the doctrine
in National Housing Authority v. Basa, Jr., et al.:395
Once the Certificate of Sale is entered in the Primary Book of Entry of the Registry of Deeds with
the registrant having paid all the required fees and accomplished all that is required of him under
the law to cause registration, the registration is complete.396
Philippine National Bank further argues that "[t]he records of all the transactions are recorded in
the Primary Entry Book and the annotation on the titles of the transaction do not control
registration. It is the recording in the Primary Entry Book which controls registration." 397
Philippine National Bank adds that though the annotation of a certificate of sale at the back of
the certificates of title is immaterial in the perfection of registration, the evidence shows that the
Certificate of Sale was annotated.398
Philippine National Bank alleges that registration was completed because Atty. Patriarca, the
Register of Deeds at that time, affixed her signature but would later erase it. 399
Philippine National Bank cites Atty. Cruzabra’s Comment, which alleges that the Sheriff’s
Provisional Certificate of Sale and other documents relative to the sale were registered in the
Primary Entry Book of the Registry of Deeds of Davao City.400 The Comment also states that:
3. The Sheriff’s Provisional Certificate of Sale was annotated at the back of the aforementioned
titles but it does not bear the signature of the former Registrar of Deeds. Noted however is that
the portion below the annotation of the Provisional Sheriff’s [sic] Certificate of Sale there appears
to be erasures ("snowpake"), and [Atty. Cruzabra] is not in a position to conclude as to the
circumstances [relative to said erasures], for lack of personal knowledge as to what transpired at
that time.401 (Citation omitted)
Philippine National Bank also cites the Decision in Administrative Case No. 02-13 dated January
12, 2005, which was the case against Atty. Patriarca for Grave Misconduct and Conduct
Unbecoming of a Public Official. In the Decision, the Land Registration Authority found that:
Respondent herein likewise admits that she finally signed the PNB transaction annotated on the
subject titles when she was informed that the motion for reconsideration was denied by this
Authority, but she subsequently erased her signature when she subsequently found out that an
appeal was filed by the Limso spouses.
....
The registration of these documents became complete when respondent affixed her signature
below these annotations. Whatever information belatedly gathered thereafter relative to the
circumstances as to the registrability of these documents, respondent can not unilaterally take
judicial notice thereof and proceed to lift at her whims and caprices what has already been
officially in force and effective, by erasing thereon her signature.402
In addition, Philippine National Bank argues that the erasure of Atty. Patriarca’s signature using
correction fluid could not have revoked, cancelled, or annulled the registration since under
Section 108 of Presidential Decree 1529, only a court order can revoke registration. 403
Philippine National Bank alleges that it has complied with the requirements under Section 7 of
Act No. 3135 and Section 47 of Republic Act No. 8791.404 Thus, it is entitled to a writ of
possession.405
The Office of the Solicitor General filed its Comment,406 quoting the dispositive portion of the
Land Registration Authority’s Consulta No. 3405 dated May 21, 2002: 407
WHEREFORE, in view of the foregoing, the Sheriff’s Provisional Certificate of Sale dated
February 04, 2002 is registerable on TCT Nos. T-147820, T-147386, and T-247012, provided all
other registration requirements are complied with.408 (Emphasis supplied)
The Office of the Solicitor General also quotes the dispositive portion of the Land Registration
Authority’s Resolution in the Motion for Reconsideration:409
WHEREFORE, in view of the foregoing[,] the Sheriff’s Provisional Certificate of Sale dated
February 4, 2002 is registrable on TCT Nos. T-147820, T-147821, T-147386 and T-247012,
provided all other registration requirements are complied with. 410 (Emphasis supplied)
The Office of the Solicitor General then cites National Housing Authority and Autocorp Group
and Autographics, Inc. v. Court of Appeals411 and discusses that when all the requirements for
registration of annotation has been complied with, it is ministerial upon the Register of Deeds to
proofs outside of the documents sought to be registered."413
For the Office of the Solicitor General, the Register of Deeds’ refusal to affix the annotation on
the foreclosed properties’ titles "should not preclude the completion of the registration of any
applicant who has complied with the requirements of the law to register its right or interest in
registered lands."414
Spouses Limso and Davao Sunrise, as intervenors-oppositors, filed a Memorandum.415 They cite
Section 117416 of Presidential Decree No. 1529417 and argue that registration of the Certificate of
Sale in the Primary Entry Book is a preliminary step in registration.418 Since Philippine National
Bank withdrew the documents it submitted to the Register of Deeds of Davao City, the Sheriff’s
Provisional Certificate of Sale was not registered.419
Further, Philippine National Bank’s argument that "entry . . . in the Primary Entry Book is
equivalent to registration"420 is not in accordance with Section 56421 of Presidential Decree No.
1529.422 Moreover, "[t]he signature of the Register of Deeds is crucial to the completeness of the
registration process."423
Spouses Limso and Davao Sunrise posit that Philippine National Bank admitted that the
Certificate of Sale is not registered in various hearings.424
These admissions are judicial admissions that should be binding on Philippine National Bank.425
Spouses Limso and Davao Sunrise allege that during the oral arguments held on March 19,
2003 at the Court of Appeals in CA G.R. SP No. 71527, counsel for Philippine National Bank
stated:426
ATTY. [BENILDA A.] TEJADA:
Yes, we can show the documents which we are going to file your Honors.
We would like to state also your Honors the fact of why no registration was ever made in this
case. Counsel forgot to mention that the fact of no registration is simply because the Register of
Deeds refused to register our Certificate of Sale. We have a pending case against them Sir
before the LRA and before the Ombudsman fore [sic] refusal to register our Certificate of Sale.
Now, we have filed this case because inspite [sic] of the fact the Register of Deeds addressed a
consulta to the Land Registration Authority on the registerity of the Certificate of Sale your
Honors[,] [i]t was at their instance that there was a consulta.
And then, the Land Registration Authority has already rendered its opinion that the document is
registrable. Despite that your Honors, the document has never been registered. So that was the
subject of our case against them. We do not understand the intransigencies we do not
understand the refusal.427
In addition, the Court of Appeals correctly dismissed Philippine National Bank’s appeal because
the issue raised involved a question of law, specifically "whether or not mere entry in the Primary
Entry Book is considered as registration of the subject Certificate of Sale."428
Section 56 of Presidential Decree No. 1529 states:
SECTION 56. Primary Entry Book; Fees; Certified Copies. — Each Register of Deeds shall keep
a primary entry book in which, upon payment of the entry fee, he shall enter, in the order of their
reception, all instruments including copies of writs and processes filed with him relating to
registered land. He shall, as a preliminary process in registration, note in such book the date,
hour and minute of reception of all instruments, in the order in which they were received. They
shall be regarded as registered from the time so noted, and the memorandum of each
instrument, when made on the certificate of title to which it refers, shall bear the same date:
Provided, that the national government as well as the provincial and city governments shall be
exempt from the payment of such fees in advance in order to be entitled to entry and
registration. (Emphasis supplied)
In this case, Philippine National Bank filed the Sheriff’s Provisional Certificate of Sale, which was
duly approved by the Executive Judge, before the Registry of Deeds of Davao City. Entries were
made in the Primary Entry Book. Hence, the Sheriff’s Provisional Certificate of Sale should be
considered registered.
Autocorp Group and Autographics, Inc. involved an extrajudicial foreclosure of mortgaged
property and the registration of a Sheriff’s Certificate of Sale. Autocorp sought the issuance of a
writ of injunction "to prevent the register of deeds from registering the subject certificate of
sale[.]"429
This court explained that a Sheriff’s Certificate of Sale is an involuntary instrument and that a
writ of injunction will no longer lie because of the following reasons:
[F]or the registration of an involuntary instrument, the law does not require the presentation of
the owner’s duplicate certificate of title and considers the annotation of such instrument upon the
entry book, as sufficient to affect the real estate to which it relates.
...
....
It is a ministerial duty on the part of the Register of Deeds to annotate the instrument on the
certificate of sale after a valid entry in the primary entry book.1awp++i1 P.D. No. 1524 provides:
SEC. 63. Foreclosure of Mortgage. — x x x
(b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer
who conducted the sale shall be filed with the Register of Deeds who shall make a brief
memorandum thereof on the certificate of title.
In fine, petitioner’s prayer for the issuance of a writ of injunction, to prevent the register of deeds
from registering the subject certificate of sale, had been rendered moot and academic by the
valid entry of the instrument in the primary entry book. Such entry is equivalent to
registration.430 (Emphasis supplied, citation omitted)
Based on the records of this case, the Sheriff’s Certificate of Sale filed by Philippine National
Bank was already recorded in the Primary Entry Book.
The refusal of the Register of Deeds to annotate the registration on the titles of the properties
should not affect Philippine National Bank’s right to possess the properties.
As to the argument that Philippine National Bank admitted in open court that the Certificate of
Sale was not registered, it is evident from Spouses Limso and Davao Sunrise’s Memorandum
that Philippine National Bank immediately explained that the non-registration was due to the
Register of Deeds’ refusal. Thus, the alleged non-registration was not due to Philippine National
Bank’s fault.
It appears on record that Philippine National Bank already complied with the requirements for
registration. Thus, there was no reason for the Register of Deeds to persistently refuse the
registration of the Certificate of Sale.
At any rate, the Land Registration Authority stated in its Resolution in Administrative Case No.
02-13 that Atty. Patriarca herself admitted that she already affixed her signature on the
annotation at the back of the certificate of titles, and that she subsequently erased her
signature.431 This finding of fact in the administrative case supports the argument of Philippine
National Bank and the opinion of the Office of the Solicitor General that the Certificate of Sale
should be considered registered.
With regard to the issue of whether Philippine National Bank is entitled to a writ of possession,
the trial court in Other Case No. 124 2002 denied the application for the writ of possession and
explained:
Portion of Sec. 47 of RA No. 8791 is quoted:
x x x the purchaser at the auction sale concerned whether in a judicial or extra judicial
foreclosure shall have the right to enter upon and take possession of such property immediately
after the date of the confirmation of the auction sale and administer the same in accordance with
law x x x.
From the quoted provision, one can readily conclude that before the sale is confirmed, it is not
considered final or perfected to entitle the purchaser at the auction sale to the writ of possession
as a matter of right. .
...
In extra-judicial foreclosure, there is technically no confirmation of the auction sale in the manner
provided for by Sec. 7 of Rule 68. The process though involves an application, preparation of the
notice of extrajudicial sale, the extra-judicial foreclosure sale, issuance of the certificate of sale,
approval of the Executive Judge or in the latter’s absence, the Vice-Executive Judge and the
registration of the certificate of sale with the Register of Deeds.
While it may be true that as found by the CA in the case earlier cited that DSIDC had only until
January 24, 2001 to redeem its properties and that the registration of the certificate of
foreclosure sale is no longer relevant in the reckoning of the redemption period, for purposes of
the issuance of the writ of possession, petitioner to this Court’s belief should complete the entire
process in extra-judicial foreclosure. Otherwise the sale may not be considered perfected and
the application for writ of possession may be denied.
The records disclose that contrary to petitioner’s claim, the Certificate of Sale covering the
subject properties has not been registered with the Registry of Deeds of Davao City as the Court
finds no annotation thereof. As such, the sale is not considered perfected to entitle petitioner to
the writ of possession as a matter of right.
Accordingly, for reason stated, the petition is DISMISSED. With the dismissal of the petition,
PNB’s Motion for Reception and Admission of PNB’s Ex-parte Testimonial and Documentary
Evidence is DENIED.
SO ORDERED.432
However, Philippine National Bank is applying for the writ of possession on the ground that it is
the winning bidder during the auction sale, and not because it consolidated titles in its name. As
such, the applicable provisions of law are Section 47 of Republic Act No. 8791433 and Section 7
of Act No. 3135.434
Section 47 of Republic Act No. 8791 provides:
SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether
judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other
credit accommodation granted, the mortgagor or debtor whose real property has been sold for
the full or partial payment of his obligation shall have the right within one year after the sale of
the real estate, to redeem the property by paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by
the bank or institution from the sale and custody of said property less the income derived
therefrom. However, the purchaser at the auction sale concerned whether in a judicial or
extrajudicial foreclosure shall have the right to enter upon and take possession of such property
immediately after the date of the confirmation of the auction sale and administer the same in
accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall be given due course only upon the filing by
the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the
damages which the bank may suffer by the enjoining or the restraint of the foreclosure
proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an
extrajudicial foreclosure, shall have the right to redeem the property in accordance with this
provision until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds which in no case shall be more than three (3) months after
foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale
prior to the effectivity of this Act shall retain their redemption rights until their expiration.
(Emphasis supplied)
Section 7 of Act No. 3135 provides:
SECTION 7. In any sale made under the provisions of this Act, the purchaser may petition the
Court of First Instance of the province or place where the property or any part thereof is situated,
to give him possession thereof during the redemption period, furnishing bond in an amount
equivalent to the use of the property for a period of twelve months, to indemnify the debtor in To grant a longer period of redemption on the ground that a co-debtor is a natural person
case it be shown that the sale was made without violating the mortgage or without complying defeats the purpose of Republic Act No. 8791. In addition, the real properties mortgaged by
with the requirements of this Act. Such petition shall be made under oath and filed in form of an Davao Sunrise appear to be used for commercial purposes.443
ex parte motion in the registration or cadastral proceedings if the property is registered, or in WHEREFORE, the Petition for Review on Certiorari in G.R. No. 173194 is DENIED.
special proceedings in the case of property registered under the Mortgage Law or under section The Petition docketed as G.R. No. 196958 is PARTIALLY GRANTED, while the Petition
one hundred and ninety-four of the Administrative Code, or of any other real property docketed as G.R. No. 197120 is DENIED.
encumbered with a mortgage duly registered in the office of any register of deeds in accordance The Decision of the Court of Appeals in CA-G.R. CV No. 79732-MIN is AFFIRMED with
with any existing law, and in each case the clerk of the court shall, upon the filing of such MODIFICATION.
petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of The Conversion, Restructuring and Extension Agreement executed in 1999 is deemed to have
Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight novated the Credit Agreement and Loan Agreement executed in 1993. Thus, the principal loan
hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of obligation of Davao Sunrise Investment and Development Corporation and Spouses Robert Alan
possession issue, addressed to the sheriff of the province in which the property is situated, who and Nancy Limso shall be computed on the basis of the amounts indicated in the Conversion,
shall execute said order immediately.1avvphi1 Restructuring and Extension Agreement.
The rule under Section 7 of Act No. 3135 was restated in Nagtalon v. United Coconut Planters Interest on the principal loan obligation shall be at the rate of 12% per annum and computed
Bank:435 from January 28, 1999, the date of the execution of the Conversion, Restructuring and Extension
During the one-year redemption period, as contemplated by Section 7 of the above-mentioned Agreement. Interest rate on the conventional interest shall be at the rate of 12% per annum from
law, a purchaser may apply for a writ of possession by filing an ex parte motion under oath in the August 21, 2000, the date of judicial demand, to June 30, 2013. From July 1, 2013 until full
registration or cadastral proceedings if the property is registered, or in special proceedings in satisfaction, the interest rate on the conventional interest shall be computed at 6% per annum in
case the property is registered under the Mortgage Law. In this case, a bond is required before view of this court’s ruling in Nacar v. Gallery Frames.444
the court may issue a writ of possession.436 This case is ordered REMANDED to Branch 17 of the Regional Trial Court of Davao City for the
On the other hand, a writ of possession may be issued as a matter of right when the title has computation of the total amount of Davao Sunrise Investment and Development Corporation and
been consolidated in the buyer’s name due to nonredemption by the mortgagor. Under this Spouses Robert Alan and Nancy Limso's remaining obligation.
situation, the basis for the writ of possession is ownership of the property.437 The Petition docketed as G.R. No. 205463 is PARTIALLY GRANTED. The Sheriffs Provisional
The Sheriff’s Provisional Certificate of Sale should be deemed registered. However, Philippine Certificate of Sale is deemed to have been registered. In view of the facts of this case, the
National Bank must still file a bond before the writ of possession may be issued. applicable period of redemption shall be three (3) months as provided under Republic Act No.
VI 8791.
To fully dispose of all the issues in these consolidated cases, this court shall also rule on one of In case the final computation shows that Davao Sunrise Investment and Development
the issues raised in G.R. No. 158622. In G.R. No. 158622, Spouses Limso and Davao Sunrise Corporation and Spouses Robert Alan and Nancy Limso overpaid Philippine National Bank,
allege that the Sheriff’s Provisional Certificate of Sale does not state the appropriate redemption Philippine National Bank must return the excess amount.
period; thus, they filed a Petition for Declaratory Relief, which was docketed as Civil Case No. The writ of possession prayed for by Philippine National Bank may only be issued after all the
29,036-2002.438 requirements for the issuance of a writ of possession are complied with.
In the loan agreement, natural and juridical persons are co-debtors, while the properties SO ORDERED.
mortgaged to secure the loan are owned by Davao Sunrise.
Act No. 3135 provides that the period of redemption is one (1) year after the sale.439 On the
other hand, Republic Act No. 8791 provides a shorter period of three (3) months to redeem in
cases involving juridical persons.440
We rule that the period of redemption for this case should be not more than three (3) months in
accordance with Section 47 of Republic Act No. 8791. The mortgaged properties are all owned
by Davao Sunrise. Section 47 of Republic Act No. 8791 states: "the mortgagor or debtor whose
real property has been sold" and "juridical persons whose property is being sold[.]" Clearly, the
law itself provides that the right to redeem belongs to the owner of the property mortgaged. As
the mortgaged properties all belong to Davao Sunrise, the shorter period of three (3) months is
the applicable redemption period.
The policy behind the shorter redemption period was explained in Goldenway Merchandising
Corporation v. Equitable PCI Bank:441
The difference in the treatment of juridical persons and natural persons was based on
the nature of the properties foreclosed—whether these are used as residence, for
which the more liberal one-year redemption period is retained, or used for industrial or
commercial purposes, in which case a shorter term is deemed necessary to reduce
the period of uncertainty in the ownership of property and enable mortgagee-banks to
dispose sooner of these acquired assets. It must be underscored that the General
Banking Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial
crisis, sought to reform the General Banking Act of 1949 by fashioning a legal
framework for maintaining a safe and sound banking system. In this context, the
amendment introduced by Section 47 embodied one of such safe and sound practices
aimed at ensuring the solvency and liquidity of our banks.442 (Citation omitted)
 In its Decision dated December 5, 2001, the CA reversed and set aside the trial court's ruling,
observing that the contract of sale executed by the spouses Ong and Lee, being complete and
G.R. No. 152347 June 21, 2006
regular on its face, is clothed with the prima facie presumption of regularity and legality. Plodding
UNION BANK OF THE PHILIPPINES, Petitioner,
on, the appellate court said:
vs.
In order that rescission of a contract made in fraud of creditors may be decreed, it is necessary
SPS. ALFREDO ONG AND SUSANA ONG and JACKSON LEE, Respondents.
that the complaining creditors must prove that they cannot recover in any other manner what is
DECISION
due them. xxx.
GARCIA, J.:
There is no gainsaying that the basis of liability of the appellant spouses in their personal
By this petition for review under Rule 45 of the Rules of Court, petitioner Union Bank of the
capacity to Union Bank is the Continuing Surety Agreement they have signed … on October 10,
Philippines (Union Bank) seeks to set aside the decision1 dated December 5, 2001 of the Court
1990. However, the real debtor of Union Bank is BMC, which has a separate juridical personality
of Appeals (CA) in CA-G.R. No. 66030 reversing an earlier decision of the Regional Trial Court
from appellants Ong. Granting that BMC was already insolvent at the time of the sale, still, there
(RTC) of Pasig City in Civil Case No. 61601, a suit thereat commenced by the petitioner against
was no showing that at the time BMC filed a petition for suspension of payment that appellants
the herein respondents for annulment or rescission of sale in fraud of creditors.
Ong were themselves bankrupt. In the case at bench, no attempt was made by Union Bank, not
The facts:
even a feeble or half-hearted one, to establish that appellants spouses have no other property
Herein respondents, the spouses Alfredo Ong and Susana Ong, own the majority capital stock
from which Union Bank, as creditor of BMC, could obtain payment. While appellants Ong may
of Baliwag Mahogany Corporation (BMC). On October 10, 1990, the spouses executed a
be independently liable directly to Union Bank under the Continuing Surety Agreement, all that
Continuing Surety Agreement in favor of Union Bank to secure a P40,000,000.00-credit line
Union Bank tried to prove was that BMC was insolvent at the time of the questioned sale. No
facility made available to BMC. The agreement expressly stipulated a solidary liability
competent evidence was adduced showing that appellants Ong had no leviable assets other
undertaking.
than the subject property that would justify challenge to the transaction. 2
On October 22, 1991, or about a year after the execution of the surety agreement, the spouses
Petitioner moved for a reconsideration of the above decision but its motion was denied by the
Ong, for P12,500,000.00, sold their 974-square meter lot located in Greenhills, San Juan, Metro
appellate court in its resolution of February 21, 2002.3
Manila, together with the house and other improvements standing thereon, to their co-
Hence, petitioner’s present recourse on its submission that the appellate court erred:
respondent, Jackson Lee (Lee, for short). The following day, Lee registered the sale and was
I. xxx WHEN IT CONSIDERED THAT THE SALE TRANSACTION BETWEEN [
then issued Transfer Certificate of Title (TCT) No. 4746-R. At about this time, BMC had already
RESPONDENTS SPOUSES ONG AND LEE] ENJOYS THE PRESUMPTION OF REGULARITY
availed itself of the credit facilities, and had in fact executed a total of twenty-two (22) promissory
AND LEGALITY AS THERE EXISTS ALSO A PRESUMPTION THAT THE SAID SALE WAS
notes in favor of Union Bank.
ENTERED IN FRAUD OF CREDITORS. PETITIONER THEREFORE NEED NOT PROVE THAT
On November 22, 1991, BMC filed a Petition for Rehabilitation and for Declaration of
RESPONDENTS SPOUSES ONG DID NOT LEAVE SUFFICIENT ASSETS TO PAY THEIR
Suspension of Payments with the Securities and Exchange Commission (SEC). To protect its
CREDITORS. BUT EVEN THEN, PETITIONER HAS PROVEN THAT THE SPOUSES HAVE
interest, Union Bank lost no time in filing with the RTC of Pasig City an action for rescission of
NO OTHER ASSETS.
the sale between the spouses Ong and Jackson Lee for purportedly being in fraud of creditors.
II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI THAT THE SALE BETWEEN
In its complaint, docketed as Civil Case No. 61601 and eventually raffled to Branch 157 of the
DEFENDANT-APPELLANTS ENJOY THE PRESUMPTION OF REGULARITY AND LEGALITY,
court, Union Bank assailed the validity of the sale, alleging that the spouses Ong and Lee
THAT THE EVIDENCE ADDUCED BY THE PETITIONER … WAS NOT SUFFICIENT TO
entered into the transaction in question for the lone purpose of fraudulently removing the
OVERCOME THE PRESUMPTION.
property from the reach of Union Bank and other creditors. The fraudulent design, according to
III. xxx IN FINDING THAT IT WAS [RESPONDENT] LEE WHO HAS SUFFICIENTLY PROVEN
Union Bank, is evidenced by the following circumstances: (1) insufficiency of consideration, the
THAT THERE WAS A VALID AND SUFFICIENT CONSIDERATION FOR THE SALE.
purchase price of P12,500,000.00 being below the fair market value of the subject property at
IV. xxx IN NOT FINDING THAT JACKSON LEE WAS IN BAD FAITH WHEN HE PURCHASED
that time; (2) lack of financial capacity on the part of Lee to buy the property at that time since
THE PROPERTY.4
his gross income for the year 1990, per the credit investigation conducted by the bank,
Petitioner maintains, citing China Banking Corporation vs. Court of Appeals, 5 that the sale in
amounted to only P346,571.73; and (3) Lee did not assert absolute ownership over the property
question, having been entered in fraud of creditor, is rescissible. In the same breath, however,
as he allowed the spouses Ong to retain possession thereof under a purported Contract of
petitioner would fault the CA for failing to consider that the sale between the Ongs and Lee is
Lease dated October 29, 1991.
presumed fraudulent under Section 70 of Act No. 1956, as amended, or the Insolvency Law.
Answering, herein respondents, as defendants a quo, maintained, in the main, that both
Elaborating on this point, petitioner states that the subject sale occurred thirty (30) days prior to
contracts of sale and lease over the Greenhills property were founded on good and valid
the filing by BMC of a petition for suspension of payment before the SEC, thus rendering the
consideration and executed in good faith. They also scored Union Bank for forum shopping,
sale not merely rescissible but absolutely void.
alleging that the latter is one of the participating creditors in BMC’s petition for rehabilitation.
We resolve to deny the petition.
Issues having been joined, trial followed. On September 27, 1999, the trial court, applying Article
In effect, the determinative issue tendered in this case resolves itself into the question of
1381 of the Civil Code and noting that the evidence on record "present[s] a holistic combination
whether or not the Ong-Lee contract of sale partakes of a conveyance to defraud Union Bank.
of circumstances distinctly characterized by badges of fraud," rendered judgment for Union
Obviously, this necessitates an inquiry into the facts and this Court eschews factual examination
Bank, the Deed of Sale executed on October 22, 1991 by the spouses Ong in favor of Lee being
in a petition for review under Rule 45 of the Rules of Court, save when, as in the instant case, a
declared null and void.
clash between the factual findings of the trial court and that of the appellate court exists,6 among
Foremost of the circumstances adverted to relates to the execution of the sale against the
other exceptions.
backdrop of the spouses Ong, as owners of 70% of BMC's stocks, knowing of the company’s
As between the contrasting positions of the trial court and the CA, that of the latter commends
insolvency. This knowledge was the reason why, according to the court, the spouses Ong
itself for adoption, being more in accord with the evidence on hand and the laws applicable
disposed of the subject property leaving the bank without recourse to recover BMC's
thereto.
indebtedness. The trial court also made reference to the circumstances which Union Bank
Essentially, petitioner anchors its case on Article 1381 of the Civil Code which lists as among the
mentioned in its complaint as indicia of conveyance in fraud of creditors.
rescissible contracts "[T]hose undertaken in fraud of creditors when the latter cannot in any other
Therefrom, herein respondents interposed an appeal to the CA which docketed their recourse as
manner collect the claim due them."
CA-G.R. No. 66030.
Contracts in fraud of creditors are those executed with the intention to prejudice the rights of
creditors. They should not be confused with those entered into without such mal-intent, even if,
as a direct consequence thereof, the creditor may suffer some damage. In determining whether
or not a certain conveying contract is fraudulent, what comes to mind first is the question of
whether the conveyance was a bona fide transaction or a trick and contrivance to defeat
creditors.7 To creditors seeking contract rescission on the ground of fraudulent conveyance rest
the onus of proving by competent evidence the existence of such fraudulent intent on the part of
the debtor, albeit they may fall back on the disputable presumptions, if proper, established under
Article 1387 of the Code.8
In the present case, respondent spouses Ong, as the CA had determined, had sufficiently
established the validity and legitimacy of the sale in question. The conveying deed, a duly
notarized document, carries with it the presumption of validity and regularity. Too, the sale was
duly recorded and annotated on the title of the property owners, the spouses Ong. As the
transferee of said property, respondent Lee caused the transfer of title to his name.
There can be no quibbling about the transaction being supported by a valid and sufficient
consideration. Respondent Lee’s account, while on the witness box, about this angle of the sale
was categorical and straightforward. An excerpt of his testimony:
Atty. De Jesus :
Before you prepared the consideration of this formal offer, as standard operating procedure of
buy and sell, what documents were prepared?
xxx xxx xxx
Jackson Lee:
A. There is a downpayment.
Q. And how much was the downpayment?
A. P2,500,000.00.
Q. Was that downpayment covered by a receipt signed by the seller?
A. Yes, Sir, P500,000.00 and P2,000,000.00
xxx xxx xxx
Q. Are you referring to the receipt dated October 19, 1991, how about the other receipt dated
October 21, 1991?
A. Yes, Sir, this is the same receipt.
xxx xxx xxx
Q. Considering that the consideration of this document is for P12,000,000.00 and you made
mention only of P2,500,000.00, covered by the receipts, do you have evidence to show that,
finally, Susana Ong received the balance of P10,000,000.00?
A. Yes, Sir.
Q. Showing to you a receipt denominated as Acknowledgement Receipt, dated October 25,
1991, are you referring to this receipt to cover the balance of P10,000,000.00?
A. Yes, sir.9
The foregoing testimony readily proves that money indeed changed hands in connection with the
sale of the subject property. Respondent Lee, as purchaser, paid the stipulated contract price to
the spouses Ong, as vendors. Receipts presented in evidence covered and proved such
payment. Accordingly, any suggestion negating payment and receipt of valuable consideration
for the subject conveyance, or worse, that the sale was fictitious must simply be rejected.
In a bid to attach a badge of fraud on the transaction, petitioner raises the issue of inadequate
consideration, alleging in this regard that only P12,500,000.00 was paid for property having,
during the period material, a fair market value of P14,500,000.00.
We do not agree.
The existence of fraud or the intent to defraud creditors cannot plausibly be presumed from the
fact that the price paid for a piece of real estate is perceived to be slightly lower, if that really be
the case, than its market value. To be sure, it is logical, even expected, for contracting minds,
each having an interest to protect, to negotiate on the price and other conditions before closing a
sale of a valuable piece of land. The negotiating areas could cover various items. The purchase
price, while undeniably an important consideration, is doubtless only one of them. Thus, a
scenario where the price actually stipulated may, as a matter of fact, be lower than the original
asking price of the vendor or the fair market value of the property, as what perhaps happened in
the instant case, is not out of the ordinary, let alone indicative of fraudulent intention. That the
spouses Ong acquiesced to the price of P12,500,000.00, which may be lower than the market
value of the house and lot at the time of alienation, is certainly not an unusual business
phenomenon.
Lest it be overlooked, the disparity between the price appearing in the conveying deed and what
the petitioner regarded as the real value of the property is not as gross to support a conclusion
of fraud. What is more, one Oliver Morales, a licensed real estate appraiser and broker, virtually
made short shrift of petitioner’s claim of gross inadequacy of the purchase price. Mr. Morales
declared that there exists no gross disparity between the market value of the subject property
and the price mentioned in the deed as consideration. He explained why:
ATTY. EUFEMIO:
Q. I am showing to you the said two (2) exhibits Mr. Morales and I would like you to go over the
terms and conditions stated therein and as an expert in real estate appraiser (sic) and also as a
real estate broker, can you give this Honorable Court your considered opinion whether the
consideration stated therein P12,500,000.00 in the light of all terms and conditions of the said
Deed of Absolute Sale and Offer to Purchase could be deemed fair and reasonable?
xxx xxx xxx
MR. MORALES:
A. My opinion generally a Deed of Absolute Sale indicated prescribed not only the amount of the
consideration. There are also other expenses involved in the sales. I do not see here other
payment of who takes care of capital gains stocks (sic) in this Deed of Sale neither who
shouldered the documentary stamps or even transfer tax. That is my comment regarding this.
Q. Precisely Mr. Witness we have also shown to you the Offer to Purchase which has been
marked as Exhibit "9" as to the terms which we are asking?
xxx xxx xxx
A. Well, it says here in item C of the conditions the Capital Gains Stocks (sic), documentary
stamps, transfer tax registration and broker’s fee for the buyer’s account. I do not know how
much is this worth. If at all in condition (sic) to the 12.5 million which is the selling price, may I,
therefore aside (sic) how much is the total cost pertaining to this. The capital gains tax on (sic),
documentary stamps, transfer tax are all computed on the basis of the consideration which is
P12.5 M, the capital gain stocks (sic) is 5%, 5% of 12.5 M.
xxx xxx xxx
Yes sir if the 5% capital gains tax and documentary stamps respectively shall be added to the
12.5 Million before the inclusion of the transfer tax, the amount will be already in the vicinity
of P13,250.000.
Q. With such consideration Mr. Witness and in the light of the terms and conditions in the said
Offer to Purchase and Deed of Absolute Sale could you give your opinion as to whether the
consideration is fair and reasonable.
xxx xxx xxx
A. With our proposal of P14.5 M as compared now to P13,250,000.00 may I give my opinion that
generally there will be two appraisers. In fairness to the situation, they should not vary by as
much as 7% down so we are playing at a variance actually of about 15%. In my experience in
this profession for the last 27 years as I have said in fairness if there is another appraisal done
by another person, that kind of difference is very marginal should at least indicate the fairness of
the property and so therefore the only way to find out is to determine the difference between
the P14.5 M and the P13,250,000.00. My computation indicates that it is close to 10%
something like that difference. What is the question again?
Q. Whether it is fair and reasonable under the circumstances.
A. I have answered already the question and I said maximum of 15%.
Q. So based on your computation this is about 10% which is fair and reasonable.
A That is right sir.10
Withal, the consideration of the sale is fair and reasonable as would justify the conclusion that
the sale is undoubtedly a true and genuine conveyance to which the parties thereto are
irrevocably and undeniably bound.
It may be stressed that, when the validity of sales contract is in issue, two veritable presumptions
are relevant: first, that there was sufficient consideration of the contract11 ; and, second, that it
was the result of a fair and regular private transaction.12 If shown to hold, these presumptions
infer prima facie the transaction's validity, except that it must yield to the evidence
adduced13 which the party disputing such presumptive validity has the burden of overcoming.
Unfortunately for the petitioner, it failed to discharge this burden. Its bare allegation respecting
the sale having been executed in fraud of creditors and without adequate consideration cannot,
without more, prevail over the respondents' evidence which more than sufficiently supports a
conclusion as to the legitimacy of the transaction and the bona fides of the parties.
Parenthetically, the rescissory action to set aside contracts in fraud of creditors is accion
pauliana, essentially a subsidiary remedy accorded under Article 1383 of the Civil Code which
the party suffering damage can avail of only when he has no other legal means to obtain
reparation for the same.14 In net effect, the provision applies only when the creditor cannot
recover in any other manner what is due him.
It is true that respondent spouses, as surety for BMC, bound themselves to answer for the
latter’s debt. Nonetheless, for purposes of recovering what the eventually insolvent BMC owed
the bank, it behooved the petitioner to show that it had exhausted all the properties of the
spouses Ong. It does not appear in this case that the petitioner sought other properties of the
spouses other than the subject Greenhills property. The CA categorically said so. Absent proof,
therefore, that the spouses Ong had no other property except their Greenhills home, the sale
thereof to respondent Lee cannot simplistically be considered as one in fraud of creditors.
Neither was evidence adduced to show that the sale in question peremptorily deprived the
petitioner of means to collect its claim against the Ongs. Where a creditor fails to show that he
has no other legal recourse to obtain satisfaction for his claim, then he is not entitled to the
rescission asked.15
For a contract to be rescinded for being in fraud of creditors, both contracting parties must be
shown to have acted maliciously so as to prejudice the creditors who were prevented from
collecting their claims.16 Again, in this case, there is no evidence tending to prove that the
spouses Ong and Lee were conniving cheats. In fact, the petitioner did not even attempt to
prove the existence of personal closeness or business and professional interdependence
between the spouses Ong and Lee as to cast doubt on their true intent in executing the contract
of sale. With the view we take of the evidence on record, their relationship vis-à-vis the subject
Greenhills property was no more than one between vendor and vendee dealing with each other
for the first time. Any insinuation that the two colluded to gyp petitioner bank is to read in a
relationship something which, from all indications, appears to be purely business.
It cannot be overemphasized that rescission is generally unavailing should a third person, acting
in good faith, is in lawful possession of the property,17 that is to say, he is protected by law
against a suit for rescission by the registration of the transfer to him in the registry.
As recited earlier, Lee was - and may still be - in lawful possession of the subject property as the
transfer to him was by virtue of a presumptively valid onerous contract of sale. His possession is
evidenced by no less than a certificate of title issued him by the Registry of Deeds of San Juan,
Metro Manila, after the usual registration of the corresponding conveying deed of sale. On the
other hand, the bona fides of his acquisition can be deduced from his conduct and outward acts
previous to the sale. As testified to by him and duly noted by the CA, respondent Lee undertook
what amounts to due diligence on the possible defects in the title of the Ongs before proceeding
with the sale. As it were, Lee decided to buy the property only after being satisfied of the
absence of such defects.18
Time and again, the Court has held that one dealing with a registered parcel of land need not go
beyond the certificate of title as he is charged with notice only of burdens which are noted on the
face of the register or on the certificate of title.19 The Continuing Surety Agreement, it ought to be
particularly pointed out, was never recorded nor annotated on the title of spouses Ong. There is
no evidence extant in the records to show that Lee had knowledge, prior to the subject sale, of
the surety agreement adverted to. In fine, there is nothing to remotely suggest that the purchase
of the subject property was characterized by anything other than good faith.
Petitioner has made much of respondent Lee not taking immediate possession of the property
after the sale, stating that such failure is an indication of his participation in the fraudulent
scheme to prejudice petitioner bank.
We are not persuaded.
Lee, it is true, allowed the respondent spouses to continue occupying the premises even after
the sale. This development, however, is not without basis or practical reason. The spouses'
continuous possession of the property was by virtue of a one-year lease20 they executed with
respondent Lee six days after the sale. As explained by the respondent spouses, they insisted
on the lease arrangement as a condition for the sale in question. And pursuant to the lease
contract aforementioned, the respondent Ongs paid and Lee collected rentals at the rate
of P25,000.00 a month. Contrary thus to the petitioner’s asseveration, respondent Lee, after the
sale, exercised acts of dominion over the said property and asserted his rights as the new
owner. So, when the respondent spouses continued to occupy the property after its sale, they
did so as mere tenants. While the failure of the vendee to take exclusive possession of the
property is generally recognized as a badge of fraud, the same cannot be said here in the light of
the existence of what appears to be a genuine lessor-lessee relationship between the spouses
Ong and Lee. To borrow from Reyes vs. Court of Appeals,21 possession may be exercised in
one’s own name or in the name of another; an owner of a piece of land has possession, either
when he himself physically occupies the same or when another person who recognizes his right
as owner is in such occupancy.
Petitioner’s assertion regarding respondent Lee’s lack of financial capacity to acquire the
property in question since his income in 1990 was only P346,571.73 is clearly untenable.
Assuming for argument that petitioner got its figure right, it is clearly incorrect to measure one’s
purchasing capacity with one’s income at a given period. But the more important consideration in
this regard is the uncontroverted fact that respondent Lee paid the purchase price of said
property. Where he sourced the needed cash is, for the nonce, really of no moment.
The cited case of China Banking22 cannot plausibly provide petitioner with a winning card. In that
case, the Court, applying Article 1381 (3) of the Civil Code, rescinded an Assignment of Rights
to Redeem owing to the failure of the assignee to overthrow the presumption that the said
conveyance/assignment is fraudulent. In turn, the presumption was culled from Article 1387, par.
2, of the Code pertinently providing that "[A]lienation by onerous title are also presumed
fraudulent when made by persons against whom some judgment has been rendered in any
instance or some writ of attachment has been issued."
Indeed, when the deed of assignment was executed in China Banking, the assignor therein
already faced at that time an adverse judgment. In the same case, moreover, the Court took
stock of other signs of fraud which tainted the transaction therein and which are, significantly, not
obtaining in the instant case. We refer, firstly, to the element of kinship, the assignor, Alfonso
Roxas Chua, being the father of the assignee, Paulino. Secondly, Paulino admitted knowing his
father to be insolvent. Hence, the Court, rationalizing the rescission of the assignment of rights,
made the following remarks:
The mere fact that the conveyance was founded on valuable consideration does not necessarily
negate the presumption of fraud under Article 1387 of the Civil Code. There has to be valuable
consideration and the transaction must have been made bona fide.23
There lies the glaring difference with the instant case.
Here, the existence of fraud cannot be presumed, or, at the very least, what were perceived to
be badges of fraud have been proven to be otherwise. And, unlike Alfonso Roxas Chua in China
Banking, a judgment has not been rendered against respondent spouses Ong or that a writ of
attachment has been issued against them at the time of the disputed sale.
In a last-ditch attempt to resuscitate a feeble cause, petitioner cites Section 70 of the Insolvency
Law which, unlike the invoked Article 1381 of the Civil Code that deals with a valid but
rescissible contract, treats of a contractual infirmity resulting in nullity no less of the transaction
in question. Insofar as pertinent, Section 70 of the Insolvency Law provides:
Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency, within thirty days
before the filing of a petition by or against him, with a view to giving a preference to any creditor
or person having a claim against him xxx makes any xxx sale or conveyance of any part of his
property, xxx such xxx sale, assignment or conveyance is void, and the assignee, or the
receiver, may recover the property or the value thereof, as assets of such insolvent debtor. xxx.
Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of
whatever character made by the insolvent within one (1) month before the filing of a petition in
insolvency by or against him, except for a valuable pecuniary consideration made in good
faith shall be void. xxx. (Emphasis added)
Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is null and
void in contemplation of the aforequoted provision, the sale having occurred on October 22,
1991 or within thirty (30) days before BMC filed a petition for suspension of payments on
November 22, 1991.
Petitioner's reliance on the afore-quoted provision is misplaced for the following reasons:
First, Section 70, supra, of the Insolvency Law specifically makes reference to
conveyance of properties made by a "debtor" or by an "insolvent" who filed a petition,
 or against whom a petition for insolvency has been filed. Respondent spouses Ong
have doubtlessly not filed a petition for a declaration of their own insolvency. Neither
has one been filed against them. And as the CA aptly observed, it was never proven
that respondent spouses are likewise insolvent, petitioner having failed to show that
they were down to their Greenhills property as their only asset.
It may be that BMC had filed a petition for rehabilitation and suspension of payments
with the SEC. The nagging fact, however is that BMC is a different juridical person
from the respondent spouses. Their seventy percent (70%) ownership of BMC’s
capital stock does not change the legal situation. Accordingly, the alleged insolvency
of BMC cannot, as petitioner postulates, extend to the respondent spouses such that
transaction of the latter comes within the purview of Section 70 of the Insolvency Law.
Second, the real debtor of petitioner bank in this case is BMC. The fact that the
respondent spouses bound themselves to answer for BMC’s indebtedness under the
surety agreement referred to at the outset is not reason enough to conclude that the
spouses are themselves debtors of petitioner bank. We have already passed upon the
simple reason for this proposition. We refer to the basic precept in this jurisdiction that
a corporation, upon coming into existence, is invested by law with a personality
separate and distinct from those of the persons composing it.24 Mere ownership by a
single or small group of stockholders of nearly all of the capital stock of the corporation
is not, without more, sufficient to disregard the fiction of separate corporate
personality.25
Third, Section 70 of the Insolvency Law considers transfers made within a month after
the date of cleavage void, except those made in good faith and for valuable pecuniary
consideration. The twin elements of good faith and valuable and sufficient
consideration have been duly established. Given the validity and the basic legitimacy
of the sale in question, there is simply no occasion to apply Section 70 of the
Insolvency Law to nullify the transaction subject of the instant case.
All told, we are far from convinced by petitioner’s argumentation that the circumstances
surrounding the sale of the subject property may be considered badges of fraud. Consequently,
its failure to show actual fraudulent intent on the part of the spouses Ong defeats its own cause.
WHEREFORE, the instant petition is DENIED and the assailed decision of the Court of Appeals
is AFFIRMED.

Costs against petitioner.

SO ORDERED.
G.R. No. 196182 September 1, 2014
ECE REALTY AND DEVELOPMENT INC., Petitioner,
vs.
RACHEL G. MANDAP, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari assailing the Decision1 and Resolution2 of
the Court of Appeals (CA), dated July 21, 2010 and March 15, 2011, respectively, in CA-G.R. SP
No. 100741.
The factual and procedural antecedents of the case are as follows:
Herein petitioner is a corporation engaged in the building and development of condominium
units. Sometime in 1995, it started the construction of a condominium project called Central Park
Condominium Building located along Jorge St., Pasay City. However, printed advertisements
were made indicating therein that the said project was to be built in Makati City.3 In December
1995, respondent, agreed to buy a unit from the above project by paying a reservation fee and,
thereafter, downpayment and monthly installments. On June 18, 1996, respondent and the
representatives of petitioner executed a Contract to Sell.4 In the said Contract, it was indicated
that the condominium project is located in Pasay City.
More than two years after the execution of the Contract to Sell, respondent, through her counsel,
wrote petitioner a letter dated October 30, 1998 demanding the return of ₱422,500.00,
representing the payments she made, on the ground that she subsequently discovered that the
condominium project was being built in Pasay City and not in Makati City as indicated in its
printed advertisements.5
However, instead of answering respondent's letter, petitioner sent her a written communication
dated November 30, 1998 informing her that her unit is ready for inspection and occupancy
should she decide to move in.6
Treating the letter as a form of denial of her demand for the return of the sum she had paid to
petitioner, respondent filed a complaint with the Expanded National Capital Region Field Office
(ENCRFO) of the Housing and Land Use Regulatory Board (HLURB) seeking the annulment of
her contract with petitioner, the return of her payments, and damages.7
On September 30, 2005, the ENCRFO dismissed respondent's complaint for lack of merit and
directedthe parties to resume the fulfillment of the terms and conditions of their sales contract.
The ENCRFO held that respondent "failed to show or substantiate the legal grounds that consist
of a fraudulent or malicious dealing with her by the [petitioner], such as, the latter's employment
of insidious words or machinations which induced or entrapped her into the contract and which,
without them, would not have encouraged her to buy the unit."8
Respondent filed a petition for review with the HLURB Board of Commissioners questioning the
decision of the ENCRFO. On April 25, 2006, the HLURB Board of Commissioners rendered
judgment dismissing respondent's complaint and affirming the decision of the ENCRFO.9 Giving
credence to the Contract to Sell executed by petitioner and respondent, the Board of
Commissioners held that when the parties reduced their contract in writing, their rights and
duties must befound in their contract and neither party can place a greater obligation than what
the contract provides.
Aggrieved, respondent filed an appeal with the Office of the President. On June 21, 2007, the
Office of the President dismissed respondent's appeal and affirmed in totothe decision of the
HLURB Board of Commissioners.10 Respondent filed a Motion for Reconsideration,11 but the
Office of the President denied it in a Resolution12 dated August 29, 2007.
Respondent then filed a petition for review with the CA.13
On July 21, 2010, the CA promulgated its assailed Decision, the dispositive portion of which
reads, thus:
WHEREFORE, premises considered, We hereby REVERSEand SET ASIDEthe Decision and
the Resolution dated June 21, 2007 and August 29, 2007, respectively, issued by the Office of
the President in OP Case No. 06-F-224. Accordingly, the contract between Rachel G. Mandap
and ECE Realty is hereby ANNULLED. Consequently, ECE Realty is ordered to return the total
amountof ₱422,500.00 representing payments made by Rachel G. Mandap on reservation fee,
[downpayment] and monthly installments on the condominium unit, with legal interest thereon at
twelve percent (12%) per annumfrom the date of filing of action until fully paid.
No costs.
SO ORDERED.14
The CA held that petitioner employed fraud and machinations to induce respondent to enter into
a contract with it. The CA also expressed doubt on the due execution of the Contract to Sell
between the parties.
Petitioner filed a Motion for Reconsideration, but the CA denied it in its March 15, 2011
Resolution.
Hence, the present petition for review on certiorariwith the following Assignment of Errors:
I
The Court of Appeals gravely erred in ruling that there was fraud in the execution of the subject
contract to sell and declaring the same as annulled and ordering petitioner ECE to refund all
payments made by respondent.
II
The Court of Appeals erred in ordering the award of legal interest at the rate of 12% per annum
starting from the filing of the complaint until fully paid when legal interest should have been
pegged at 6%.15
The Court finds the petition meritorious.
The basic issue in the present caseis whether petitioner was guilty of fraud and if so, whether
such fraud is sufficient ground to nullify its contract with respondent.
Article 1338 of the Civil Code provides that "[t]here is fraud when through insidious words or
machinationsof one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to."
In addition, under Article 1390 of the same Code, a contract is voidable or annullable "where the
consent is vitiated by mistake, violence, intimidation, undue influence or fraud."
Also, Article 1344 of the same Codeprovides that "[i]n order that fraud may make a contract
voidable, it should be serious and should not have been employed by both contracting parties."
Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts,
it must fulfill two conditions.
First, the fraud must be dolo causanteor it must be fraud in obtaining the consent of the party.16
This is referred to as causal fraud. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive
a prudent person cannot be a ground for nullity.17 The circumstances of each case should be
considered, taking into account the personal conditions of the victim.18
Second, the fraud must be proven by clear and convincing evidence and not merely by a
preponderance thereof.19
In the present case, this Court finds that petitioner is guilty of false representation of a fact. This
is evidenced by its printed advertisements indicating that its subject condominium project is
located in Makati City when, in fact, it is in Pasay City. The Court agrees with the Housing and
Land Use Arbiter, the HLURB Board ofCommissioners, and the Office of the President, in
condemning petitioner's deplorable act of making misrepresentations in its advertisementsand in
issuing a stern warning that a repetition of this act shall bedealt with more severely.
However, insofar as the present case is concerned, the Court agrees with the Housing and Land
Use Arbiter, the HLURB Board of Commissioners, and the Office of the President, that the
misrepresentation made by petitioner in its advertisements does not constitute causal fraud
which would have been a valid basis in annulling the Contract to Sell between petitioner and
respondent.
In his decision, the Housing and Land Use Arbiter found that respondent failed to show that "the
essential and/or moving factor that led the [respondent] to give her consent and agree to buy the
unit was precisely the project's advantageous or uniquelocation in Makati [City] – to the
exclusion of other places or cityx x x." Both the HLURB Board of Commissioners and the Office
of the President affirmed the finding of the Arbiter and unanimously held that respondent failed
to prove that the location of the said project was the causal consideration or the principal
inducement which led her into buyingher unit in the said condominium project. The Court finds
no cogent reason to depart from the foregoing findings and conclusion of the above agencies.
Indeed, evidence shows that respondent proceeded to sign the Contract to Sell despite
information contained therein that the condominium is located in Pasay City. This only means
that she still agreed to buy the subject property regardless of the fact that it is located in a place
different from what she was originally informed. If she had a problem with the property's location,
she should not havesigned the Contract to Sell and, instead, immediately raised this issue with
petitioner. But she did not. As correctly observed by the Office of the President, it took
respondent more than two years from the execution of the Contract to Sell to demand the return
of the amount she paid on the ground that she was misled into believing that the subject
property islocated in Makati City. In the meantime, she continued to make payments.
The Court is not persuaded by the ruling of the CA which expresses doubt on the due execution
of the Contractto Sell. The fact remains that the said Contract to Sell was notarized. Itis settled
that absent any clear and convincing proof to the contrary, a notarized document enjoys the
presumption of regularity and is conclusive as to the truthfulness of its contents.20 Neither does
the Court agree thatthe presumption of regularity accorded to the notarized Contract to Sell was
overcome by evidence to the contrary. Respondent's allegation that she signed the said
Contract to Sell with several blank spaces, and which allegedly did not indicate the location of
the condominium, was not supported by proof. The basic rule is that mere allegation is not
evidence and is not equivalent to proof.21 In addition, the fact that respondent made several
payments prior to the execution of the subject Contract to Sell is not the kind of evidence needed
to overcome such presumption of regularity.
With respect to the foregoing discussions, the Court quotes with approval the disquisition of the
Office of the President on the credibility of the claims of petitioner and respondent, to wit:
xxxx
We give credence to the version of [petitioner] ECE Realty considering that there is no cogent
reason why this Office could not rely on the truth and veracity of the notarized Contract to Sell.
"Being a notarized document, it had in its favorthe presumption of regularity, and to overcome
the same, there must be evidence that is clear, convincing and more than merely preponderant;
otherwise, the document should be upheld. [Respondent] Mandap failed to overcome this
presumption.
The contention that Mandap signed the Contract to Sell in-blank, and [that] it was ECE Realty
that supplied the details on it is remarkably threadbare for no evidence was submitted to support
such claim in all the proceedings before the ENCRFO and the Board of Commissioners. It is
only now that Mandap has belatedly submitted the Affidavit of Lorenzo G. Tipon. This cannot be
done without running afoul with the well-settled principle barring a party from introducing fresh
defenses and facts at the appellate stage. Moreover, the infirmity of affidavits as evidence is a
matter of judicial experience. It issettled that no undue importance shall be given to a sworn
statement or affidavit as a piece of evidence because being taken ex parte, an affidavit is almost
always incomplete and inaccurate. Thus, absent, as here, of (sic) any controverting evidence, it
is reasonable to presume that Mandap knew the contents of the Contract to Sell which was
executed with legal formalities. The ruling in Bernardo vs. Court of Appeals is enlightening in this
wise:
x x x. The rule that one who signs a contract is presumed to know its contentshas been applied
even to contract of illiterate persons on the ground that if such persons are unable to read, they
are negligent if they fail to have the contract read to them. If a person cannot read the
instrument, it is as much his duty to procure some reliable persons to read and explain it tohim,
before he signs it, as it would be to read it before he signed it if he were able to do so and his
failure to obtain a reading and explanation of it is such gross negligence as will estop him from
avoiding it on the ground that he was ignorant of its contents.22
In any case, even assuming that petitioner’s misrepresentation consists of fraud which could bea
ground for annulling their Contract to Sell, respondent's act of affixing her signatureto the said
Contract, after having acquired knowledge of the property's actual location, can be construed as
an implied ratification thereof.
Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows:
Art. 1393. Ratification may be effected expressly or tacitly.1âwphi1 It is understood that there is
a tacit ratification if, with knowledge of the reason which renders the contract voidable and such
reason having ceased, the person who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.
Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom.23
Under Article 1392 of the Civil Code, "ratification extinguishes the action to annul a voidable
contract." In addition, Article 1396 of the same Code provides that "[r]atification cleanses the
contract from all its defects from the moment it was constituted."

Hence, based on the foregoing, the findings and conclusions of the Housing and Land Use
Arbiter, the HLURB Board of Commissioners and the Office of the President, should be
sustained.

WHEREFORE, the instant petition is GRANTED. The Decision and Resolution of the Court of
Appeals, dated July 21, 2010 and March 15, 2011, respectively, are REVERSEDand SET
ASIDE. The September 30, 2005 Decision of the Expanded National Capital Region Field Office
of the Housing and Land Use Regulatory Board, which dismisses respondent's complaint and
directs petitioner and respondent to resume the fulfillment of their sales contract, is
REINSTATED.

SO ORDERED.
G.R. No. 179597 February 3, 2014
IGLESIA FILIPINA INDEPENDIENTE, Petitioner,
vs.
HEIRS of BERNARDINO TAEZA, Respondents.
DECISION
PERALTA, J.:
This deals with the Petition for Review on Certiorari under Rule 45 of the Rules of Court praying
that the Decision1 of the Court of Appeals (CA), promulgated on June 30, 2006, and the
Resolution2 dated August 23, 2007, denying petitioner's motion for reconsideration thereof, be
reversed and set aside.
The CA's narration of facts is accurate, to wit:
The plaintiff-appellee Iglesia Filipina Independiente (IFI, for brevity), a duly registered religious
corporation, was the owner of a parcel of land described as Lot 3653, containing an area of
31,038 square meters, situated at Ruyu (now Leonarda), Tuguegarao, Cagayan, and covered by
Original Certificate of Title No. P-8698. The said lot is subdivided as follows: Lot Nos. 3653-A,
3653-B, 3653-C, and 3653-D.
Between 1973 and 1974, the plaintiff-appellee, through its then Supreme Bishop Rev. Macario
Ga, sold Lot 3653-D, with an area of 15,000 square meters, to one Bienvenido de Guzman.
On February 5, 1976, Lot Nos. 3653-A and 3653-B, with a total area of 10,000 square meters,
were likewise sold by Rev. Macario Ga, in his capacity as the Supreme Bishop of the plaintiff-
appellee, to the defendant Bernardino Taeza, for the amount of ₱100,000.00, through
installment, with mortgage to secure the payment of the balance. Subsequently, the defendant
allegedly completed the payments.
In 1977, a complaint for the annulment of the February 5, 1976 Deed of Sale with Mortgage was
filed by the Parish Council of Tuguegarao, Cagayan, represented by Froilan Calagui and Dante
Santos, the President and the Secretary, respectively, of the Laymen's Committee, with the then
Court of First Instance of Tuguegarao, Cagayan, against their Supreme Bishop Macario Ga and
the defendant Bernardino Taeza.
The said complaint was, however, subsequently dismissed on the ground that the plaintiffs
therein lacked the personality to file the case.
After the expiration of Rev. Macario Ga's term of office as Supreme Bishop of the IFI on May 8,
1981, Bishop Abdias dela Cruz was elected as the Supreme Bishop. Thereafter, an action for
the declaration of nullity of the elections was filed by Rev. Ga, with the Securities and Exchange
Commission (SEC).
In 1987, while the case with the SEC is (sic) still pending, the plaintiff-appellee IFI, represented
by Supreme Bishop Rev. Soliman F. Ganno, filed a complaint for annulment of the sale of the
subject parcels of land against Rev. Ga and the defendant Bernardino Taeza, which was
docketed as Civil Case No. 3747. The case was filed with the Regional Trial Court of
Tuguegarao, Cagayan, Branch III, which in its order dated December 10, 1987, dismissed the
said case without prejudice, for the reason that the issue as to whom of the Supreme Bishops
could sue for the church had not yet been resolved by the SEC.
On February 11, 1988, the Securities and Exchange Commission issued an order resolving the
leadership issue of the IFI against Rev. Macario Ga.
Meanwhile, the defendant Bernardino Taeza registered the subject parcels of land.
Consequently, Transfer Certificate of Title Nos. T-77995 and T-77994 were issued in his name.
The defendant then occupied a portion of the land. The plaintiff-appellee allegedly demanded
the defendant to vacate the said land which he failed to do.
In January 1990, a complaint for annulment of sale was again filed by the plaintiff-appellee IFI,
this time through Supreme Bishop Most Rev. Tito Pasco, against the defendant-appellant, with
the Regional Trial Court of Tuguegarao City, Branch 3.
On November 6, 2001, the court a quo rendered judgment in favor of the plaintiff-
appellee.1âwphi1 It held that the deed of sale executed by and between Rev. Ga and the
defendant-appellant is null and void.3
The dispositive portion of the Decision of Regional Trial Court of Tuguegarao City (RTC) reads
as follows:
WHEREFORE, judgment is hereby rendered:
1) declaring plaintiff to be entitled to the claim in the Complaint;
2) declaring the Deed of Sale with Mortgage dated February 5, 1976 null and void;
3) declaring Transfer Certificates of Title Numbers T-77995 and T-77994 to be null and void ab
initio;
4) declaring the possession of defendant on that portion of land under question and ownership
thereof as unlawful;
5) ordering the defendant and his heirs and successors-in-interest to vacate the premises in
question and surrender the same to plaintiff; [and]
6) condemning defendant and his heirs pay (sic) plaintiff the amount of ₱100,000.00 as
actual/consequential damages and ₱20,000.00 as lawful attorney's fees and costs of the amount
(sic).4
Petitioner appealed the foregoing Decision to the CA. On June 30, 2006, the CA rendered its
Decision reversing and setting aside the RTC Decision, thereby dismissing the complaint.5 The
CA ruled that petitioner, being a corporation sole, validly transferred ownership over the land in
question through its Supreme Bishop, who was at the time the administrator of all properties and
the official representative of the church. It further held that "[t]he authority of the then Supreme
Bishop Rev. Ga to enter into a contract and represent the plaintiff-appellee cannot be assailed,
as there are no provisions in its constitution and canons giving the said authority to any other
person or entity."6
Petitioner then elevated the matter to this Court via a petition for review on certiorari, wherein the
following issues are presented for resolution:
A.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING THE
FEBRUARY 5, 1976 DEED OF SALE WITH MORTGAGE AS NULL AND VOID;
B.) ASSUMING FOR THE SAKE OF ARGUMENT THAT IT IS NOT VOID, WHETHER OR NOT
THE COURT OF APPEALS ERRED IN NOT FINDING THE FEBRUARY 5, 1976 DEED OF
SALE WITH MORTGAGE AS UNENFORCEABLE, [and]
C.) WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING RESPONDENT
TAEZA HEREIN AS BUYER IN BAD FAITH.7
The first two issues boil down to the question of whether then Supreme Bishop Rev. Ga is
authorized to enter into a contract of sale in behalf of petitioner.
Petitioner maintains that there was no consent to the contract of sale as Supreme Bishop Rev.
Ga had no authority to give such consent. It emphasized that Article IV (a) of their Canons
provides that "All real properties of the Church located or situated in such parish can be
disposed of only with the approval and conformity of the laymen's committee, the parish priest,
the Diocesan Bishop, with sanction of the Supreme Council, and finally with the approval of the
Supreme Bishop, as administrator of all the temporalities of the Church." It is alleged that the
sale of the property in question was done without the required approval and conformity of the
entities mentioned in the Canons; hence, petitioner argues that the sale was null and void.
In the alternative, petitioner contends that if the contract is not declared null and void, it should
nevertheless be found unenforceable, as the approval and conformity of the other entities in their
church was not obtained, as required by their Canons.
Section 113 of the Corporation Code of the Philippines provides that:
Sec. 113. Acquisition and alienation of property. - Any corporation sole may purchase and hold
real estate and personal property for its church, charitable, benevolent or educational purposes,
and may receive bequests or gifts for such purposes. Such corporation may mortgage or sell
real property held by it upon obtaining an order for that purpose from the Court of First Instance
of the province where the property is situated; x x x Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or church, religious society or order
concerned represented by such corporation sole regulate the method of acquiring, holding,
selling and mortgaging real estate and personal property, such rules, regulations and discipline
shall control, and the intervention of the courts shall not be necessary.8
Pursuant to the foregoing, petitioner provided in Article IV (a) of its Constitution and Canons of
the Philippine Independent Church,9 that "[a]ll real properties of the Church located or situated
in such parish can be disposed of only with the approval and conformity of the laymen's
committee, the parish priest, the Diocesan Bishop, with sanction of the Supreme Council, and
finally with the approval of the Supreme Bishop, as administrator of all the temporalities of the
Church."
Evidently, under petitioner's Canons, any sale of real property requires not just the consent of
the Supreme Bishop but also the concurrence of the laymen's committee, the parish priest, and
the Diocesan Bishop, as sanctioned by the Supreme Council. However, petitioner's Canons do
not specify in what form the conformity of the other church entities should be made known. Thus,
as petitioner's witness stated, in practice, such consent or approval may be assumed as a
matter of fact, unless some opposition is expressed.10
Here, the trial court found that the laymen's committee indeed made its objection to the sale
known to the Supreme Bishop.11 The CA, on the other hand, glossed over the fact of such
opposition from the laymen's committee, opining that the consent of the Supreme Bishop to the
sale was sufficient, especially since the parish priest and the Diocesan Bishop voiced no
objection to the sale.12
The Court finds it erroneous for the CA to ignore the fact that the laymen's committee objected
to the sale of the lot in question. The Canons require that ALL the church entities listed in Article
IV (a) thereof should give its approval to the transaction. Thus, when the Supreme Bishop
executed the contract of sale of petitioner's lot despite the opposition made by the laymen's
committee, he acted beyond his powers.
This case clearly falls under the category of unenforceable contracts mentioned in Article 1403,
paragraph (1) of the Civil Code, which provides, thus:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or
legal representation, or who has acted beyond his powers;
In Mercado v. Allied Banking Corporation,13 the Court explained that:
x x x Unenforceable contracts are those which cannot be enforced by a proper action in court,
unless they are ratified, because either they are entered into without or in excess of authority or
they do not comply with the statute of frauds or both of the contracting parties do not possess
the required legal capacity. x x x.14
Closely analogous cases of unenforceable contracts are those where a person signs a deed of
extrajudicial partition in behalf of co-heirs without the latter's authority;15 where a mother as
judicial guardian of her minor children, executes a deed of extrajudicial partition wherein she
favors one child by giving him more than his share of the estate to the prejudice of her other
children;16 and where a person, holding a special power of attorney, sells a property of his
principal that is not included in said special power of attorney.17
In the present case, however, respondents' predecessor-in-interest, Bernardino Taeza, had
already obtained a transfer certificate of title in his name over the property in question. Since the
person supposedly transferring ownership was not authorized to do so, the property had
evidently been acquired by mistake. In Vda. de Esconde v. Court of Appeals,18 the Court
affirmed the trial court's ruling that the applicable provision of law in such cases is Article 1456 of
the Civil Code which states that "[i]f property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the
person from whom the property comes." Thus, in Aznar Brothers Realty Company v. Aying,19
citing Vda. de Esconde,20 the Court clarified the concept of trust involved in said provision, to
wit:
Construing this provision of the Civil Code, in Philippine National Bank v. Court of Appeals, the
Court stated:
A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense for in a
typical trust, confidence is reposed in one person who is named a trustee for the benefit of
another who is called the cestui que trust, respecting property which is held by the trustee for the
benefit of the cestui que trust. A constructive trust, unlike an express trust, does not emanate
from, or generate a fiduciary relation. While in an express trust, a beneficiary and a trustee are
linked by confidential or fiduciary relations, in a constructive trust, there is neither a promise nor
any fiduciary relation to speak of and the so-called trustee neither accepts any trust nor intends
holding the property for the beneficiary.
The concept of constructive trusts was further elucidated in the same case, as follows:
. . . implied trusts are those which, without being expressed, are deducible from the nature of the
transaction as matters of intent or which are superinduced on the transaction by operation of law
as matters of equity, independently of the particular intention of the parties. In turn, implied trusts
are either resulting or constructive trusts. These two are differentiated from each other as
follows:
Resulting trusts are based on the equitable doctrine that valuable consideration and not legal
title determines the equitable title or interest and are presumed always to have been
contemplated by the parties. They arise from the nature of circumstances of the consideration
involved in a transaction whereby one person thereby becomes invested with legal title but is
obligated in equity to hold his legal title for the benefit of another. On the other hand,
constructive trusts are created by the construction of equity in order to satisfy the demands of
justice and prevent unjust enrichment. They arise contrary to intention against one who, by
fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought
not, in equity and good conscience, to hold. (Italics supplied)
A constructive trust having been constituted by law between respondents as trustees and
petitioner as beneficiary of the subject property, may respondents acquire ownership over the
said property? The Court held in the same case of Aznar,21 that unlike in express trusts and
resulting implied trusts where a trustee cannot acquire by prescription any property entrusted to
him unless he repudiates the trust, in constructive implied trusts, the trustee may acquire the
property through prescription even if he does not repudiate the relationship. It is then incumbent
upon the beneficiary to bring an action for reconveyance before prescription bars the same.
Here, the present action was filed on January 19, 1990,24 while the transfer certificates of title
over the subject lots were issued to respondents' predecessor-in-interest, Bernardino Taeza,
only on February 7, 1990.25
Clearly, therefore, petitioner's complaint was filed well within the prescriptive period stated
above, and it is only just that the subject property be returned to its rightful owner.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals, dated June 30,
2006, and its Resolution dated August 23, 2007, are REVERSED and SET ASIDE. A new
judgment is hereby entered:
(1) DECLARING petitioner Iglesia Filipina Independiente as the RIGHTFUL OWNER of the lots
covered by Transfer Certificates of Title Nos. T-77994 and T-77995;
(2) ORDERING respondents to execute a deed reconveying the aforementioned lots to
petitioner;
(3) ORDERING respondents and successors-in-interest to vacate the subject premises and
surrender the same to petitioner; and
(4) Respondents to PAY costs of suit.
SO ORDERED.

In Aznar,22 the Court explained the basis for the prescriptive period, to wit:

x x x under the present Civil Code, we find that just as an implied or constructive trust is an
offspring of the law (Art. 1456, Civil Code), so is the corresponding obligation to reconvey the
property and the title thereto in favor of the true owner. In this context, and vis-á-vis prescription,
Article 1144 of the Civil Code is applicable.

Article 1144. The following actions must be brought within ten years from the time the right of
action accrues:

(1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment.

xxx xxx xxx

An action for reconveyance based on an implied or constructive trust must perforce prescribe in
ten years and not otherwise. A long line of decisions of this Court, and of very recent vintage at
that, illustrates this rule. Undoubtedly, it is now well-settled that an action for reconveyance
based on an implied or constructive trust prescribes in ten years from the issuance of the
Torrens title over the property.

It has also been ruled that the ten-year prescriptive period begins to run from the date of
registration of the deed or the date of the issuance of the certificate of title over the property, x x
x.23

G.R. No. 173211 October 11, 2012
HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC, Petitioners,
vs.
COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA MENDOZA-ROY
and SPOUSES DOMINADOR LOZADA and MARTINA MENDOZA-LOZADA, Respondents.
DECISION
MENDOZA, J.:
This is a Petition for Review on Certiorari under Rule 45 assailing the February 16, 2006
Decision1 of the Court of Appeals (CA), in CA G.R. CV No. 75982, which modified the April 30,
2002 Decision2 of the Regional Trial Court, Branch 220, Quezon City ( RTC), in Civil Case No.
Q-94-19452, an action for cancellation of transfer certificate of title and reconveyance of
property.
The Facts
From the records, it appears that Ireneo Mendoza (Ireneo), married to Salvacion Fermin
(Salvacion), was the owner of the subject property, presently covered by TCT No. 242655 of the
Registry of Deeds of Quezon City and situated at No. 36, Road 8, Bagong Pag-asa, Quezon
City, which he purchased in 1954. Ireneo had two children: respondents Josefina and Martina
(respondents), Salvacion being their stepmother. When he was still alive, Ireneo, also took care
of his niece, Angelina, since she was three years old until she got married. The property was
then covered by TCT No. 106530 of the Registry of Deeds of Quezon City. On October 25,
1977, Ireneo, with the consent of Salvacion, executed a deed of absolute sale of the property in
favor of Angelina and her husband, Mario (Spouses Intac). Despite the sale, Ireneo and his
family, including the respondents, continued staying in the premises and paying the realty taxes.
After Ireneo died intestate in 1982, his widow and the respondents remained in the premises.3
After Salvacion died, respondents still maintained their residence there. Up to the present, they
are in the premises, paying the real estate taxes thereon, leasing out portions of the property,
and collecting the rentals.4
The Dispute
The controversy arose when respondents sought the cancellation of TCT No. 242655, claiming
that the sale was only simulated and, therefore, void. Spouses Intac resisted, claiming that it was
a valid sale for a consideration.
On February 22, 1994, respondents filed the Complaint for Cancellation of Transfer Certificate of
Title (TCT) No. 2426555 against Spouses Intac before the RTC. The complaint prayed not only
for the cancellation of the title, but also for its reconveyance to them. Pending litigation, Mario
died on May 20, 1995 and was substituted by his heirs, his surviving spouse, Angelina, and their
children, namely, Rafael, Kristina, Ma. Tricia Margarita, Mario, and Pocholo, all surnamed Intac
(petitioners).
Averments of the Parties
In their Complaint, respondents alleged, among others, that when Ireneo was still alive, Spouses
Intac borrowed the title of the property (TCT No. 106530) from him to be used as collateral for a
loan from a financing institution; that when Ireneo informed respondents about the request of
Spouses Intac, they objected because the title would be placed in the names of said spouses
and it would then appear that the couple owned the property; that Ireneo, however, tried to
appease them, telling them not to worry because Angelina would not take advantage of the
situation considering that he took care of her for a very long time; that during his lifetime, he
informed them that the subject property would be equally divided among them after his death;
and that respondents were the ones paying the real estate taxes over said property.
It was further alleged that after the death of Ireneo in 1982, a conference among relatives was
held wherein both parties were present including the widow of Ireneo, Salvacion; his nephew,
Marietto Mendoza (Marietto); and his brother, Aurelio Mendoza (Aurelio). In the said conference,
it was said that Aurelio informed all of them that it was Ireneo’s wish to have the property divided
among his heirs; that Spouses Intac never raised any objection; and that neither did they inform
all those present on that occasion that the property was already sold to them in 1977.6
Respondents further alleged that sometime in 1993, after the death of Salvacion, rumors spread
in the neighborhood that the subject property had been registered in the names of Spouses
Intac; that upon verification with the Office of the Register of Deeds of Quezon City, respondents
were surprised to find out that TCT No. 106530 had indeed been cancelled by virtue of the deed
of absolute sale executed by Ireneo in favor of Spouses Intac, and as a result, TCT No. 242655
was issued in their names; that the cancellation of TCT No. 106530 and the subsequent
issuance of TCT No. 242655 were null and void and had no legal effect whatsoever because the
deed of absolute sale was a fictitious or simulated document; that the Spouses Intac were guilty
of fraud and bad faith when said document was executed; that Spouses Intac never informed
respondents that they were already the registered owners of the subject property although they
had never taken possession thereof; and that the respondents had been in possession of the
subject property in the concept of an owner during Ireneo’s lifetime up to the present.
In their Answer,7 Spouses Intac countered, among others, that the subject property had been
transferred to them based on a valid deed of absolute sale and for a valuable consideration; that
the action to annul the deed of absolute sale had already prescribed; that the stay of
respondents in the subject premises was only by tolerance during Ireneo’s lifetime because they
were not yet in need of it at that time; and that despite respondents’ knowledge about the sale
that took place on October 25, 1977, respondents still filed an action against them.
Ruling of the RTC
On April 30, 2002, the RTC rendered judgment in favor of respondents and against Spouses
Intac. The dispositive portion of its Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered:
(1) Declaring the Deed of Absolute Sale executed by Ireneo Mendoza in favor of Mario and
Angelina Intac dated October 25, 1977 as an equitable mortgage;
(2) Ordering the Register of Deeds of Quezon City to cancel Transfer Certificate Title No.
242655 and, in lieu thereof, issue a new Transfer Certificate of Title in the name of Ireneo
Mendoza; and
(3) Ordering defendants to pay plaintiffs the amount of Thirty Thousand Pesos (Php30,000.00)
as and for attorney’s fees.
The other claims for damages are hereby denied for lack of merit.
SO ORDERED.8
The RTC ruled, among others, that the sale between Ireneo and Salvacion, on one hand, and
Spouses Intac was null and void for being a simulated one considering that the said parties had
no intention of binding themselves at all. It explained that the questioned deed did not reflect the
true intention of the parties and construed the said document to be an equitable mortgage on the
following grounds: 1 the signed document did not express the real intention of the contracting
parties because Ireneo signed the said document only because he was in urgent need of funds;
2 the amount of ₱60,000.00 in 1977 was too inadequate for a purchase price of a 240-square
meter lot located in Quezon City; 3 Josefina and Martina continued to be in possession of the
subject property from 1954 and even after the alleged sale took place in 1977 until this case was
filed in 1994; and 4 the Spouses Intac started paying real estate taxes only in 1999. The RTC
added that the Spouses Intac were guilty of fraud because they effected the registration of the
subject property even though the execution of the deed was not really intended to transfer the
ownership of the subject property.
Ruling of the CA
On appeal, the CA modified the decision of the RTC. The CA ruled that the RTC erred in first
declaring the deed of absolute sale as null and void and then interpreting it to be an equitable
mortgage. The CA believed that Ireneo agreed to have the title transferred in the name of the
Spouses Intac to enable them to facilitate the processing of the mortgage and to obtain a loan.
This was the exact reason why the deed of absolute sale was executed. Marietto testified that
Ireneo never intended to sell the subject property to the Spouses Intac and that the deed of sale
was executed to enable them to borrow from a bank. This fact was confirmed by Angelina
herself when she testified that she and her husband mortgaged the subject property sometime in
July 1978 to finance the construction of a small hospital in Sta. Cruz, Laguna.
The CA further observed that the conduct of Spouses Intac belied their claim of ownership.
When the deed of absolute sale was executed, Spouses Intac never asserted their ownership
over the subject property, either by collecting rents, by informing respondents of their ownership
or by demanding possession of the land from its occupants. It was not disputed that it was
respondents who were in possession of the subject property, leasing the same and collecting
rentals. Spouses Intac waited until Ireneo and Salvacion passed away before they disclosed the
transfer of the title to respondents. Hence, the CA was of the view that the veracity of their claim
of ownership was suspicious.
Moreover, wrote the CA, although Spouses Intac claimed that the purchase of the subject
property was for a valuable consideration (P60,000.00), they admitted that they did not have any
proof of payment. Marietto, whose testimony was assessed by the RTC to be credible, testified
that there was no such payment because Ireneo never sold the subject property as he had no
intention of conveying its ownership and that his only purpose in lending the title was to help
Spouses Intac secure a loan. Thus, the CA concluded that the deed of absolute sale was a
simulated document and had no legal effect.
Finally, the CA stated that even assuming that there was consent, the sale was still null and void
because of lack of consideration. The decretal portion of the CA Decision reads:
WHEREFORE, in view of the foregoing premises, the decision of the Regional Trial Court of
Quezon City, Branch 220, is AFFIRMED with modifications, as follows:
1. The Deed of Absolute Sale dated October 25, 1977 executed by Ireneo Mendoza and
Salvacion Fermen in favor of Spouses Mario and Angelina Intac is hereby declared NULL AND
VOID;
2. the Register of Deed[s] of Quezon City is ordered to cancel TCT No. 242655 and, in lieu
thereof, issue a new one and reinstate Ireneo Mendoza as the registered owner;
3. The defendant appellants are hereby ordered to pay the plaintiff appellees the amount of thirty
thousand pesos (Php30,000.00) as and for attorney’s fees; and
4. The other claims for damages are denied for lack of merit.
SO ORDERED.9
Not in conformity, petitioners filed this petition for review anchored on the following
ASSIGNMENT OF ERRORS
I
THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT AFFIRMED THE
DECISION OF THE REGIONAL TRIAL COURT DATED FEBRUARY 16, 2006 WHICH WAS
CONTRARY TO THE APPLICABLE LAWS AND EXISTING JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT CLEARLY
OVERLOOKED, MISUNDERSTOOD AND/OR MISAPPLIED THE EVIDENCE PRESENTED IN
THE COURT A QUO.10
Petitioners’ position
Petitioners primarily argue that the subject deed of sale was a valid and binding contract
between the parties. They claim that all the elements of a valid contract of sale were present, to
wit: [a] consent or meeting of the minds, that is, consent to transfer ownership in exchange of
price; [b] determinate subject matter; and [c] price certain in money or its equivalent.
Petitioners claim that respondents have validly gave their consent to the questioned sale of the
subject property. In fact, it was Ireneo and Salvacion who approached them regarding their
intention to sell the subject property. Ireneo and Salvacion affixed their signatures on the
questioned deed and never brought any action to invalidate it during their lifetime. They had all
the right to sell the subject property without having to inform their children of their intention to sell
the same. Ordinary human experience dictates that a party would not affix his or her signature
on any written instrument which would result in deprivation of one’s property right if there was
really no intention to be bound by it. A party would not keep silent for several years regarding the
validity and due execution of a document if there was an issue on the real intention of the
vendors. The signatures of Ireneo and Salvacion meant that they had knowingly and willfully
entered into such agreement and that they were prepared for the consequences of their act.
Respondents’ Position
Respondents are of the position that the RTC and the CA were correct in ruling that the
questioned deed of absolute sale was a simulated one considering that Ireneo and Salvacion
had no intention of selling the subject property. The true intention rather was that Spouses Intac
would just borrow the title of the subject property and offer it as a collateral to secure a loan. No
money actually changed hands.
According to respondents, there were several circumstances which put in doubt the validity of
the deed of absolute sale. First, the parties were not on equal footing because Angelina was a
doctor by profession while Ireneo and Salvacion were less educated people who were just
motivated by their trust, love and affection for her whom they considered as their own child.
Second, if there was really a valid sale, it was just and proper for Spouses Intac to divulge the
conveyance to respondents, being compulsory heirs, but they did not. Third, Ireneo and
Salvacion did nothing to protect their interest because they banked on the representation of
Spouses Intac that the title would only be used to facilitate a loan with a bank. Fourth, Ireneo
and Salvacion remained in possession of the subject property without being disturbed by
Spouses Intac. Fifth, the price of the sale was inadequate and inequitable for a prime property
located in Pag-asa, Quezon City. Sixth, Ireneo and Salvacion had no intention of selling the
subject property because they had heirs who would inherit the same. Seventh, the Spouses
Intac abused the trust and affection of Ireneo and Salvacion by arrogating unto themselves the
ownership of the subject property to the prejudice of his own children, Josefina and Martina.
Finally, petitioners could not present a witness to rebut Marietto’s testimony which was
straightforward and truthful.
The Court’s Ruling
Basically, the Court is being asked to resolve the issue of whether the Deed of Absolute Sale,11
dated October 25, 1977, executed by and between Ireneo Mendoza and Salvacion Fermin, as
vendors, and Mario Intac and Angelina Intac, as vendees, involving the subject real property in
Pagasa, Quezon City, was a simulated contract or a valid agreement.
The Court finds no merit in the petition.
A contract, as defined in the Civil Code, is a meeting of minds, with respect to the other, to give
something or to render some service. Article 1318 provides:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Accordingly, for a contract to be valid, it must have three essential elements: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of
the obligation which is established.12
All these elements must be present to constitute a valid contract. Consent is essential to the
existence of a contract; and where it is wanting, the contract is non-existent. In a contract of
sale, its perfection is consummated at the moment there is a meeting of the minds upon the
thing that is the object of the contract and upon the price. Consent is manifested by the meeting
of the offer and the acceptance of the thing and the cause, which are to constitute the contract.
In this case, the CA ruled that the deed of sale executed by Ireneo and Salvacion was absolutely
simulated for lack of consideration and cause and, therefore, void. Articles 1345 and 1346 of the
Civil Code provide:
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 or fictitious contract is void. A relative simulation, when it
does not prejudice a third person and is not intended for any purpose contrary to law, morals,
good customs, public order or public policy binds the parties to their real agreement.
If the parties state a false cause in the contract to conceal their real agreement, the contract is
only relatively simulated and the parties are still bound by their real agreement. Hence, where
the essential requisites of a contract are present and the simulation refers only to the content or
terms of the contract, the agreement is absolutely binding and enforceable between the parties
and their successors in interest.13
In absolute simulation, there is a colorable contract but it has no substance as the parties have
no intention to be bound by it. "The main characteristic of an absolute simulation is that the
apparent contract is not really desired or intended to produce legal effect or in any way alter the
juridical situation of the parties."14 "As a result, an absolutely simulated or fictitious contract is
void, and the parties may recover from each other what they may have given under the
contract."15
In the case at bench, the Court is one with the courts below that no valid sale of the subject
property actually took place between the alleged vendors, Ireneo and Salvacion; and the alleged
vendees, Spouses Intac. There was simply no consideration and no intent to sell it.
Critical is the testimony of Marietto, a witness to the execution of the subject absolute deed of
sale. He testified that Ireneo personally told him that he was going to execute a document of
sale because Spouses Intac needed to borrow the title to the property and use it as collateral for
their loan application. Ireneo and Salvacion never intended to sell or permanently transfer the full
ownership of the subject property to Spouses Intac. Marietto was characterized by the RTC as a
credible witness.
Aside from their plain denial, petitioners failed to present any concrete evidence to disprove
Marietto’s testimony. They claimed that they actually paid P150,000.00 for the subject property.
They, however, failed to adduce proof, even by circumstantial evidence, that they did, in fact,
pay it. Even for the consideration of P60,000.00 as stated in the contract, petitioners could not
show any tangible evidence of any payment therefor. Their failure to prove their payment only
strengthened Marietto’s story that there was no payment made because Ireneo had no intention
to sell the subject property.
Angelina’s story, except on the consideration, was consistent with that of Marietto. Angelina
testified that she and her husband mortgaged the subject property sometime in July 1978 to
finance the construction of a small hospital in Sta. Cruz, Laguna. Angelina claimed that Ireneo
offered the property as he was in deep financial need.
Granting that Ireneo was in financial straits, it does not prove that he intended to sell the
property to Angelina. Petitioners could not adduce any proof that they lent money to Ireneo or
that he shared in the proceeds of the loan they had obtained. And, if their intention was to build
a hospital, could they still afford to lend money to Ireneo? And if Ireneo needed money, why
would he lend the title to Spouses Intac when he himself could use it to borrow money for his
needs? If Spouses Intac took care of him when he was terminally ill, it was not surprising for
Angelina to reciprocate as he took care of her since she was three (3) years old until she got
married. Their caring acts for him, while they are deemed services of value, cannot be
considered as consideration for the subject property for lack of quantification and the Filipino
culture of taking care of their elders.
Thus, the Court agrees with the courts below that the questioned contract of sale was only for
the purpose of lending the title of the property to Spouses Intac to enable them to secure a loan.
Their arrangement was only temporary and could not give rise to a valid sale. Where there is no
consideration, the sale is null and void ab initio. In the case of Lequin v. Vizconde,16 the Court
wrote:
There can be no doubt that the contract of sale or Kasulatan lacked the essential element of
consideration. It is a well-entrenched rule that where the deed of sale states that the purchase
price has been paid but in fact has never been paid, the deed of sale is null and void ab initio for
lack of consideration. Moreover, Art. 1471 of the Civil Code, which provides that "if the price is
simulated, the sale is void," also applies to the instant case, since the price purportedly paid as
indicated in the contract of sale was simulated for no payment was actually made.
Consideration and consent are essential elements in a contract of sale.1âwphi1 Where a party’s
consent to a contract of sale is vitiated or where there is lack of consideration due to a simulated
price, the contract is null and void ab initio. [Emphases supplied]
More importantly, Ireneo and his family continued to be in physical possession of the subject
property after the sale in 1977 and up to the present. They even went as far as leasing the same
and collecting rentals. If Spouses Intac really purchased the subject property and claimed to be
its true owners, why did they not assert their ownership immediately after the alleged sale took
place? Why did they have to assert their ownership of it only after the death of Ireneo and
Salvacion? One of the most striking badges of absolute simulation is the complete absence of
any attempt on the part of a vendee to assert his right of dominion over the property.17
On another aspect, Spouses Intac failed to show that they had been paying the real estate taxes
of the subject property. They admitted that they started paying the real estate taxes on the
property for the years 1996 and 1997 only in 1999. They could only show two (2) tax receipts
(Real Property Tax Receipt No. 361105, dated April 21, 1999, and Real Property Tax Receipt
No. 361101, dated April 21, 1999).18 Noticeably, petitioners’ tax payment was just an
afterthought. The non-payment of taxes was also taken against the alleged vendees in the case
of Lucia Carlos Aliño v. Heirs of Angelica A. Lorenzo.19 Thus,
Furthermore, Lucia religiously paid the realty taxes on the subject lot from 1980 to 1987.While
tax receipts and declarations of ownership for taxation purposes are not, in themselves,
incontrovertible evidence of ownership, they constitute at least proof that the holder has a claim
of title over the property, particularly when accompanied by proof of actual possession. They are
good indicia of the possession in the concept of owner, for no one in his right mind would be
paying taxes for a property that is not in his actual or at least constructive possession. The
voluntary declaration of a piece of property for taxation purposes manifests not only one's
sincere and honest desire to obtain title to the property and announces his adverse claim against
the State and all other interested parties, but also the intention to contribute needed revenues to
the Government. Such an act strengthens one's bona fide claim of acquisition of ownership.
On the other hand, respondent heirs failed to present evidence that Angelica, during her lifetime,
paid the realty taxes on the subject lot. They presented only two tax receipts showing that
Servillano, Sr. belatedly paid taxes due on the subject lot for the years 1980-1981 and part of
year 1982 on September 8, 1989, or about a month after the institution of the complaint on
August 3, 1989, a clear indication that payment was made as an afterthought to give the
semblance of truth to their claim.
Thus, the subsequent acts of the parties belie the intent to be bound by the deed of sale.
[Emphases supplied]
The primary consideration in determining the true nature of a contract is the intention of the
parties. If the words of a contract appear to contravene the evident intention of the parties, the
latter shall prevail. Such intention is determined not only from the express terms of their
agreement, but also from the contemporaneous and subsequent acts of the parties.20 As
heretofore shown, the contemporaneous and subsequent acts of both parties in this case, point
to the fact that the intention of Ireneo was just to lend the title to the Spouses Intac to enable
them to borrow money and put up a hospital in Sta. Cruz, Laguna. Clearly, the subject contract
was absolutely simulated and, therefore, void.
In view of the foregoing, the Court finds it hard to believe the claim of the Spouses Intac that the
stay of Ireneo and his family in the subject premises was by their mere tolerance as they were
not yet in need of it. As earlier pointed out, no convincing evidence, written or testimonial, was
ever presented by petitioners regarding this matter. It is also of no moment that TCT No. 106530
covering the subject property was cancelled and a new TCT (TCT No. 242655)21 was issued in
their names. The Spouses Intac never became the owners of the property despite its registration
in their names. After all, registration does not vest title.
As a logical consequence, petitioners did not become the owners of the subject property even
after a TCT had been issued in their names. After all, registration does not vest title. Certificates
of title merely confirm or record title already existing and vested. They cannot be used to protect
a usurper from the true owner, nor can they be used as a shield for the commission of fraud, or
to permit one to enrich oneself at the expense of others. Hence, reconveyance of the subject
property is warranted.22
The Court does not find acceptable either the argument of the Spouses Intac that respondents’
action for cancellation of TCT No. 242655 and the reconveyance of the subject property is
already barred by the Statute of Limitations. The reason is that the respondents are still in actual
possession of the subject property. It is a well-settled doctrine that "if the person claiming to be
the owner of the property is in actual possession thereof, the right to seek reconveyance, which
in effect seeks to quiet title to the property, does not prescribe."23 In Lucia Carlos Aliño, it was
also written:
The lower courts fault Lucia for allegedly not taking concrete steps to recover the subject lot,
demanding its return only after 10 years from the registration of the title. They, however, failed to
consider that Lucia was in actual possession of the property.
It is well-settled that an action for reconveyance prescribes in 10 years, the reckoning point of
which is the date of registration of the deed or the date of issuance of the certificate of title over
the property. In an action for reconveyance, the decree of registration is highly regarded as
incontrovertible. What is sought instead is the transfer of the property or its title, which has been
erroneously or wrongfully registered in another person's name, to its rightful or legal owner or to
one who has a better right.
However, in a number of cases in the past, the Court has consistently ruled that if the person
claiming to he the owner of the property is in actual possession thereof, the right to seek
reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The reason
for this is that one who is in actual possession of a piece of land claiming to be the owner thereof
may wait until his possession is disturbed or his title is attacked before taking steps to vindicate
his right. The reason being, that his undisturbed possession gives him the continuing right to
seek the aid of a court of equity to ascertain the nature of the adverse claim of a third party and
its effect on his title, which right can be claimed only by one who is in possession. Thus,
considering that Lucia continuously possessed the subject lot, her right to institute a suit to clear
the cloud over her title cannot he barred by the statute of limitations.:24 [Emphases supplied]
WHEREFORE, the petition is DENED SO ORDERED.
[G.R. No. 153201. January 26, 2005]
JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ, RODOLFO
MENCHAVEZ, CESAR MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA MENCHAVEZ,
ELMA MENCHAVEZ, CHARITO M. MAGA, FE M. POTOT, THELMA M. REROMA, MYRNA M.
YBAEZ, and SARAH M. VILLABER, petitioners, vs. FLORENTINO TEVES JR., respondent.
DECISION
PANGANIBAN, J.:
Avoid contract is deemed legally nonexistent. It produces no legal effect. As a general rule,
courts leave parties to such a contract as they are, because they are in pari delicto or equally at
fault. Neither party is entitled to legal protection.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the February
28, 2001 Decision[2] and the April 16, 2002 Resolution[3] of the Court of Appeals (CA) in CA-GR
CV No. 51144. The challenged Decision disposed as follows:
WHEREFORE, the assailed decision is hereby MODIFIED, as follows:
1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount of P128,074.40
as actual damages, and P50,000.00 as liquidated damages;
2. Dismissing the third party complaint against the third party defendants;
3. Upholding the counterclaims of the third party defendants against the [petitioners. Petitioners]
are hereby required to pay [the] third party defendants the sum of P30,000.00 as moral damages
for the clearly unfounded suit;
4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in
the concept of attorneys fees and appearance fees of P300.00 per appearance;
5. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 as
exemplary damages pro bono publico and litigation expenses including costs, in the sum of
P5,000.00.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
On February 28, 1986, a Contract of Lease was executed by Jose S. Menchavez, Juan S.
Menchavez Sr., Juan S. Menchavez Jr., Rodolfo Menchavez, Simeon Menchavez, Reynaldo
Menchavez, Cesar Menchavez, Charito M. Maga, Fe M. Potot, Thelma R. Reroma, Myrna
Ybaez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez, and Elma S. Menchavez, as
lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the Contract are herein
reproduced as follows:
WHEREAS, the LESSORS are the absolute and lawful co-owners of that area covered by
FISHPOND APPLICATION No. VI-1076 of Juan Menchavez, Sr., filed on September 20, 1972,
at Fisheries Regional Office No. VII, Cebu City covering an area of 10.0 hectares more or less
located at Tabuelan, Cebu;
xxxxxxxxx
NOW, THEREFORE, for and in consideration of the mutual covenant and stipulations
hereinafter set forth, the LESSORS and the LESSEE have agreed and hereby agree as follows:
1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this Contract of
Lease, renewable at the OPTION of the LESSORS;
2. The LESSEE agrees to pay the LESSORS at the residence of JUAN MENCHAVEZ SR., one
of the LESSORS herein, the sum of FORTY THOUSAND PESOS (P40,000.00) Philippine
Currency, annually x x x;
3. The LESSORS hereby warrant that the above-described parcel of land is fit and good for the
intended use as FISHPOND;
4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful and
adequate enjoyment of the lease for the entire duration of the contract;
5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the intended use
of the leased premises as FISHPOND FOR THE ENTIRE DURATION OF THE CONTRACT;
6. The LESSORS hereby warrant that the above-premises is free from all liens and
encumbrances, and shall protect the LESSEE of his right of lease over the said premises from
any and all claims whatsoever;
7. Any violation of the terms and conditions herein provided, more particularly the warranties
above-mentioned, the parties of this Contract responsible thereof shall pay liquidated damages
in the amount of not less than P50,000.00 to the offended party of this Contract; in case the
LESSORS violated therefor, they bound themselves jointly and severally liable to the LESSEE;
x x x x x x x x x.[5]
On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the
fishpond dikes constructed by respondent and delivered possession of the subject property to
other parties.[6] As a result, he filed a Complaint for damages with application for preliminary
attachment against petitioners. In his Complaint, he alleged that the lessors had violated their
Contract of Lease, specifically the peaceful and adequate enjoyment of the property for the
entire duration of the Contract. He claimed P157,184.40 as consequential damages for the
demolition of the fishpond dikes, P395,390.00 as unearned income, and an amount not less
than P100,000.00 for rentals paid.[7]
Respondent further asserted that the lessors had withheld from him the findings of the trial court
in Civil Case No. 510-T, entitled Eufracia Colongan and Paulino Pamplona v. Juan Menchavez
Sr. and Sevillana S. Menchavez. In that case involving the same property, subject of the lease,
the Menchavez spouses were ordered to remove the dikes illegally constructed and to pay
damages and attorneys fees.[8]
Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego, Albino Laput,
Adrinico Che and Charlemagne Arendain Jr., as agents of Eufracia Colongan and Paulino
Pamplona. The third-party defendants maintained that the Complaint filed against them was
unfounded. As agents of their elderly parents, they could not be sued in their personal capacity.
Thus, they asserted their own counterclaims.[9]
After trial on the merits, the RTC ruled thus:
[The court must resolve the issues one by one.] As to the question of whether the contract of
lease between Teves and the [petitioners] is valid, we must look into the present law on the
matter of fishponds. And this is Pres. Decree No. 704 which provides in Sec. 24:
Lease of fishponds-Public lands available for fishpond development including those earmarked
for family-size fishponds and not yet leased prior to November 9, 1972 shall be leased only to
qualified persons, associations, cooperatives or corporations, subject to the following conditions.
1. The lease shall be for a period of twenty five years (25), renewable for another twenty five
years;
2. Fifty percent of the area leased shall be developed and be producing in commercial scale
within three years and the remaining portion shall be developed and be producing in commercial
scale within five years; both periods begin from the execution of the lease contract;
3. All areas not fully developed within five years from the date of the execution of the lease
contract shall automatically revert to the public domain for disposition of the bureau; provided
that a lessee who failed to develop the area or any portion thereof shall not be permitted to
reapply for said area or any portion thereof or any public land under this decree; and/or any
portion thereof or any public land under this decree;
4. No portion of the leased area shall be subleased.
The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:
Sec. 2 - All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests, or timber, wild life, flora and fauna and other
natural resources are owned by the state.
Sec. 3 - Lands of the public domain are classified into agricultural, forest or timber, mineral lands
and national parks. Agricultural lands of the public domain may be further classified by law
according to the uses to which they may be devoted. Alienable lands of the public domain shall
be limited to agricultural lands x x x.
As a consequence of these provisions, and the declared public policy of the State under the
Regalian Doctrine, the lease contract between Florentino Teves, Jr. and Juan Menchavez Sr.
and his family is a patent nullity. Being a patent nullity, [petitioners] could not give any rights to
Florentino Teves, Jr. under the principle: NEMO DAT QUOD NON HABET - meaning ONE
CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in litigation belongs
to the State and not to [petitioners]. Therefore, the first issue is resolved in the negative, as the
court declares the contract of lease as invalid and void ab-initio.
On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the court rules
that the [respondent] and [petitioners] are in pari-delicto. As a consequence of this, the court
must leave them where they are found. x x x.
xxxxxxxxx
x x x. Why? Because the defendants ought to have known that they cannot lease what does not
belong to them for as a matter of fact, they themselves are still applying for a lease of the same
property under litigation from the government.
On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet the
owner[s], had assumed the risks and under the principle of VOLENTI NON FIT INJURIA
NEQUES DOLUS - He who voluntarily assumes a risk, does not suffer damage[s] thereby. As a
consequence, when Teves leased the fishpond area from [petitioners]- who were mere holders
or possessors thereof, he took the risk that it may turn out later that his application for lease may
not be approved.
Unfortunately however, even granting that the lease of [petitioners] and [their] application in
1972 were to be approved, still [they] could not sublease the same. In view therefore of these,
the parties must be left in the same situation in which the court finds them, under the principle IN
PARI DELICTO NON ORITOR ACTIO, meaning[:] Where both are at fault, no one can found a
claim.
On the third issue of whether the third party defendants are liable for demolishing the dikes
pursuant to a writ of execution issued by the lower court[, t]his must be resolved in the negative,
that the third party defendants are not liable. First, because the third party defendants are mere
agents of Eufracia Colongan and Eufenio Pamplona, who are the ones who should be made
liable if at all, and considering that the demolition was pursuant to an order of the court to restore
the prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v. Menchavez.
After the court has ruled that the contract of lease is null and void ab-initio, there is no right of
the [respondent] to protect and therefore[,] there is no basis for questioning the Sheriffs authority
to demolish the dikes in order to restore the prevailing party, under the principle VIDETUR
NEMO QUISQUAM ID CAPERE QUOD EI NECESSE EST ALII RESTITUERE - He will not be
considered as using force who exercise his rights and proceeds by the force of law.
WHEREFORE, in view of all foregoing [evidence] and considerations, this court hereby renders
judgment as follows:
1. Dismissing the x x x complaint by the [respondent] against the [petitioners];
2. Dismissing the third party complaint against the third party defendants;
3. Upholding the counterclaims of the third party defendants against the [petitioners. The
petitioners] are hereby required to pay third party defendants the sum of P30,000.00 as moral
damages for this clearly unfounded suit;
4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in
the concept of attorneys fees and appearance fees of P300.00 per appearance;
5. Requiring the [petitioners] to pay to the third party defendants the sum of P10,000.00 as
exemplary damages probono publico and litigation expenses including costs, in the sum of
P5,000.00.[10] (Underscoring in the original)
Respondent elevated the case to the Court of Appeals, where it was docketed as CA-GR CV
No. 51144.
Ruling of the Court of Appeals
The CA disagreed with the RTCs finding that petitioners and respondent were in pari delicto. It
contended that while there was negligence on the part of respondent for failing to verify the
ownership of the subject property, there was no evidence that he had knowledge of petitioners
lack of ownership.[11] It held as follows:
x x x. Contrary to the findings of the lower court, it was not duly proven and established that
Teves had actual knowledge of the fact that [petitioners] merely usurped the property they
leased to him. What Teves admitted was that he did not ask for any additional document other
than those shown to him, one of which was the fishpond application. In fact, [Teves] consistently
claimed that he did not bother to ask the latter for their title to the property because he relied on
their representation that they are the lawful owners of the fishpond they are holding for lease.
(TSN, July 11, 1991, pp. 8-11)[12]
The CA ruled that respondent could recover actual damages in the amount of P128,074.40.
Citing Article 1356[13] of the Civil Code, it further awarded liquidated damages in the amount of
P50,000, notwithstanding the nullity of the Contract.[14]
Hence, this Petition.[15]
The Issues
Petitioners raise the following issues for our consideration:
1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it modified
the trial courts decision when it ruled in effect that the trial court erred in holding that the
respondent and petitioners are in pari delicto, and the courts must leave them where they are
found;
2. The Court of Appeals disregarded the evidence, the law and jurisprudence in modifying the
decision of the trial court and ruled in effect that the Regional Trial Court erred in dismissing the
respondents Complaint.[16]
The Courts Ruling
The Petition has merit.
Main Issue:
Were the Parties in Pari Delicto?
The Court shall discuss the two issues simultaneously.
In Pari Delicto Rule
on Void Contracts
The parties do not dispute the finding of the trial and the appellate courts that the Contract of
Lease was void.[17] Indeed, the RTC correctly held that it was the State, not petitioners, that
owned the fishpond. The 1987 Constitution specifically declares that all lands of the public
domain, waters, fisheries and other natural resources belong to the State.[18] Included here are
fishponds, which may not be alienated but only leased.[19] Possession thereof, no matter how
long, cannot ripen into ownership.[20]
Being merely applicants for the lease of the fishponds, petitioners had no transferable right over
them. And even if the State were to grant their application, the law expressly disallowed
sublease of the fishponds to respondent.[21] Void are all contracts in which the cause, object or
purpose is contrary to law, public order or public policy.[22]
A void contract is equivalent to nothing; it produces no civil effect.[23] It does not create, modify
or extinguish a juridical relation.[24] Parties to a void agreement cannot expect the aid of the
law; the courts leave them as they are, because they are deemed in pari delicto or in equal
fault.[25] To this rule, however, there are exceptions that permit the return of that which may
have been given under a void contract.[26] One of the exceptions is found in Article 1412 of the
Civil Code, which states:
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the others undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of what has been promised him. The other, who
is not at fault, may demand the return of what he has given without any obligation to comply with
his promise.
On this premise, respondent contends that he can recover from petitioners, because he is an
innocent party to the Contract of Lease.[27] Petitioners allegedly induced him to enter into it
through serious misrepresentation.[28]
Finding of In Pari Delicto:
A Question of Fact
The issue of whether respondent was at fault or whether the parties were in pari delicto is a
question of fact not normally taken up in a petition for review on certiorari under Rule 45 of the
Rules of Court.[29] The present case, however, falls under two recognized exceptions to this
rule.[30] This Court is compelled to review the facts, since the CAs factual findings are (1)
contrary to those of the trial court;[31] and (2) premised on an absence of evidence, a
presumption that is contradicted by the evidence on record.[32]
Unquestionably, petitioners leased out a property that did not belong to them, one that they had
no authority to sublease. The trial court correctly observed that petitioners still had a pending
lease application with the State at the time they entered into the Contract with respondent.[33]
Respondent, on the other hand, claims that petitioners misled him into executing the
Contract.[34] He insists that he relied on their assertions regarding their ownership of the
property. His own evidence, however, rebuts his contention that he did not know that they lacked
ownership. At the very least, he had notice of their doubtful ownership of the fishpond.
Respondent himself admitted that he was aware that the petitioners lease application for the
fishpond had not yet been approved.[35] Thus, he knowingly entered into the Contract with the
risk that the application might be disapproved. Noteworthy is the fact that the existence of a
fishpond lease application necessarily contradicts a claim of ownership. That respondent did not
know of petitioners lack of ownership is therefore incredible.
The evidence of respondent himself shows that he negotiated the lease of the fishpond with both
Juan Menchavez Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge
Esparagoza.[36] His counsels presence during the negotiations, prior to the parties meeting of
minds, further debunks his claim of lack of knowledge. Lawyers are expected to know that
fishponds belong to the State and are inalienable. It was reasonably expected of the counsel
herein to advise his client regarding the matter of ownership.
Indeed, the evidence presented by respondent demonstrates the contradictory claims of
petitioners regarding their alleged ownership of the fishpond. On the one hand, they claimed
ownership and, on the other, they assured him that their fishpond lease application would be
approved.[37] This circumstance should have been sufficient to place him on notice. It should
have compelled him to determine their right over the fishpond, including their right to lease it.

The Contract itself stated that the area was still covered by a fishpond application.[38]
Nonetheless, although petitioners declared in the Contract that they co-owned the property, their
erroneous declaration should not be used against them. A cursory examination of the Contract
suggests that it was drafted to favor the lessee. It can readily be presumed that it was he or his
counsel who prepared it -- a matter supported by petitioners evidence.[39] The ambiguity should
therefore be resolved against him, being the one who primarily caused it.[40]

The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of
the ownership status of the property that had been leased to him. On the contrary, as the party
alleging the fact, it was he who had the burden of proving through a preponderance of
evidence[41] -- that they misled him regarding the ownership of the fishpond. His evidence fails
to support this contention. Instead, it reveals his fault in entering into a void Contract. As both
parties are equally at fault, neither may recover against the other.[42]

Liquidated Damages

Not Proper

The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of
Lease was void. Even if it was assumed that respondent was entitled to reimbursement as
provided under paragraph 1 of Article 1412 of the Civil Code, the award of liquidated damages
was contrary to established legal principles.

Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a
breach thereof.[43] Liquidated damages are identical to penalty insofar as legal results are
concerned.[44] Intended to ensure the performance of the principal obligation, such damages
are accessory and subsidiary obligations.[45] In the present case, it was stipulated that the party
responsible for the violation of the terms, conditions and warranties of the Contract would pay
not less than P50,000 as liquidated damages. Since the principal obligation was void, there was
no contract that could have been breached by petitioners; thus, the stipulation on liquidated
damages was inexistent. The nullity of the principal obligation carried with it the nullity of the
accessory obligation of liquidated damages.[46]

As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil
Code. This law merely allows innocent parties to recover what they have given without any
obligation to comply with their prestation. No damages may be recovered on the basis of a void
contract; being nonexistent, the agreement produces no juridical tie between the parties
involved. Since there is no contract, the injured party may only recover through other sources of
obligations such as a law or a quasi-contract.[47] A party recovering through these other sources
of obligations may not claim liquidated damages, which is an obligation arising from a contract.

WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE.
The Decision of the trial court is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.