Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-
appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

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

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the
bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending
appeal he had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines
from the refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding
yearly depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object,
he could not return the animals nor pay their value and prayed for the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus
the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the
filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October
and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on
November 1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order
appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant
Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959
she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau
Animal of Industry and that sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound
inflicted during a Huk raid on Hacienda Felicidad Intal, and praying that the writ of execution be quashed and
that a writ of preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On 6
February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied her motion. Hence,
this appeal certified by the Court of Appeals to this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the
Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry,
Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is
why in its objection of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee
prays "that another writ of execution in the sum of P859.53 be issued against the estate of defendant
deceased Jose V. Bagtas." She cannot be held liable for the two bulls which already had been returned to and
received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November
1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept,
and that as such death was due to force majeure she is relieved from the duty of returning the bull or paying its
value to the appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V.
Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later
on renewed for another year as regards one bull, was subject to the payment by the borrower of breeding fee
of 10% of the book value of the bulls. The appellant contends that the contract was commodatum and that, for
that reason, as the appellee retained ownership or title to the bull it should suffer its loss due to force majeure.
A contract of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then
the contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to
the responsibilities of a possessor in bad faith, because she had continued possession of the bull after the
expiry of the contract. And even if the contract be commodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for
another period of one year to end on 8 May 1950. But the appellant kept and used the bull until November
1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the
deceased husband of the appellant the bulls had each an appraised book value, to with: the Sindhi, at
P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of
the bull due to fortuitous event the late husband of the appellant would be exempt from liability.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment
of its value being a money claim should be presented or filed in the intestate proceedings of the defendant who
died on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having
ceased to exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of
Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice,
the legal representative of the deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3
which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court
promptly of such death . . . and to give the name and residence of the executory administrator,
guardian, or other legal representative of the deceased . . . .

The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been
issue letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for
monopoly against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be
due, not due, or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and
judgment for monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg.,
Highway 54, Quezon City, within six (6) months from the date of the first publication of this order, serving a
copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the
said deceased," is not a notice to the court and the appellee who were to be notified of the defendant's death in
accordance with the above-quoted rule, and there was no reason for such failure to notify, because the
attorney who appeared for the defendant was the same who represented the administratrix in the special
proceedings instituted for the administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant or of the administration
proceedings of his estate instituted in another court that if the attorney for the deceased defendant did not
notify the plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only
liable for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was
killed while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its
objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the
writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having
been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for
payment by the appellant, the administratrix appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal,
JJ., concur.
Barrera, J., concurs in the result.

Footnotes

1
Article 1933 of the Civil Code.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION
G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long time
ago can properly be considered res judicata by respondent Court of Appeals in the present two cases between
petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of
Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149
[Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the Honorable
Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and
Civil Case No. 3655 (429), with the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic
of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs.
Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of
Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs'
claim or damages is hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions that
the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases affirmed by
the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots were possessed by
the predecessors-in-interest of private respondents under claim of ownership in good faith from 1906 to 1951;
that petitioner had been in possession of the same lots as bailee in commodatum up to 1951, when petitioner
repudiated the trust and when it applied for registration in 1962; that petitioner had just been in possession as
owner for eleven years, hence there is no possibility of acquisitive prescription which requires 10 years
possession with just title and 30 years of possession without; that the principle of res judicata on these findings
by the Court of Appeals will bar a reopening of these questions of facts; and that those facts may no longer be
altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two aforementioned
cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole controversy
started when the defendant Catholic Vicar Apostolic of the Mountain Province
(VICAR for brevity) filed with the Court of First Instance of Baguio Benguet on
September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4
in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as
LRC N-91, said Lots being the sites of the Catholic Church building, convents,
high school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of
Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3,
respectively, asserting ownership and title thereto. After trial on the merits, the
land registration court promulgated its Decision, dated November 17, 1965,
confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the
Heirs of Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607)
appealed the decision of the land registration court to the then Court of Appeals,
docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision,
dated May 9, 1977, reversing the decision of the land registration court and
dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by the two
sets of oppositors in the land registration case (and two sets of plaintiffs in the
two cases now at bar), the first lot being presently occupied by the convent and
the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying
the Court of Appeals to order the registration of Lot 3 in the names of the Heirs of
Egmidio Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and Pacita
Valdez filed their motion for reconsideration praying that both Lots 2 and 3 be
ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez.
On August 12,1977, the Court of Appeals denied the motion for reconsideration
filed by the Heirs of Juan Valdez on the ground that there was "no sufficient merit
to justify reconsideration one way or the other ...," and likewise denied that of the
Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for review on
certiorari of the decision of the Court of Appeals dismissing his (its) application
for registration of Lots 2 and 3, docketed as G.R. No. L-46832, entitled 'Catholic
Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of
Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for reconsideration the
Heirs of Juan Valdez and Pacita Valdez, on September 8, 1977, filed with the
Supreme Court a petition for review, docketed as G.R. No. L-46872,
entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar,
Heirs of Egmidio Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution both
petitions (of VICAR on the one hand and the Heirs of Juan Valdez and Pacita
Valdez on the other) for lack of merit. Upon the finality of both Supreme Court
resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano
filed with the then Court of First Instance of Baguio, Branch II, a Motion For
Execution of Judgment praying that the Heirs of Octaviano be placed in
possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on
December 7, 1978, denied the motion on the ground that the Court of Appeals
decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any
affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a
petitioner for certiorari and mandamus, docketed as CA-G.R. No. 08890-R,
entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In
its decision dated May 16, 1979, the Court of Appeals dismissed the petition.
 It was at that stage that the instant cases were filed. The Heirs of Egmidio
Octaviano filed Civil Case No. 3607 (419) on July 24, 1979, for recovery of
possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case No. 3655 (429)
on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision,
pp. 199-201, Orig. Rec.).

In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented
one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in
question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written
demand (Exh. B—B-4 ) to defendant Vicar for the return of the land to them; and the reasonable
rentals for the use of the land at P10,000.00 per month. On the other hand, defendant Vicar
presented the Register of Deeds for the Province of Benguet, Atty. Nicanor Sison, who testified
that the land in question is not covered by any title in the name of Egmidio Octaviano or any of
the plaintiffs (Exh. 8). The defendant dispensed with the testimony of Mons.William Brasseur
when the plaintiffs admitted that the witness if called to the witness stand, would testify that
defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and
peacefully and has constructed permanent structures thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted
the case on the sole issue of whether or not the decisions of the Court of Appeals and the
Supreme Court touching on the ownership of Lot 2, which in effect declared the plaintiffs the
owners of the land constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the
defense of ownership and/or long and continuous possession of the two lots in question since
this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the
principle of res judicata. Plaintiffs contend that the question of possession and ownership have
already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R)
and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his
part, defendant Vicar maintains that the principle of res judicata would not prevent them from
litigating the issues of long possession and ownership because the dispositive portion of the
prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and
titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the decision,
and not its body, is the controlling pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN

POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS
A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;

8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF
LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO
1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS
BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT
RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it
clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of Appeals
dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared that the
said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents as
owners of the land, neither was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith
from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated
the trust by declaring the properties in its name for taxation purposes. When petitioner applied for registration
of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years. Ordinary
acquisitive prescription requires possession for ten years, but always with just title. Extraordinary acquisitive
prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No.
38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings
are res judicatabetween the parties. They can no longer be altered by presentation of evidence because those
issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to open the
door to endless litigations by continuous determination of issues without end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R,
shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in question
under its ownership, on its evaluation of evidence and conclusion of facts.

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for acquisitive
prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for ordinary
acquisitive prescription because of the absence of just title. The appellate court did not believe the findings of
the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase
from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary evidence to support
the same and the alleged purchases were never mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez and
Octaviano had Free Patent Application for those lots since 1906. The predecessors of private respondents, not
petitioner Vicar, were in possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and 3,
because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar only
declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for by the
Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and the new
convent only 2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from
Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar after
the church and the convent were destroyed. They never asked for the return of the house, but when they
allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees' failure to
return the subject matter of commodatum to the bailor did not mean adverse possession on the part of the
borrower. The bailee held in trust the property subject matter of commodatum. The adverse claim of petitioner
came only in 1951 when it declared the lots for taxation purposes. The action of petitioner Vicar by such
adverse claim could not ripen into title by way of ordinary acquisitive prescription because of the absence of
just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors under
claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum; and that
the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its
findings of fact have become incontestible. This Court declined to review said decision, thereby in effect,
affirming it. It has become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of discretion, when it
held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the principle of res
judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as
supported by evidence established in that decision may no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the
Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is
AFFIRMED, with costs against petitioner.

SO ORDERED.

Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 102970 May 13, 1993

LUZAN SIA, petitioner,
vs.
COURT OF APPEALS and SECURITY BANK and TRUST COMPANY, respondents.

Asuncion Law Offices for petitioner.

Cauton, Banares, Carpio & Associates for private respondent.

DAVIDE, JR., J.:

The Decision of public respondent Court of Appeals in CA-G.R. CV No. 26737, promulgated on 21 August
1991,1reversing and setting aside the Decision, dated 19 February 1990, 2 of Branch 47 of the Regional Trial
Court (RTC) of Manila in Civil Case No. 87-42601, entitled "LUZAN SIA vs. SECURITY BANK and TRUST
CO.," is challenged in this petition for review on certiorari under Rule 45 of the Rules Court.

Civil Case No. 87-42601 is an action for damages arising out of the destruction or loss of the stamp collection
of the plaintiff (petitioner herein) contained in Safety Deposit Box No. 54 which had been rented from the
defendant pursuant to a contract denominated as a Lease Agreement. 3 Judgment therein was rendered in
favor of the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendant, Security Bank & Trust Company, ordering the defendant bank to pay the
plaintiff the sum of —

a) Twenty Thousand Pesos (P20,000.00), Philippine Currency, as actual damages;

b) One Hundred Thousand Pesos (P100,000.00), Philippine Currency, as moral damages; and

c) Five Thousand Pesos (P5,000.00), Philippine Currency, as attorney's fees and legal
expenses.

The counterclaim set up by the defendant are hereby dismissed for lack of merit.

No costs.

SO ORDERED.4

The antecedent facts of the present controversy are summarized by the public respondent in its challenged
decision as follows:

The plaintiff rented on March 22, 1985 the Safety Deposit Box No. 54 of the defendant bank at
its Binondo Branch located at the Fookien Times Building, Soler St., Binondo, Manila wherein
he placed his collection of stamps. The said safety deposit box leased by the plaintiff was at the
bottom or at the lowest level of the safety deposit boxes of the defendant bank at its aforesaid
Binondo Branch.

During the floods that took place in 1985 and 1986, floodwater entered into the defendant
bank's premises, seeped into the safety deposit box leased by the plaintiff and caused,
according to the plaintiff, damage to his stamps collection. The defendant bank rejected the
plaintiff's claim for compensation for his damaged stamps collection, so, the plaintiff instituted an
action for damages against the defendant bank.
 The defendant bank denied liability for the damaged stamps collection of the plaintiff on the
basis of the "Rules and Regulations Governing the Lease of Safe Deposit Boxes" (Exhs. "A-1",
"1-A"), particularly paragraphs 9 and 13, which reads (sic):

"9. The liability of the Bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the safe by any person other than the Renter, his authorized agent or
legal representative;

xxx xxx xxx

"13. The Bank is not a depository of the contents of the safe and it has neither the possession
nor the control of the same. The Bank has no interest whatsoever in said contents, except as
herein provided, and it assumes absolutely no liability in connection therewith."

The defendant bank also contended that its contract with the plaintiff over safety deposit box
No. 54 was one of lease and not of deposit and, therefore, governed by the lease agreement
(Exhs. "A", "L") which should be the applicable law; that the destruction of the plaintiff's stamps
collection was due to a calamity beyond obligation on its part to notify the plaintiff about the
floodwaters that inundated its premises at Binondo branch which allegedly seeped into the
safety deposit box leased to the plaintiff.

The trial court then directed that an ocular inspection on (sic) the contents of the safety deposit
box be conducted, which was done on December 8, 1988 by its clerk of court in the presence of
the parties and their counsels. A report thereon was then submitted on December 12, 1988
(Records, p. 98-A) and confirmed in open court by both parties thru counsel during the hearing
on the same date (Ibid., p. 102) stating:

"That the Safety Box Deposit No. 54 was opened by both plaintiff Luzan Sia and
the Acting Branch Manager Jimmy B. Ynion in the presence of the undersigned,
plaintiff's and defendant's counsel. Said Safety Box when opened contains two
albums of different sizes and thickness, length and width and a tin box with
printed word 'Tai Ping Shiang Roast Pork in pieces with Chinese designs and
character."

Condition of the above-stated Items —

"Both albums are wet, moldy and badly damaged.

1. The first album measures 10 1/8 inches in length, 8 inches in width and 3/4 in thick. The
leaves of the album are attached to every page and cannot be lifted without destroying it, hence
the stamps contained therein are no longer visible.

2. The second album measure 12 1/2 inches in length, 9 3/4 in width 1 inch thick. Some of its
pages can still be lifted. The stamps therein can still be distinguished but beyond restoration.
Others have lost its original form.

3. The tin box is rusty inside. It contains an album with several pieces of papers stuck up to the
cover of the box. The condition of the album is the second abovementioned album."5

The SECURITY BANK AND TRUST COMPANY, hereinafter referred to as SBTC, appealed the trial court's
decision to the public respondent Court of Appeals. The appeal was docketed as CA-G.R. CV No. 26737.

In urging the public respondent to reverse the decision of the trial court, SBTC contended that the latter erred
in (a) holding that the lease agreement is a contract of adhesion; (b) finding that the defendant had failed to
exercise the required diligence expected of a bank in maintaining the safety deposit box; (c) awarding to the
plaintiff actual damages in the amount of P20,000.00, moral damages in the amount of P100,000.00 and
attorney's fees and legal expenses in the amount of P5,000.00; and (d) dismissing the counterclaim.

On 21 August 1991, the respondent promulgated its decision the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and instead the appellee's
complaint is hereby DISMISSED. The appellant bank's counterclaim is likewise DISMISSED. No
costs.6

In reversing the trial court's decision and absolving SBTC from liability, the public respondent found and ruled
that:

a) the fine print in the "Lease Agreement " (Exhibits "A" and "1" ) constitutes the terms and conditions of the
contract of lease which the appellee (now petitioner) had voluntarily and knowingly executed with SBTC;

b) the contract entered into by the parties regarding Safe Deposit Box No. 54 was not a contract of deposit
wherein the bank became a depositary of the subject stamp collection; hence, as contended by SBTC, the
provisions of Book IV, Title XII of the Civil Code on deposits do not apply;

c) The following provisions of the questioned lease agreement of the safety deposit box limiting SBTC's
liability:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the Safe by any person other than the Renter, his authorized agent or
legal representative.

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession
nor the control of the same. The Bank has no interest whatsoever in said contents, except as
herein provided, and it assumes absolutely no liability in connection therewith.

are valid since said stipulations are not contrary to law, morals, good customs, public order or public policy;
and

d) there is no concrete evidence to show that SBTC failed to exercise the required diligence in maintaining the
safety deposit box; what was proven was that the floods of 1985 and 1986, which were beyond the control of
SBTC, caused the damage to the stamp collection; said floods were fortuitous events which SBTC should not
be held liable for since it was not shown to have participated in the aggravation of the damage to the stamp
collection; on the contrary, it offered its services to secure the assistance of an expert in order to save most of
the stamps, but the appellee refused; appellee must then bear the lose under the principle of "res perit
domino."

Unsuccessful in his bid to have the above decision reconsidered by the public respondent, 7 petitioner filed the
instant petition wherein he contends that:

IT WAS A GRAVE ERROR OR AN ABUSE OF DISCRETION ON THE PART OF THE

RESPONDENT COURT WHEN IT RULED THAT RESPONDENT SBTC DID NOT FAIL TO
EXERCISE THE REQUIRED DILIGENCE IN MAINTAINING THE SAFETY DEPOSIT BOX OF
THE PETITIONER CONSIDERING THAT SUBSTANTIAL EVIDENCE EXIST (sic) PROVING
THE CONTRARY.

II
 THE RESPONDENT COURT SERIOUSLY ERRED IN EXCULPATING PRIVATE
RESPONDENT FROM ANY LIABILITY WHATSOEVER BY REASON OF THE PROVISIONS
OF PARAGRAPHS 9 AND 13 OF THE AGREEMENT (EXHS. "A" AND "A-1").

III

THE RESPONDENT COURT SERIOUSLY ERRED IN NOT UPHOLDING THE AWARDS OF

THE TRIAL COURT FOR ACTUAL AND MORAL DAMAGES, INCLUDING ATTORNEY'S
FEES AND LEGAL EXPENSES, IN FAVOR OF THE PETITIONER.8

We subsequently gave due course the petition and required both parties to submit their respective
memoranda, which they complied with.9

Petitioner insists that the trial court correctly ruled that SBTC had failed "to exercise the required diligence
expected of a bank maintaining such safety deposit box . . . in the light of the environmental circumstance of
said safety deposit box after the floods of 1985 and 1986." He argues that such a conclusion is supported by
the evidence on record, to wit: SBTC was fully cognizant of the exact location of the safety deposit box in
question; it knew that the premises were inundated by floodwaters in 1985 and 1986 and considering that the
bank is guarded twenty-four (24) hours a day , it is safe to conclude that it was also aware of the inundation of
the premises where the safety deposit box was located; despite such knowledge, however, it never bothered to
inform the petitioner of the flooding or take any appropriate measures to insure the safety and good
maintenance of the safety deposit box in question.

SBTC does not squarely dispute these facts; rather, it relies on the rule that findings of facts of the Court of
Appeals, when supported by substantial exidence, are not reviewable on appeal by certiorari. 10

The foregoing rule is, of course, subject to certain exceptions such as when there exists a disparity between
the factual findings and conclusions of the Court of Appeals and the trial court. 11 Such a disparity obtains in
the present case.

As We see it, SBTC's theory, which was upheld by the public respondent, is that the "Lease Agreement "
covering Safe Deposit Box No. 54 (Exhibit "A and "1") is just that — a contract of lease — and not a contract of
deposit, and that paragraphs 9 and 13 thereof, which expressly limit the bank's liability as follows:

9. The liability of the bank by reason of the lease, is limited to the exercise of the diligence to
prevent the opening of the Safe by any person other than the Renter, his autliorized agent or
legal representative;

xxx xxx xxx

13. The bank is not a depository of the contents of the Safe and it has neither the possession
nor the control of the same. The Bank has no interest whatsoever said contents, except as
herein provided, and it assumes absolutely no liability in connection therewith. 12

are valid and binding upon the parties. In the challenged decision, the public respondent further avers that
even without such a limitation of liability, SBTC should still be absolved from any responsibility for the damage
sustained by the petitioner as it appears that such damage was occasioned by a fortuitous event and that the
respondent bank was free from any participation in the aggravation of the injury.

We cannot accept this theory and ratiocination. Consequently, this Court finds the petition to be impressed with
merit.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, 13 this Court explicitly rejected
the contention that a contract for the use of a safety deposit box is a contract of lease governed by Title VII,
Book IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to be strictly
governed by the Civil Code provision on deposit; 14 it is, as We declared, a special kind of deposit. The
prevailing rule in American jurisprudence — that the relation between a bank renting out safe deposit boxes
and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment for hire and
mutual benefit 15 — has been adopted in this jurisdiction, thus:

In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it
is clear that in this jurisdiction, the prevailing rule in the United States has been adopted.
Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides:

"Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations may perform the following services:

(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safequarding of such effects.

xxx xxx xxx

The banks shall perform the services permitted under subsections (a), (b) and (c) of this section
as depositories or as agents. . . ."(emphasis supplied)

Note that the primary function is still found within the parameters of a contract of deposit, i.e.,
the receiving in custody of funds, documents and other valuable objects for safekeeping. The
renting out of the safety deposit boxes is not independent from, but related to or in conjunction
with, this principal function. A contract of deposit may be entered into orally or in writing (Art.
1969, Civil Code] and, pursuant to Article 1306 of the Civil Code, the parties thereto may
establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in
performing its obligation, it is found guilty of fraud, negligence, delay or contravention of the
tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing the degree
of diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence,
any stipulation exempting the depositary from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay would be void for being contrary to law and
public policy. In the instant case, petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither the possession nor
control of the same.

"14. The bank has no interest whatsoever in said contents, except as herein expressly provided,
and it assumes absolutely no liability in connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in agreement with this
proposition for indeed, said provisions are inconsistent with the respondent Bank's responsibility
as a depositary under Section 72 (a) of the General Banking Act. Both exempt the latter from
any liability except as contemplated in condition 8 thereof which limits its duty to exercise
reasonable diligence only with respect to who shall be admitted to any rented safe, to wit:

"8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be responsible for
the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of
the Bank. It is not correct to assert that the Bank has neither the possession nor control of the
 contents of the box since in fact, the safety deposit box itself is located in its premises and is
under its absolute control; moreover, the respondent Bank keeps the guard key to the said box.
As stated earlier, renters cannot open their respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then, to the extent above stated, the foregoing
conditions in the contract in question are void and ineffective. It has been said:

"With respect to property deposited in a safe-deposit box by a customer of a

safe-deposit company, the parties, since the relation is a contractual one, may by
special contract define their respective duties or provide for increasing or limiting
the liability of the deposit company, provided such contract is not in violation of
law or public policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by law from
the relationship of the parties; liability of the deposit company will not be enlarged
or restricted by words of doubtful meaning. The company, in renting safe-deposit
boxes, cannot exempt itself from liability for loss of the contents by its own fraud
or negligence or that, of its agents or servants, and if a provision of the contract
may be construed as an attempt to do so, it will be held ineffective for the
purpose. Although it has been held that the lessor of a safe-deposit box cannot
limit its liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limit its liability to some extent by
agreement or stipulation ."[10 AM JUR 2d., 466]. (citations omitted) 16

It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety Deposit Box in CA Agro-
Industrial Development Corp. are strikingly similar to condition No. 13 in the instant case. On the other hand,
both condition No. 8 in CA Agro-Industrial Development Corp. and condition No. 9 in the present case limit the
scope of the exercise of due diligence by the banks involved to merely seeing to it that only the renter, his
authorized agent or his legal representative should open or have access to the safety deposit box. In short, in
all other situations, it would seem that SBTC is not bound to exercise diligence of any kind at all. Assayed in
the light of Our aforementioned pronouncements in CA Agro-lndustrial Development Corp., it is not at all
difficult to conclude that both conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety
deposit box in question (Exhibits "A" and "1") must be stricken down for being contrary to law and public policy
as they are meant to exempt SBTC from any liability for damage, loss or destruction of the contents of the
safety deposit box which may arise from its own or its agents' fraud, negligence or delay. Accordingly, SBTC
cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of the
stamp collection because the flooding was a fortuitous event and there was no showing of SBTC's participation
in the aggravation of the loss or injury. It states:

Article 1174 of the Civil Code provides:

"Except in cases expressly specified by the law, or when it is otherwise declared

by stipulation, or when the nature of the obligation requires the assumption of
risk, no person shall be responsible for those events which could not be
foreseen, or which, though foreseen, were inevitable.'

In its dissertation of the phrase "caso fortuito" the Enciclopedia Jurisdicada Española 17 says: "In
a legal sense and, consequently, also in relation to contracts, a "caso fortuito" prevents
(sic) 18 the following essential characteristics: (1) the cause of the unforeseen ands unexpected
occurrence, or of the failure of the debtor to comply with his obligation, must be independent of
the human will; (2) it must be impossible to foresee the event which constitutes the "caso
fortuito," or if it can be foreseen, it must be impossible to avoid; (3) the occurrence must be such
as to render it impossible for one debtor to fulfill his obligation in a normal manner; and (4) the
obligor must be free from any participation in the aggravation of the injury resulting to the
creditor." (cited in Servando vs. Phil., Steam Navigation Co., supra). 19
 Here, the unforeseen or unexpected inundating floods were independent of the will of the
appellant bank and the latter was not shown to have participated in aggravating damage (sic) to
the stamps collection of the appellee. In fact, the appellant bank offered its services to secure
the assistance of an expert to save most of the then good stamps but the appelle refused and
let (sic) these recoverable stamps inside the safety deposit box until they were ruined. 20

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately, however,
the public respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was
guilty of negligence. The facts constituting negligence are enumerated in the petition and have been
summarized in thisponencia. SBTC's negligence aggravated the injury or damage to the stamp collection.
SBTC was aware of the floods of 1985 and 1986; it also knew that the floodwaters inundated the room where
Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time in notifying the petitioner in
order that the box could have been opened to retrieve the stamps, thus saving the same from further
deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a
good father of a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the
aforementioned fourth characteristic of a fortuitous event is absent Article 1170 of the Civil Code, which reads:

Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable for damages,

thus comes to the succor of the petitioner. The destruction or loss of the stamp collection which was, in the
language of the trial court, the "product of 27 years of patience and diligence" 21 caused the petitioner
pecuniary loss; hence, he must be compensated therefor.

We cannot, however, place Our imprimatur on the trial court's award of moral damages. Since the relationship
between the petitioner and SBTC is based on a contract, either of them may be held liable for moral damages
for breach thereof only if said party had acted fraudulently or in bad faith. 22 There is here no proof of fraud or
bad faith on the part of SBTC.

WHEREFORE, the instant petition is hereby GRANTED. The challenged Decision and Resolution of the public
respondent Court of Appeals of 21 August 1991 and 21 November 1991, respectively, in CA-G.R. CV No.
26737, are hereby SET ASIDE and the Decision of 19 February 1990 of Branch 47 of the Regional Trial Court
of Manila in Civil Case No. 87-42601 is hereby REINSTATED in full, except as to the award of moral damages
which is hereby set aside.

Costs against the private respondent.

SO ORDERED.
G.R. No.178407

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
S.F. NAGUIAT ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

This case calls for the determination of whether the approval and consent of the insolvency court is required
under Act No. 1956, otherwise known as the Insolvency Law, before a secured creditor like petitioner
Metropolitan Bank and Trust Company can proceed with the extrajudicial foreclosure of the mortgaged
property.

This is a Petition for Review1 under Rule 45, seeking to reverse and

set aside the November 15, 2006 Decision2 and June 14, 2007 Resolution3 of the Court of Appeals (Sixth
Division) in CA-G.R. SP No. 94968. The questioned Decision and Resolution dismissed Metropolitan Bank and
Trust Company’s Petition for Certiorari and Mandamus4 and denied its subsequent Motion for Reconsideration
and Clarification.5

Sometime in April 1997, Spouses Rommel Naguiat and Celestina Naguiat and S.F. Naguiat Enterprises, Inc.
(S.F. Naguiat) executed a real estate mortgage6 in favor of Metropolitan Bank and Trust Company (Metrobank)
to secure certain credit accommodations obtained from the latter amounting to 17 million. The mortgage was
constituted over the following properties:
 (1)TCT No. 586767 – a parcel of land in the Barrio of Pulung Bulu, Angeles, Pampanga, with an area of
489 square meters; and

(2)TCT No. 310523 – a parcel of land in Marikina, Rizal, with an area of 1,200.10 square meters.8

On March 3, 2005, S.F. Naguiat represented by Celestina T. Naguiat, Eugene T. Naguiat, and Anna N. Africa
obtained a loan9 from Metrobank in the amount of 1,575,000.00. The loan was likewise secured by the 1997
real estate mortgage by virtue of the Agreement on Existing Mortgage(s) 10 executed between the parties on
March 15, 2004.

On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary Insolvency with Application for the Appointment of a
Receiver11 pursuant to Act No. 1956, as amended,12 before the Regional Trial Court of Angeles City and which
was raffled to Branch 56.13 Among the assets declared in the Petition was the property covered by TCT No.
58676 (one of the properties mortgaged to Metrobank).14

Presiding Judge Irin Zenaida S. Buan (Judge Buan) issued the Order15 dated July 12, 2005, declaring S.F.
Naguiat insolvent; directing the Deputy Sheriff to take possession of all the properties of S.F. Naguiat until the
appointment of a receiver/assignee; and forbidding payment of any debts due, delivery of properties, and
transfer of any of its properties.

Pending the appointment of a receiver, Judge Buan directed the creditors, including Metrobank, to file their
respective Comments on the Petition.16 In lieu of a Comment, Metrobank filed a Manifestation and
Motion17informing the court of Metrobank’s decision to withdraw from the insolvency proceedings because it
intended to extrajudicially foreclose the mortgaged property to satisfy its claim against S.F. Naguiat.18

Subsequently, S.F. Naguiat defaulted in paying its loan.19 On November 8, 2005, Metrobank instituted an
extrajudicial foreclosure proceeding against the mortgaged property covered by TCT No. 5867620 and sold the
property at a public auction held on December 9, 2005 to Phoenix Global Energy, Inc., the highest
bidder.21Afterwards, Sheriff Claude B. Balasbas prepared the Certificate of Sale22 and submitted it for approval
to Clerk of Court Vicente S. Fernandez, Jr. and Executive Judge Bernardita Gabitan-Erum (Executive Judge
Gabitan-Erum). However, Executive Judge Gabitan-Erum issued the Order23 dated December 15, 2005
denying her approval of the Certificate of Sale in view of the July 12, 2005 Order issued by the insolvency
court. Metrobank’s subsequent Motion for Reconsideration was also denied in the Order24 dated April 24,
2006.

Aggrieved by both Orders of Executive Judge Gabitan-Erum, Metrobank filed a Petition25 for certiorari and
mandamus before the Court of Appeals on June 22, 2006. S.F. Naguiat filed its Manifestation26 stating that it
was not interposing any objection to the Petition and requested that the issues raised in the Petition be
resolved without objection and argument on its part.27

On November 15, 2006, the Court of Appeals rendered its Decision dismissing the Petition on the basis of
Metrobank’s failure to "obtain the permission of the insolvency court to extrajudicially foreclose the mortgaged
property."28 The Court of Appeals declared that "a suspension of the foreclosure proceedings is in order, until
an assignee [or receiver,] is elected or appointed [by the insolvency court] so as to afford the insolvent debtor
proper representation in the foreclosure [proceedings]."29

Metrobank filed a Motion for Reconsideration and Clarification, which was denied by the Court of Appeals in its
Resolution dated June 14, 2007.30 The Court of Appeals held that leave of court must be obtained from the
insolvency court whether the foreclosure suit was instituted judicially or extrajudicially so as to afford the
insolvent estate’s proper representation (through the assignee) in such action31 and "to avoid the dissipation of
the insolvent debtor’s assets in possession of the insolvency court without the latter’s knowledge."32

Hence, the present Petition for Review was filed. Petitioner contends that the Court of Appeals decided
questions of substance in a way not in accord with law and with the applicable decisions of this court:
 A.

By ruling that there must be a motion for leave of court to be filed and granted by the insolvency court, before
the petitioner, as a secured creditor of an insolvent, can extrajudicially foreclose the mortgaged property, which
is tantamount to a judicial legislation.

B.

By ruling that the Honorable Executive Judge Bernardita Gabitan- Erum did not abuse her discretion in
refusing to perform her ministerial duty of approving the subject certificate of sale, despite the fact that the
petitioner and the designated sheriff complied with all the requirements mandated by Act No. 3135, as
amended, circulars, administrative matters and memorandums issued by the Honorable Supreme Court.

C.

By ruling that the action of the Honorable Executive Judge Bernardita Gabitan-Erum is proper in denying the
approval of the Certificate of Sale on the grounds that the issuance of the Order dated 12 July 2005 declaring
respondent insolvent and the pendency of the insolvency proceeding forbid the petitioner, as a secured
creditor, to foreclose the subject mortgaged property.33 (Emphasis supplied)

On October 20, 2007, S.F. Naguiat filed a Manifestation34 stating that it interposed no objection to the Petition
and submitted the issues raised therein without any argument.

On November 28, 2007, the court resolved "to give due course to the petition [and] to decide the case
according to the pleadings already filed[.]"35

The issues for resolution are:

First, whether the Court of Appeals erred in ruling that prior leave of the insolvency court is necessary before a
secured creditor, like petitioner Metropolitan Bank and Trust Company, can extrajudicially foreclose the
mortgaged property.

Second, whether the Court of Appeals erred in ruling that Executive Judge Gabitan-Erum did not abuse her
discretion in refusing to approve the Certificate of Sale.

Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must first obtain leave or
permission from the insolvency court before said creditor can foreclose on the mortgaged property. 36 It adds
that this procedural requirement applies only to civil suits, and not when the secured creditor opts to exercise
the right to foreclose extrajudicially the mortgaged property under Act No. 3135, as amended, because
extrajudicial foreclosure is not a civil suit.37 Thus, the Court of Appeals allegedly imposed a new condition that
was tantamount to unauthorized judicial legislation when it required petitioner to file a Motion for Leave of the
insolvency court.38 Said condition, petitioner argues, defeated and rendered inutile its right or prerogative under
Act No. 1956 to independently initiate extrajudicial foreclosure of the mortgaged property.39

Nonetheless, petitioner contends that the filing of its Manifestation before the insolvency court served as
sufficient notice of its intention and, in effect, asked the court’s permission to foreclose the mortgaged
property.40

Petitioner further contends that "the powers and responsibilities of an Executive Judge in extrajudicial
foreclosure proceedings, in line with Administrative Order No. 6, is merely to supervise the conduct of the
extra- judicial foreclosure of the property"41 and to oversee that the procedural requirements are faithfully
complied with;42 and when "the Clerk of Court and Sheriff concerned complied with their designated duties and
responsibilities under the [administrative] directives and under Act No. 3135, as amended, and the
corresponding filing and legal fees were duly paid, it becomes a ministerial duty on the part of the executive
judge to approve the certificate of sale."43 Thus, Executive Judge Gabitan-Erum allegedly exceeded her
authority by "exercising judicial discretion in issuing her Orders dated December 15, 2006 and April 24, 2006 . .
. despite the fact that Sheriff Balasbas complied with all the notices requirements under Act No. 3135, [as]
amended, . . . and the petitioner and the highest bidder paid all the requisite filing and legal fees[.]"44

Furthermore, citing Chartered Bank v. C.A. Imperial and National Bank,45 petitioner submits that the order of
insolvency affected only unsecured creditors and not secured creditors, like petitioner, which did not surrender
its right over the mortgaged property.46 Hence, it contends that the Court of Appeals seriously erred in holding
as proper Executive Judge Gabitan-Erum’s disapproval of the Certificate of Sale on account of the Order of
insolvency issued by the insolvency court.47

Finally, petitioner points out that contrary to the Court of Appeals’ ruling, "there is nothing more to suspend
because the extrajudicial foreclosure of the mortgaged property was already a fait accompli as the public
auction sale was conducted on December 9, 2005 and all the requisite legal fees were paid and a Certificate of
Sale was already prepared."48 "The only remaining thing to do [was] for the . . . Executive Judge to sign the
Certificate of Sale, which she . . . refused to do."49

The Petition has no merit.

A look at the historical background of the laws governing insolvency in this country will be helpful in resolving
the questions presented before us.

The first insolvency law, Act No. 1956, was enacted on May 20, 1909. It was derived from the Insolvency Act of
California (1895), with a few provisions taken from the United States Bankruptcy Act of 1898. 50 Act No.1956
was entitled "An Act Providing for the Suspension of Payments, the Relief of Insolvent Debtors, the Protection
of Creditors, and the Punishment of Fraudulent Debtors." The remedies under the law were through a
suspension of payment51 (for a debtor who was solvent but illiquid) or a discharge from debts and liabilities
through the voluntary52or involuntary53 insolvency proceedings (for a debtor who was insolvent).

The objective of suspension of payments is the deferment of the payment of debts until such time as the
debtor, which possesses sufficient property to cover all its debts, is able to convert such assets into cash or
otherwise acquires the cash necessary to pay its debts. On the other hand, the objective in insolvency
proceedings is "to effect an equitable distribution of the bankrupt’s properties among his creditors and to
benefit the debtor by discharging54him from his liabilities and enabling him to start afresh with the property set
apart for him as exempt."55

Act No. 1956 was meant to be a complete law on insolvency,56 and debts were to be liquidated in accordance
with the order of priority set forth under Chapter VI, Sections 48 to 50 on "Classification and Preference of
Creditors"; and Sections 29 and 59 with respect to mortgage or pledge of real or personal property, or lien
thereon. Jurisdiction over suspension of payments and insolvency was vested in the Courts of First Instance
(now the Regional Trial Courts).57

The Civil Code58 (effective August 30, 1950) established a system of concurrence and preference of credits,
which finds particular application in insolvency proceedings.59 Philippine Savings Bank v. Hon.
Lantin60 explains this scheme:

Concurrence of credits occurs when the same specific property of the debtor or all of his property is subjected
to the claims of several creditors. The concurrence of credits raises no questions of consequence where the
value of the property or the value of all assets of the debtor is sufficient to pay in full all the creditors. However,
it becomes material when said assets are insufficient for then some creditors of necessity will not be paid or
some creditors will not obtain the full satisfaction of their claims. In this situation, the question of preference will
then arise, that is to say who of the creditors will be paid ahead of the others. (Caguioa, Comments and Cases
on Civil Law, 1970 ed., Vol. VI, p. 472.)61
The credits are classified into three general categories, namely, "(a) special preferred credits listed in Articles
224162and 2242,63 (b) ordinary preferred credits listed in Article 2244[,]64 and (c) common credits under Article
2245."65

The special preferred credits enumerated in Articles 2241 (with respect to movable property) and 2242 (with
respect to immovable property) are considered as mortgages or pledges of real or personal property, or liens
within the purview of Act No. 1956.66 These credits, which enjoy preference with respect to a specific movable
or immovable property, exclude all others to the extent of the value of the property.67 If there are two or more
liens on the same specific property, the lienholders divide the value of the property involved pro rata, after the
taxes on the same property are fully paid.68

"Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence
over ordinary preferred credits so far as concerns the property to which the liens have attached. The specially
preferred credits must be discharged first out of the proceeds of the property to which they relate, before
ordinary preferred creditors may lay claim to any part of such proceeds."69

"In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow
such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash and
other assets of the insolvent applied in a certain sequence or order of priority."70

(5)Credits and advancements made to the debtor for support of himself or herself, and family, during
the last year preceding the insolvency;

(6)Support during the insolvency proceedings, and for three months thereafter;

(7)Fines and civil indemnification arising from a criminal offense;

(8)Legal expenses, and expenses incurred in the administration of the insolvent’s estate for the
common interest of the creditors, when properly authorized and approved by the court;

(9)Taxes and assessments due the national government, other than those mentioned in articles 2241,
No. 1, and 2242, No. 1;

(10)Taxes and assessments due any province, other than those referred to in articles 2241, No. 1, and
2242, No. 1;

(11)Taxes and assessments due any city or municipality, other than those indicated in articles 2241,
No. 1, and 2242, No. 1;

(12)Damages for death or personal injuries caused by a quasi-delict;

(13)Gifts due to public and private institutions of charity or beneficence;

(14)Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment,
if they have been the subject of litigation.

These credits shall have preference among themselves in the order of priority of the dates of the instruments
and of the judgments, respectively.

It was held that concurrence and preference of credits can only be ascertained in the context of a general
liquidation proceeding that is in rem, such as an insolvency proceeding, where properties of the debtor are
inventoried and liquidated and the claims of all the creditors may be bindingly adjudicated.71 The application of
this order of priorities established under the Civil Code in insolvency proceedings assures that priority of claims
are respected and credits belonging to the same class are equitably treated.
Conformably, it is the policy of Act No. 1956 to place all the assets and liabilities of the insolvent debtor
completely within the jurisdiction and control of the insolvency court without the intervention of any other court
in the insolvent debtor’s concerns or in the administration of the estate.72 It was considered to be of prime
importance that the insolvency proceedings follow their course as speedily as possible in order that a
discharge, if the insolvent debtor is entitled to it, should be decreed without unreasonable delay. "Proceedings
of [this] nature cannot proceed properly or with due dispatch unless they are controlled absolutely by the court
having charge thereof."73

In 1981, Presidential Decree No. 1758 amended Presidential Decree No. 902-A, the Securities and Exchange
Commission charter. Under its terms,74 jurisdiction regarding corporations that sought suspension of payments
process was taken away from the regular courts and given to the Securities and Exchange Commission.75 In
addition, an alternative to suspension of payments — rehabilitation — was introduced. It enables a corporation
whose assets are not sufficient to cover its liabilities to apply to the Securities and Exchange Commission for
the appointment of a rehabilitation receiver and/or management committee76 and then to develop a
rehabilitation plan with a view to rejuvenating a financially distressed corporation. However, the procedure to
avail of the remedy was not spelled out until 20 years later when the Securities and Exchange Commission
finally adopted the Rules of Procedure on Corporate Recovery on January 4, 2000.

Shortly thereafter, with the passage of Republic Act No. 8799 or The Securities Regulation Code on July 19,
2000, jurisdiction over corporation rehabilitation cases was reverted to the Regional Trial Courts designated as
commercial courts or rehabilitation courts.77 This legal development was implemented by the Interim Rules of
Procedure on Corporate Rehabilitation (made effective in December 2000), which was later replaced by A.M.
00-8- 10-SC or the Rules of Procedure on Corporate Rehabilitation of 2008.

Act No. 1956 continued to remain in force and effect until its express repeal on July 18, 2010 when Republic
Act No. 10142,78 otherwise known as the Financial Rehabilitation and Insolvency Act of 2010, took effect.
Republic Act No. 10142 now provides for court proceedings in the rehabilitation or liquidation of debtors, both
juridical and natural persons, in a "timely, fair, transparent, effective and efficient"79 manner. The purpose of
insolvency proceedings is "to encourage debtors . . . and their creditors to collectively and realistically resolve
and adjust competing claims and property rights"80 while "maintain[ing] certainty and predictability in
commercial affairs, preserv[ing] and maximiz[ing] the value of the assets of these debtors, recogniz[ing]
creditor rights and respect[ing] priority of claims, and ensur[ing] equitable treatment of creditors who are
similarly situated."81 It has also been provided that whenever rehabilitation is no longer feasible, "it is in the
interest of the State to facilitate a speedy and orderly liquidation of [the] debtors’ assets and the settlement of
their obligations."82

Unlike Act No. 1956, Republic Act No. 10142 provides a broad definition of the term, "insolvent":

SEC. 4. Definition of Terms. - As used in this Act, the term:

....

(p) Insolvent shall refer to the financial condition of a debtor that is generally unable to pay its or his liabilities
as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.

Republic Act No. 10142 also expressly categorizes different forms of debt relief available to a corporate debtor
in financial distress. These are out-of-court restructuring agreements;83 pre-negotiated rehabilitation;84 court-
supervised rehabilitation;85 and liquidation (voluntary and involuntary).86 An insolvent individual debtor can avail
of suspension of payments,87 or liquidation.88

During liquidation proceedings, a secured creditor may waive its security or lien, prove its claim, and share in
the distribution of the assets of the debtor, in which case it will be admitted as an unsecured creditor; or
maintain its rights under the security or lien,89 in which case:
 1.[T]he value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.
When the value of the property is less than the claim . . . the [creditor] will be admitted . . . as a creditor
for the balance. If its value exceeds the claim . . . the liquidator may convey the property to the creditor
and waive the debtor’s right of redemption upon receiving the excess from the creditor;

2.[T]he liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds
of the sale; or

3.[T]he secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws.90

A secured creditor, however, is subject to the temporary stay of foreclosure proceedings for a period of 180
days,91upon the issuance by the court of the Liquidation Order.92

Republic Act No. 10142 was to govern all petitions filed after it had taken effect, and all further proceedings in
pending insolvency, suspension of payments, and rehabilitation cases, except when its application "would not
be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall
apply."93

The relevant proceedings in this case took place prior to Republic Act No. 10142; hence, the issue will be
resolved according to the provisions of Act No. 1956.

II

Act No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent court before said
creditor can foreclose the mortgaged property.

When read together, the following provisions of Act No. 1956 reveal the necessity for leave of the insolvency
court:

(A)Under Section 14, "[a]n insolvent debtor, owing debts exceeding in amount the sum of one thousand
pesos, may apply to be discharged from his debts and liabilities by petition to the Court of First Instance
of the province or city in which he has resided for six months next preceding the filing of such petition.
In his petition, he shall set forth his place of residence, the period of his residence therein immediately
prior to filing said petition, his inability to pay all his debts in full, his willingness to surrender all his
property, estate, and effects not exempt from execution for the benefit of his creditors, and an
application to be adjudged an insolvent. He shall annex to his petition a schedule and inventory in the
form hereinafter provided. The filing of such petition shall be an act of insolvency."

(B)Under Section 16, "[the] inventory must contain, besides the creditors, an accurate description of all
the real and personal property, estate, and effects of the [insolvent], including his homestead, if any,
together with a statement of the value of each item of said property, estate, and effects and its location,
and a statement of the incumbrances thereon. All property exempt by law from execution shall be set
out in said inventory with a statement of its valuation, location, and the incumbrances thereon, if any.
The inventory shall contain an outline of the facts giving rises [sic], or which might give rise, to a right of
action in favor of the insolvent debtor."

(C)Under Section 18, upon receipt of the petition, the court shall issue an order declaring the petitioner
insolvent, and directing the sheriff to take possession of, and safely keep, until the appointment of a
receiver or assignee, all the debtor’s real and personal property, except those exempt by law from
execution. The order also forbids the transfer of any property by the debtor.

(D)Under Section 32, once an assignee is elected and qualified, the clerk of court shall assign and
convey to the assignee all the real and personal property of the debtor, not exempt from execution, and
such assignment shall relate back to the commencement of the insolvency proceedings, and by
operation of law, shall vest the title to all such property in the assignee.
With the declaration of insolvency of the debtor, insolvency courts "obtain full and complete jurisdiction over all
property of the insolvent and of all claims by and against [it.]"94 It follows that the insolvency court has exclusive
jurisdiction to deal with the property of the insolvent.95 Consequently, after the mortgagor-debtor has been
declared insolvent and the insolvency court has acquired control of his estate, a mortgagee may not, without
the permission of the insolvency court, institute proceedings to enforce its lien. In so doing, it would interfere
with the insolvency court’s possession and orderly administration of the insolvent’s properties.96

It is true that under Section 59 of Act No. 1956, the creditor is given the option to participate in the insolvency
proceedings by proving the balance of his debt, after deducting the value of the mortgaged property as agreed
upon with the receiver or determined by the court or by a sale of the property as directed by the court; or
proving his whole debt, after releasing his claim to the receiver/sheriff before the election of an assignee, or to
the assignee. However, Section 59 of Act No. 1956 proceeds to state that when "the property is not sold or
released, and delivered up, or its value fixed, the creditor [is] not allowed to prove any part of his debt," but the
assignee shall deliver to the creditor the mortgaged property. Hence, explicitly under Section 59 and as a
necessary consequence flowing from the exclusive jurisdiction of the insolvency court over the estate of the
insolvent, the mortgaged property must first be formally delivered by the court or the assignee (if one has
already been elected) before a mortgagee-creditor can initiate proceedings for foreclosure.97

Here, the foreclosure and sale of the mortgaged property of the debtor, without leave of court, contravene the
provisions of Act No. 1956 and violate the Order dated July 12, 2005 of the insolvency court which declared
S.F. Naguiat insolvent and forbidden from making any transfer of any of its properties to any person.

Petitioner would insist that "respondent was given the opportunity to be represented in the public auction sale
conducted on December 9, 2005"98 because it received a copy of the Notice of the Sheriff’s Sale on November
11, 2005;99 and the Notice of Auction Sale was published in a newspaper of general circulation.100 However,
respondent allegedly opted not to participate by not attending the public auction sale.101

Such was to be expected because when the foreclosure proceeding was initiated, respondent was already
declared insolvent. Indeed, upon the adjudication of insolvency, the insolvent ceased to exist and was in effect
judicially declared dead as of the filing of the insolvency petition and by the nature of things had no further
interest in the property covered by the mortgage.102 Under Section 32 of Act No. 1956, title to the insolvent’s
estate relates back to the filing of the insolvency petition upon the election of the assignee who shall thereafter
act on behalf of all the creditors. Under Section 36, the assignee has the power to redeem all valid mortgages
or sell property subject to mortgage. Thus, the extrajudicial foreclosure of the mortgaged property initiated by
petitioner without leave of insolvency court would effectively exclude the assignee’s right to participate in the
public auction sale of the property and to redeem the foreclosed property103 to the prejudice of all the other
creditors of the insolvent.

Petitioner filed its Manifestation and Motion before the insolvency court on September 7, 2005,104 praying that it
would no longer file the Comment required as it opted to exercise its right to extrajudicially foreclose the
property mortgaged and that it "be allowed to temporarily withdraw its active participation in the . . . proceeding
pending the outcome of the extra- judicial foreclosure proceeding of the mortgaged property."105

Petitioner should have waited for the insolvency court to act on its Manifestation and Motion before foreclosing
the mortgaged property and its lien (assuming valid) would not be impaired or its claim in any way jeopardized
by any reasonable delay. There are mechanisms within Act No. 1956 such as Section 59 that ensure that the
interests of the secured creditor are adequately protected. Parenthetically, mortgage liens are retained in
insolvency proceedings. What is merely suspended until court approval is obtained is the creditor’s
enforcement of such preference.

On the other hand, to give the secured creditor a free hand in foreclosing its collateral upon the initiation of
insolvency proceedings may frustrate the basic objectives of Act No. 1956 of maximizing the value of the
estate of the insolvent or obtaining the highest return possible from its sale for the benefit of all the creditors
(both secured and unsecured).

III
Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she refused to approve
and sign the Certificate of Sale, as would warrant the issuance of a writ of mandamus against her.

An executive judge has the administrative duty in extrajudicial foreclosure proceedings to ensure that all the
conditions of Act No. 3135 have been complied with before approving the sale at public auction of any
mortgaged property.106

"Certain requisites must be established before a creditor can proceed to an extrajudicial foreclosure, namely:
first, there must have been the failure to pay the loan obtained from the mortgagee-creditor; second, the loan
obligation must be secured by a real estate mortgage; and third, the mortgagee-creditor has the right to
foreclose the real estate mortgage either judicially or extrajudicially."107

Furthermore, Act No. 3135 outlines the notice and publication requirements and the procedure for the
extrajudicial foreclosure which constitute a condition sine qua non for its validity. Specifically, Sections 2, 3,
and 4 of the law prescribe the formalities of the extrajudicial foreclosure proceeding:

SEC. 2. Said sale cannot be made legally outside of the province in which the property sold is situated; and in
case the place within said province in which the sale is to be made is the subject of stipulation, such sale shall
be made in said place or in the municipal building of the municipality in which the property or part thereof is
situated.

SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public
places of the municipality or city where the property is situated, and if such property is worth more than four
hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.

SEC. 4. The sale shall be made at public auction, between the hours of nine in the morning and four in the
afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the
peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall
be entitled to collect a fee of five pesos for each day of actual work performed, in addition to his
expenses.1âwphi1

"Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial doubt
exists."108

There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety of the foreclosure sale. Her
verification with the records of the Clerk of Court showed that a Petition for Insolvency had been filed and had
already been acted upon by the insolvency court prior to the application for extrajudicial foreclosure of the
mortgaged properties. Among the inventoried unpaid debts and properties attached to the Petition for
Insolvency was the loan secured by the real estate mortgage subject of the application for extrajudicial
foreclosure sale.109 With the pendency of the insolvency case, substantial doubt exists to justify the refusal by
Executive Judge Gabitan-Erum to approve the Certificate of Sale as the extrajudicial foreclosure sale without
leave of the insolvency court may contravene the policy and purpose of Act No. 1956.110

Act No. 3135 is silent with respect to mortgaged properties that are in custodia legis, such as the property in
this case, which was placed under the control and supervision of the insolvency court. This court has declared
that "[a] court which has control of such property, exercises exclusive jurisdiction over the same, retains all
incidents relative to the conduct of such property. No court, except one having supervisory control or superior
jurisdiction in the premises, has a right to interfere with and change that possession."111 The extrajudicial
foreclosure and sale of the mortgaged property of the debtor would clearly constitute an interference with the
insolvency court's possession of the property.

Furthermore, Executive Judge Gabitan-Erum noticed that the President of the highest bidder in the public
auction sale may be related to the owners of S.F. Naguiat Enterprises, Inc. The President of the highest bidder,
Phoenix Global Energy, Inc., was a certain Eugene T. Naguiat.112 "Among the incorporators of S.F. Naguiat
Enterprises, Inc. [the insolvent corporation] [were] Sergio F. Naguiat, Maningning T. Naguiat, Antolin M. Tiglao,
Nero F. Naguiat and Antolin T. Naguiat. Later[,] its capital was increased and the listed subscribers [were]
Celestina T. Naguiat, Rommel T. Naguiat, Antolin T. Naguiat, Sergio T. Naguiat, Jr., Alexander T. Naguiat,
Coumelo T. Naguiat, Fely Ann Breggs and Teresita Celine Quemer."113

Under the foregoing circumstances, the refusal of Executive Judge Gabitan-Erum to approve the Certificate of
Sale was in accord with her duty to act with prudence, caution, and attention in the performance of her
functions.

WHEREFORE, the Petition is DENIED, and the Court of Appeals' Decision dated November 15, 2006 and
Resolution dated June 14, 2007 are AFFIRMED.

SO ORDERED.
G.R. No. 195166

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

vs.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that judgment be
rendered reversing and setting aside the September 30, 2010 Decision1 and the January 4, 2011
Resolution2 of the Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition also prays that
respondents Spouses Romeo and Annie Abella be ordered to pay petitioners Spouses Salvador and Alma
Abella 2.5% monthly interest plus the remaining balance of the amount loaned.

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December 28,
2005 Decision3 of the Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No. 6627. It directed
petitioners to pay respondents P148,500.00 (plus interest), which was the amount respondents supposedly
overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals denied petitioners’ Motion for
Reconsideration.

The Regional Trial Court’s December 28, 2005 Decision ordered respondents to pay petitioners the
supposedly unpaid loan balance of P300,000.00 plus the allegedly stipulated interest rate of 30% per annum,
as well as litigation expenses and attorney’s fees.4

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint5 for sum of money and
damages with prayer for preliminary attachment against respondents Spouses Romeo and Annie Abella before
the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil Case No. 6627.6

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of
P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was payable
within one (1) year. Petitioners added that respondents were able to pay a total of P200,000.00— P100,000.00
paid on two separate occasions—leaving an unpaid balance of P300,000.00.7

In their Answer8 (with counterclaim and motion to dismiss), respondents alleged that the amount involved did
not pertain to a loan they obtained from petitioners but was part of the capital for a joint venture involving the
lending of money.9

Specifically, respondents claimed that they were approached by petitioners, who proposed that if respondents
were to "undertake the management of whatever money [petitioners] would give them, [petitioners] would get
2.5% a month with a 2.5% service fee to [respondents]."10 The 2.5% that each party would be receiving
represented their sharing of the 5% interest that the joint venture was supposedly going to charge against its
debtors. Respondents further alleged that the one year averred by petitioners was not a deadline for payment
but the term within which they were to return the money placed by petitioners should the joint venture prove to
be not lucrative. Moreover, they claimed that the entire amount of P500,000.00 was disposed of in accordance
with their agreed terms and conditions and that petitioners terminated the joint venture, prompting them to
collect from the joint venture’s borrowers. They were, however, able to collect only to the extent of
P200,000.00; hence, the P300,000.00 balance remained unpaid.11

In the Decision12 dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It noted that
the terms of the acknowledgment receipt executed by respondents clearly showed that: (a) respondents were
indebted to the extent of P500,000.00; (b) this indebtedness was to be paid within one (1) year; and (c) the
indebtedness was subject to interest. Thus, the trial court concluded that respondents obtained a simple loan,
although they later invested its proceeds in a lending enterprise.13 The Regional Trial Court adjudged
respondents solidarily liable to petitioners. The dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00 with
interest at the rate of 30% per annum from the time the complaint was filed on July 31, 2002 until fully
paid;

2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for litigation
expenses, and another sum of P5,000.00 as attorney’s fees.

For lack of legal basis, plaintiffs’ claim for moral and exemplary damages has to be denied, and for lack of
merit the counter-claim is ordered dismissed.14

In the Order dated March 13, 2006,15 the Regional Trial Court denied respondents’ Motion for Reconsideration.

On respondents’ appeal, the Court of Appeals ruled that while respondents had indeed entered into a simple
loan with petitioners, respondents were no longer liable to pay the outstanding amount of P300,000.00. 16

The Court of Appeals reasoned that the loan could not have earned interest, whether as contractually
stipulated interest or as interest in the concept of actual or compensatory damages. As to the loan’s not having
earned stipulated interest, the Court of Appeals anchored its ruling on Article 1956 of the Civil Code, which
requires interest to be stipulated in writing for it to be due.17 The Court of Appeals noted that while the
acknowledgement receipt showed that interest was to be charged, no particular interest rate was
specified.18 Thus, at the time respondents were making interest payments of 2.5% per month, these interest
payments were invalid for not being properly stipulated by the parties. As to the loan’s not having earned
interest in the concept of actual or compensatory damages, the Court of Appeals, citing Eusebio-Calderon v.
People,19 noted that interest in the concept of actual or compensatory damages accrues only from the time that
demand (whether judicial or extrajudicial) is made. It reasoned that since respondents received petitioners’
demand letter only on July 12, 2002, any interest in the concept of actual or compensatory damages due
should be reckoned only from then. Thus, the payments for the 2.5% monthly interest made after the perfection
of the loan in 1999 but before the demand was made in 2002 were invalid.20

Since petitioners’ charging of interest was invalid, the Court of Appeals reasoned that all payments
respondents made by way of interest should be deemed payments for the principal amount of P500,000.00.21

The Court of Appeals further noted that respondents made a total payment of P648,500.00, which, as against
the principal amount of P500,000.00, entailed an overpayment of P148,500.00. Applying the principle of solutio
indebiti, the Court of Appeals concluded that petitioners were liable to reimburse respondents for the overpaid
amount of P148,500.00.22 The dispositive portion of the assailed Court of Appeals Decision reads:

WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET ASIDE, and a new
one issued, finding that the Spouses Salvador and Alma Abella are DIRECTED to jointly and severally pay
Spouses Romeo and Annie Abella the amount of P148,500.00, with interest of 6% interest (sic) per annum to
be computed upon receipt of this decision, until full satisfaction thereof. Upon finality of this judgment, an
interest as the rate of 12% per annum, instead of 6%, shall be imposed on the amount due, until full payment
thereof.23

In the Resolution24 dated January 4, 2011, the Court of Appeals denied petitioners’ Motion for Reconsideration.
Aggrieved, petitioners filed the present appeal25 where they claim that the Court of Appeals erred in completely
striking off interest despite the parties’ written agreement stipulating it, as well as in ordering them to reimburse
and pay interest to respondents.

In support of their contentions, petitioners cite Article 1371 of the Civil Code,26 which calls for the consideration
of the contracting parties’ contemporaneous and subsequent acts in determining their true intention. Petitioners
insist that respondents’ consistent payment of interest in the year following the perfection of the loan showed
that interest at 2.5% per month was properly agreed upon despite its not having been expressly stated in the
acknowledgment receipt. They add that during the proceedings before the Regional Trial Court, respondents
admitted that interest was due on the loan.27

In their Comment,28 respondents reiterate the Court of Appeals’ findings that no interest rate was ever
stipulated by the parties and that interest was not due and demandable at the time they were making interest
payments.29

In their Reply,30 petitioners argue that even though no interest rate was stipulated in the acknowledgment
receipt, the case fell under the exception to the Parol Evidence Rule. They also argue that there exists
convincing and sufficiently credible evidence to supplement the imperfection of the acknowledgment receipt. 31

For resolution are the following issues:

First, whether interest accrued on respondents’ loan from petitioners. If so, at what rate?

Second, whether petitioners are liable to reimburse respondents for the latter’s supposed excess payments
and for interest.

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple loan
or mutuum, rather than a joint venture, with petitioners.

Respondents’ claims, as articulated in their testimonies before the trial court, cannot prevail over the clear
terms of the document attesting to the relation of the parties. "If the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control." 32

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation is one
of simple loan or mutuum:

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so
that the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind
and quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to
the borrower.

....

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the same kind and quality. (Emphasis supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:

Batan, Aklan

March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from Mrs. Alma
R. Abella, payable within one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)33 (Emphasis supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first, respondents’
receipt of the sum of P500,000.00 from petitioner Alma Abella; second, respondents’ duty to pay back this
amount within one (1) year from March 22, 1999; and third, respondents’ duty to pay interest. Consistent with
what typifies a simple loan, petitioners delivered to respondents with the corresponding condition that
respondents shall pay the same amount to petitioners within one (1) year.

II

Although we have settled the nature of the contractual relation between petitioners and respondents,
controversy persists over respondents’ duty to pay conventional interest, i.e., interest as the cost of borrowing
money.34

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has been
expressly stipulated in writing."

On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It attests to
the contracting parties’ intent to subject to interest the loan extended by petitioners to respondents. The
controversy, however, stems from the acknowledgment receipt’s failure to state the exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate.
In Spouses Toring v. Spouses Olan,35 this court clarified the effect of Article 1956 of the Civil Code and noted
that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of money, according to the
Civil Code, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be
12% per annum."36

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and Trust
Company v. Regional Trial Court of Makati, Branch 61: "In a loan or forbearance of money, the interest due
should be that stipulated in writing, and in the absence thereof, the rate shall be 12% per annum."37

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:38

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.39 (Emphasis
supplied)

The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security
Bank to Spouses Toring, jurisprudence has repeatedly used the word "shall," a term that has long been settled
to denote something imperative or operating to impose a duty.40 Thus, the rule leaves no room for alternatives
or otherwise does not allow for discretion. It requires the application of the legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames41 recognized that the legal rate of interest has been
reduced to 6% per annum:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982 and, accordingly,
issued Circular No. 799, Series of 2013, effective July 1, 2013, the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing
the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No.
905, Series of 1982:

Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed
in judgments, in the absence of an express contract as to such rate of interest, shall be six percent (6%) per
annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for

Non-Bank Financial Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern
the parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate
allowed in judgments shall no longer be twelve percent (12%) per annum — as reflected in the case of Eastern
Shipping Lines and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1,=
4305S.3 and 4303P.1 of the Manual of Regulations for Non- Bank Financial Institutions, before its amendment
by BSP-MB Circular No. 799 — but will now be six percent (6%) per annum effective July 1, 2013. It should be
noted, nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently,
the twelve percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of six percent (6%) per annum shall be the prevailing rate of interest when applicable.42 (Emphasis
supplied, citations omitted)

Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the definite
and mandatory framing of the rule articulated in Eastern Shipping, Security Bank, and Spouses
Toring. Nacar even restates Eastern Shipping:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No. 799, as follows:

....

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 43 (Emphasis
supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple loan or
mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At present, this is 6%
per annum, subject to Nacar’s qualification on prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional interest
at the rate of 12% per annum, the legal rate of interest at the time the parties executed their agreement.
Moreover, should conventional interest still be due as of July 1, 2013, the rate of 12% per annum shall persist
as the rate of conventional interest.

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.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per annum. They
argue that the acknowledgment receipt fails to show the complete and accurate intention of the contracting
parties. They rely on Article 1371 of the Civil Code, which provides that the contemporaneous and subsequent
acts of the contracting parties shall be considered should there be a need to ascertain their intent. 44 In addition,
they claim that this case falls under the exceptions to the Parol Evidence Rule, as spelled out in Rule 130,
Section 9 of the Revised Rules on Evidence.45

It is a basic precept in legal interpretation and construction that a rule or provision that treats a subject with
specificity prevails over a rule or provision that treats a subject in general terms. 46

The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil Code and
specifically governs simple loans or mutuum. Mutuum is a type of nominate contract that is specifically
recognized by the Civil Code and for which the Civil Code provides a specific set of governing rules: Articles
1953 to 1961. In contrast, Article 1371 is among the Civil Code provisions generally dealing with contracts. As
this case particularly involves a simple loan, the specific rule spelled out in Security Bank and Spouses
Toring finds preferential application as against Article 1371.

Contrary to petitioners’ assertions, there is no room for entertaining extraneous (or parol) evidence. In Spouses
Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation,47 we spelled out the
requisites for the admission of parol evidence:

In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence of any of
the four (4) exceptions has been put in issue in a party’s pleading or has not been objected to by the adverse
party; and second, that the parol evidence sought to be presented serves to form the basis of the conclusion
proposed by the presenting party.48

The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of a case.
Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule only in the Reply they filed
before this court. This is the last pleading that either of the parties has filed in the entire string of proceedings
culminating in this Decision. It is, therefore, too late for petitioners to harp on this rule. In any case, what is at
issue is not admission of evidence per se, but the appreciation given to the evidence adduced by the parties. In
the Petition they filed before this court, petitioners themselves acknowledged that checks supposedly attesting
to payment of monthly interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2,"
"3," "4," "5," "6," "7," and "8").49 What petitioners have an issue with is not the admission of these pieces of
evidence but how these have not been appreciated in a manner consistent with the conclusions they advance.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan,50 the willingness of the parties to enter into a relation
involving an unconscionable interest rate is inconsequential to the validity of the stipulated rate:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily
assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of
property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as
one that may be sustained within the sphere of public or private morals.51

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and the law." 52

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.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at this rate,
respondents’ obligation would have more than doubled—increased to 219.7% of the principal—by the end of
the third year after which the loan was contracted if the entire principal remained unpaid. By the end of the
ninth year, it would have multiplied more than tenfold (or increased to 1,060.45%). In 2015, this would have
multiplied by more than 66 times (or increased to 6,654.17%). Thus, from an initial loan of only P500,000.00,
respondents would be obliged to pay more than P33 million. This is grossly unfair, especially since up to the
fourth year from when the loan was obtained, respondents had been assiduously delivering payment. This
reduces their best efforts to satisfy their obligation into a protracted servicing of a rapacious loan.

The legal rate of interest is the presumptive reasonable compensation for borrowed money. While parties are
free to deviate from this, any deviation must be reasonable and fair. Any deviation that is far-removed is
suspect. Thus, in cases where stipulated interest is more than twice the prevailing legal rate of interest, it is for
the creditor to prove that this rate is required by prevailing market conditions. Here, petitioners have articulated
no such justification.

In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the application of any
interest rate other than that specifically provided for by the parties in their loan document or, in lieu of it, the
legal rate. Here, as the contracting parties failed to make a specific stipulation, the legal rate must apply.
Moreover, the rate that petitioners adverted to is unconscionable. The conventional interest due on the
principal amount loaned by respondents from petitioners is held to be 12% per annum.

III

Apart from respondents’ liability for conventional interest at the rate of 12% per annum, outstanding
conventional interest—if any is due from respondents—shall itself earn legal interest from the time judicial
demand was made by petitioners, i.e., on July 31, 2002, when they filed their Complaint. This is consistent with
Article 2212 of the Civil Code, which provides:

Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point.

So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially
demanded."53

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,54 the interest due on conventional
interest shall be at the rate of 12% per annum from July 31, 2002 to June 30, 2013. Thereafter, or starting July
1, 2013, this shall be at the rate of 6% per annum.

IV

Proceeding from these premises, we find that respondents made an overpayment in the amount of P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was charged
against the principal amount of P500,000.00. The first payment of P100,000.00 was made on June 30,
2001,55 while the second payment of P100,000.00 was made on December 30, 2001.56

The Court of Appeals’ September 30, 2010 Decision stated that respondents paid P6,000.00 in March 1999.57

The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the time the
principal sum of P500,000.00 was borrowed from [petitioners], [respondents] ha[d] been religiously
paying"59 what was supposedly interest "at the rate of 2.5% per month."60

From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents’ payment of
P100,000.00 on June 30, 2001, which was deducted from the principal amount of P500,000.00), the 2.5%
monthly "interest" was pegged to the principal amount of P500,000.00. These monthly interests, thus,
amounted to P12,500.00 per month. Considering that the period from March 1999 to June 2001 spanned
twenty seven (27) months, respondents paid a total of P337,500.00.61

From June 22, 2001 up to December 22, 2001 (before respondents’ payment of another P100,000.00 on
December 30, 2001, which was deducted from the remaining principal amount of P400,000.00), the 2.5%
monthly "interest" was pegged to the remaining principal amount of P400,000.00. These monthly interests,
thus, amounted to P10,000.00 per month. Considering that this period spanned six (6) months, respondents
paid a total of P60,000.00.62

From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5% monthly
"interest" was pegged to the remaining principal amount of P300,000.00. These monthly interests, thus,
amounted to P7,500.00 per month. Considering that this period spanned six (6) months, respondents paid a
total of P45,000.00.63

Applying these facts and the properly applicable interest rate (for conventional interest, 12% per annum; for
interest on conventional interest, 12% per annum from July 31, 2002 up to June 30, 2013 and 6% per annum
henceforth), the following conclusions may be drawn:

By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00 was due
from respondents. This consisted of the principal of P500,000.00 and conventional interest of P60,000.00.

Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00 (P12,500.00 each
from April 1999 to March 2000). This was in addition to their initial payment of P6,000.00 in March 1999.

Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until
the interests have been covered.

Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any excess
payments shall be charged against the principal. As respondents paid a total of P156,000.00 within the first
year, the conventional interest of P60,000.00 must be deemed fully paid and the remaining amount that
respondents paid (i.e., P96,000.00) is to be charged against the principal. This yields a balance of
P404,000.00. By the end of the second year following the perfection of the loan, or as of March 21, 2001,
P452,480.00 was due from respondents. This consisted of the outstanding principal of P404,000.00 and
conventional interest of P48,480.00.

Within this second year, respondents completed another round of twelve (12) monthly payments totaling
P150,000.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the second
year, the conventional interest of P48,480.00 must be deemed fully paid and the remaining amount that
respondents paid (i.e., P101,520.00) is to be charged against the principal. This yields a balance of
P302,480.00.

By the end of the third year following the perfection of the loan, or as of March 21, 2002, P338,777.60 was due
from respondents. This consists of the outstanding principal of P302,480.00 and conventional interest of
P36,297.60.

Within this third year, respondents paid a total of P320,000.00, as follows:

(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly payments of
P12,500.00 each, totaling P37,500.00.

(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal payment.

(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments of
P10,000.00 each. At this point, the monthly payments no longer amounted to P12,500.00 each
because the supposed monthly interest payments were pegged to the supposedly remaining principal
of P400,000.00. Thus, during this period, they paid a total of six (6) monthly payments totaling
P60,000.00.

(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001 payment,
was charged against the principal.

(e) From the end of December 2002 to the end of February 2002, respondents delivered monthly
payments of P7,500.00 each. At this point, the supposed monthly interest payments were now pegged
to the supposedly remaining principal of P300,000.00. Thus, during this period, they delivered three (3)
monthly payments totaling P22,500.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the third year,
the conventional interest of P36,927.50 must be deemed fully paid and the remaining amount that respondents
paid (i.e., P283,702.40) is to be charged against the principal. This yields a balance of P18,777.60.

By the end of the fourth year following the perfection of the loan, or as of March 21, 2003, P21,203.51 would
have been due from respondents. This consists of: (a) the outstanding principal of P18,777.60, (b)
conventional interest of P2,253.31, and (c) interest due on conventional interest starting from July 31, 2002,
the date of judicial demand, in the amount of P172.60. The last (i.e., interest on interest) must be pro-rated.
There were only 233 days from July 31, 2002 (the date of judicial demand) to March 21, 2003 (the end of the
fourth year); this left 63.83% of the fourth year, within which interest on interest might have accrued. Thus, the
full annual interest on interest of 12% per annum could not have been completed, and only the proportional
amount of 7.66% per annum may be properly imposed for the remainder of the fourth year.

From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments of
P7,500.00 each. Thus, during this period, they delivered three (3) monthly payments totalling P22,500.00.

At this rate, however, payment would have been completed by respondents even before the end of the fourth
year. Thus, for precision, it is more appropriate to reckon the amounts due as against payments made
on a monthly, rather than an annual, basis.

By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly conventional
interest at 1%, amounting to P187.78) would have been due from respondents. Deducting the monthly
payment of P7,500.00 for the preceding month in a manner consistent with Article 1253 of the Civil Code would
yield a balance of P11,465.38.

By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly conventional
interest at 1%, amounting to P114.65) would have been due from respondents. Deducting the monthly
payment of P7,500.00 for the preceding month in a manner consistent with Article 1253 of the Civil Code would
yield a balance of P4,080.03.

By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly conventional
interest at 1%, amounting to P40.80) would have been due from respondents. Deducting the monthly payment
of P7,500.00 for the preceding month in a manner consistent with Article 1253 of the Civil Code would yield a
negative balance of P3,379.17.

Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional interest that
had accrued on their loan. By this date, they also overpaid P3,379.17. Moreover, while hypothetically, interest
on conventional interest would not have run from July 31, 2002, no such interest accrued since there was no
longer any conventional interest due from respondents by then.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of the Civil
Code64 applies. Article 2154 reads:

Article 2154. If something is received when there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.

In Moreno-Lentfer v. Wolff,65 this court explained the application of solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself
unjustly at the expense of another. It applies where (1) a payment is made when there exists no binding
relation between the payor, who has no duty to pay, and the person who received the payment, and (2) the
payment is made through mistake, and not through liberality or some other cause.66

As respondents had already fully paid the principal and all conventional interest that had accrued, they were no
longer obliged to make further payments.1awp++i1 Any further payment they made was only because of a
mistaken impression that they were still due. Accordingly, petitioners are now bound by a quasi-contractual
obligation to return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum."67This applies to obligations arising from quasi-contracts such as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is
involved, or shall be liable for fruits received or which should have been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages
to the person who delivered the thing, until it is recovered.

Consistent however, with our finding that the excess payment made by respondents were borne out of a mere
mistake that it was due, we find it in the better interest of equity to no longer hold petitioners liable for interest
arising from their quasi-contractual obligation.

Nevertheless, Nacar also provides:

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.68
Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award. This shall be
reckoned from the finality of this Decision until its full satisfaction.

WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of the Court of
Appeals Nineteenth Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners Spouses Salvador and
Alma Abella are DIRECTED to jointly and severally reimburse respondents Spouses Romeo and Annie Abella
the amount of P3,379.17, which respondents have overpaid.

A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the finality of this
Decision until its full satisfaction.

SO ORDERED.

G.R. No. 191174

PARADIGM DEVELOPMENT CORPORATION OF THE PHILIPPINES, Petitioner

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent

DECISION

REYES, J., J.:

This is a Petition for Review on Certiorari 1 filed under Rule 45 of the Rules of Court assailing the
Decision 2 dated November 25, 2009 and Resolution 3 dated February 2, 2010 of the Court of Appeals (CA) in
CA-G.R. CV No. 89755, which granted respondent Bank of the Philippine Islands' (BPI) appeal and
accordingly dismissed the complaint filed by petitioner Paradigm Development Corporation of the Philippines
(PDCP).

The Facts

Sometime in February 1996, Sengkon Trading (Sengkon), a sole proprietorship owned by Anita Go, obtained a
loan from Far East Bank and Trust Company (FEBTC) under a credit facility denominated as Omnibus Line in
the amount of PlOO Million on several sub-facilities with their particular sub-limits denominated as follows: (i)
Discounting Line for P20 Million; (ii) Letter of Credit/Trust Receipt (LC-TR) Line for P60 Million; and (iii) Bills
Purchased Line for PS Million. This was embodied in the document denominated as "Agreement for Renewal
of Omnibus Line." 4

On April 19, 1996, FEBTC again granted Sengkon another credit facility, denominated as Credit Line, in the
amount of ₱60 Million as contained in the "Agreement for Credit Line." Two real estate mortgage (REM)
contracts were executed by PDCP President Anthony L. Go (Go) to partially secure Sengkon's obligations
under this Credit Line. One REM, acknowledged on April 22, 1996, was constituted over Transfer Certificate of
Title (TCT) No. RT-55259 (354583) and secured the amount of P8 Million. The other REM, acknowledged on
December 19, 1997, was constituted over TCT Nos. RT-58281, RT-54993 (348989) and RT-55260 (352956)
and secured the amount of ₱42,400,000.00. 5

In a letter dated September 18, 1997, FEB TC informed Sengkon regarding the renewal, increase and
conversion of its ₱l00 Million Omnibus Line to ₱l50 Million LC-TR Line and P20 Million Discounting Line, the
renewal of the ₱60 Million Credit Line and P8 Million Bills Purchased Line. 6

In the same letter, FEBTC also approved the request of Sengkon to change the account name from
SENGKON TRADING to SENGKON TRADING, INC. (STI). 7

Eventually, Sengkon defaulted in the payment of its loan obligations.8 Thus, in a letter dated September 8,
1999, FEBTC demanded payment from PDCP of alleged Credit Line and Trust Receipt availments with a
principal balance of ₱244,277, 199 .68 plus interest and other charges which Sengkon failed to pay. PDCP
responded by requesting for segregation of Sengkon's obligations under the Credit Line and for the pertinent
statement of account and supporting documents. 9

Negotiations were then held and PDCP proposed to pay approximately ₱50 Million, allegedly corresponding to
the obligations secured by its property, for the release of its properties but FEBTC pressed for a
comprehensive repayment scheme for the entirety of Sengkon's obligations. 10

Meanwhile, the negotiations were put on hold because BPI acquired FEB TC and assumed the rights and
obligations of the latter. 11

When negotiations for the payment of Sengkon's outstanding obligations, however, fell, FEBTC, on April 5,
2000, initiated foreclosure proceedings against the mortgaged properties of PDCP before the Regional Trial
Court (RTC) of Quezon City. 12 In its Bid for the mortgaged properties, FEBTC's counsel stated that:

On behalf of our client, [FEBTC], we hereby submit its Bid for the Real Properties including all improvements
existing thereon covered by [TCT] Nos. RT - 55259 (354583), 58281, RT - 54993 (348989) and RT- 55260
(352956) which are the subject of the Auction Sale scheduled on June, 20, 2000 in the amount of:

SEVENTY[-]SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (₱76,500,000.00), Philippine

Currency.

Please note that the aforesaid Bid is only in PARTIAL SETTLEMENT of the obligation of [PDCP], x x x. 13

Upon verification with the Registry of Deeds, PDCP discovered that FEBTC extra-judicially foreclosed on June
20, 2000 the first and second mortgage without notice to it as mortgagor and sold the mortgaged properties to
FEBTC as the lone bidder. 14 Thereafter, on August 8, 2000, the corresponding Certificate of Sale was
registered. 15

Consequently, on July 19, 2001, PDCP filed a Complaint for Annulment of Mortgage, Foreclosure, Certificate
of Sale and Damages 16 with the RTC of Quezon City, against BPI, successor-in-interest of FEB TC, alleging
that the REMs and their foreclosure were null and void. 17

In its Amended Complaint, 18 PDCP alleged that FEB TC assured it that the mortgaged properties will only
secure the Credit Line sub-facility of the Omnibus Line. With this understanding, PDCP President Go allegedly
agreed to sign on two separate dates a pro-forma and blank REM, securing the amount of ₱42.4 Million and
P8 Million, respectively. PDCP, however, claimed that it had no intent to be bound under the second REM,
which was not intended to be a separate contract, but only a means to reduce registration expenses. 19

Moreover, PDCP averred that sometime in September 1997, FEBTC allegedly requested it to sign a document
which would effectively extend the liability of the properties covered by the mortgage beyond the Credit Line.
Because of its refusal to sign said document, it surmised that this must have been the reason why, as it later
discovered, FEBTC registered not only the first but also the second REM, contrary to the parties' agreement. 20

In asking for the nullity of the REMs and the foreclosure proceeding, PDCP alleged:

a.) THAT although the [REM] of April 22, 1996 for Php 8.0 Million was not a separate security but was merely
intended to reduce registration expenses, FEBTC, [BPI's] predecessor-in-interest, fraudulently and in violation
of the original intent and agreement of the parties, made it appear that said [REM] of April 22, 1996 was
separate and distinct from that of December 18, 1997 and caused the registration of both mortgages with
separate considerations totaling Php 50.4 Million;

b.) THAT the subject [REMs] were foreclosed to answer not only for obligations incurred under SENGKON's
Credit Line but also for other obligations of SENGKON and other companies which were not secured by said
mortgages;

c.) THAT no notice was given to or received by [PDCP] of the projected foreclosure x x x since the notice of
said foreclosure was sent by defendant SHERIFF to an address (333 EDSA, Quezon City) other than [PDCP's]
known address as stated in the [REMs] themselves (333 EDSA Caloocan City) x x x;

d.) THAT, contrary to the then prevailing Supreme Court Circular AM 99-10-05-0 x x x, only one (1) bidder was
present and participated at the foreclosure sale[; and]

e.) THAT, without the knowledge and consent of [PDCPJ, obligation of SENGKON has been transferred to STI
[,] a juridical personality separate and distinct from SENGKON, a single proprietorship. This substitution of
SENGKON as debtor by STI x x x effectively novated the obligation of [PDCP] to FEBTC. x x x. 21 (Underlining
ours)

Ruling of the RTC

On April 16, 2007, the R TC rendered its Decision22 nullifying the REMs and the foreclosure proceedings. It
also awarded damages to PDCP. The dispositive portion of the decision reads:

WHEREFORE, premises considered the Court renders judgment in favor of [PDCP] and against defendants
[BPI], Sheriff and the Register of Deeds of Quezon City in the following manner:

1) Declaring null and void and of no further force and effect the following:

(a) the [REMs] (Annexes "F" and "F-1" hereof);

(b) the foreclosure thereof;

 (c) the Certificate of Sale; and

(d) the entries relating to said [REMs] and Certificate of Sale annotated on TCT Nos. 58281, RT-54993
(348989), RT-55260 (352956) and RT-55259 (354583) covering the mortgaged properties;

2) Ordering defendant Registrar of Deeds to cancel all the annotations of the [REMs] and the Certificate of
Sale on the above stated TCTs covering the mortgaged properties and otherwise to clear said TCTs of any
liens and encumbrances annotated thereon relating to the invalid [REMs] aforesaid;

3) Ordering defendant [BPI] to return to [PDCP] the owner's duplicate copies of the TCTs covering the
mortgaged properties free from any and all liens and encumbrances; and,

4) Ordering the defendant BPI to pay [PDCP] the following sums:

(a) Php 150,000.00 as attorney's fees; and,

(b) Php 50,000.00 as litigation expenses.

The Writ of Preliminary Injunction is hereby made FINAL and PERMANENT.

Costs against defendant [BPI].

SO ORDERED. 23

The RTC observed that the availments under the Credit Line, secured by PDCP's properties, may be made
only within one year, or from April 19, 1996 to April 30, 1997. While BPI claimed that the period of said credit
line was extended up to July 31, 1997, PDCP was not notified of the extension and thus could not have
consented to the extension. Anyhow, said the RTC, "no evidence had been adduced to show that Sengkon
availed of any loan under the credit line up to July 31, 1997." Thus, in the absence of any monetary obligation
that needed to be secured, the REM cannot be said to subsist. 24

Further, the RTC agreed with PDCP that novation took place in this case, which resulted in discharging the
latter from its obligations as third-party mortgagor. In addition, it also nullified the foreclosure proceedings
because the original copies of the promissory notes (PN s ), which were the basis of FEBTC's Petition for
Extrajudicial Foreclosure of Mortgage, were not presented in court and no notice of the extrajudicial foreclosure
sale was given to PDCP. 25

Lastly, the RTC ruled that the shorter period of redemption under Republic Act No. 8791 26 cannot apply to
PDCP considering that the REMs were executed prior to the effectivity of said law. As such, the longer period
of redemption under Act No. 3135 27 applies. 28

Aggrieved, BPI appealed to the CA. 29

Ruling of the CA

In its Decision 30 dated November 25, 2009, the CA reversed the RTC's ruling on all points. The CA found
PDCP's contentions incredible for the following reasons: (i) the fact that PDCP surrendered the titles to the
mortgaged properties to FEBTC only shows that PDCP intended to mortgage all of these properties; (ii) if it
were true that FEBTC assured PDCP that it would be registering only one of the two REMs in order to reduce
registration expenses, then each of the two REMs should have covered the four properties but it was not. On
the contrary, the four properties were spread out with one REM covering one of the four properties and the
other REMs covering the remaining three properties; and (iii) PDCP never complained to FEB TC regarding
the registration of the two REMs even after it discovered the same. 31
Also, the CA ruled that novation could not have taken place from FEBTC's mere act of approving Sengkon's
request to change account name from Sengkon to STI. 32

Moreover, it held that the fact that FEBTC failed to submit the original copies of the PN s that formed the basis
of its Petition for Extra judicial Foreclosure of Mortgage cannot affect the validity of foreclosure because the
validity of the obligations represented in those PNs was never denied by Sengkon nor by PDCP. 33

The CA added that even if the obligations of Sengkon in credit facilities (other than the Credit Line) were
included, since the REMs contain a dragnet clause, these other obligations were still covered by PDCP's
REMs. 34 Lastly, the CA ruled that the failure to send a notice of extrajudicial foreclosure sale to PDCP did not
affect the validity of the foreclosure sale because personal notice to the mortgagor is not even generally
required. 35

Hence, this present petition,, .where PDCP presented the following arguments:

I. THE FINDINGS IN THE CA DECISION WlllCH DEVIATED ON ALMOST ALL POINTS FROM THOSE OF
THE RTC ARE NOT IN ACCORD WITH THE RULES ON THE ASSESSMENT OF THE CREDIBILITY AND
WEIGHT OF THE EVIDENCE;

II. THE VALIDITY OF THE REMs, AS UPHELD BY THE CA, IS VITIATED BY THE FACT THAT BPI'S
PREDECESSOR-IN-INTEREST VIOLATED THE TRUE INTENT AND AGREEMENT OF THE PARTIES
THERETO;

III. THE CA DECISION'S REJECTION OF PDCP'S NOVATION THEORY BASED ON THE ABSENCE OF AN
EXPRESS RELEASE OF THE OLD DEBTOR AND THE SUBSTITUTION IN ITS PLACE OF A NEW DEBTOR
IS MISPLACED AND ERRONEOUS;

IV. THE FORECLOSURE OF THE REMs WAS VITIATED NOT ONLY BY THE INADMISSIBILITY OF THE
PNs UPON WHICH IT IS BASED BUT ALSO BECAUSE IT VIOLATED THE THERETO APPLICABLE RULES;
and

V. THE APPLICATION BY THE CA OF THE SHORTENED PERIOD OF REDEMPTION IN THIS CASE

VIOLATED THE NON-IMPAIRMENT AND EQUAL PROTECTION CLAUSES OF THE CONSTITUTION. 36

Ruling of the Court

The Court finds the petition meritorious. The registration of the REMs, even if contrary to the supposed intent
of the parties, did not affect the validity of the mortgage contracts

According to PDCP, when FEBTC registered both REMs, even ifthe intent was only to register one, the validity
of both REMs was vitiated by lack of consent. PDCP claims that said intent is supported by the fact that the
REMs were constituted merely as "partial security" for Sengkon's obligations and therefore there was really no
intent to be bound under both - but only in one - REM.

The Court cannot see its way clear through PDCP's argument. To begin with, the registration of the REM
contract is not essential to its validity. Article 2085 of the Civil Code provides:

Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. In relation thereto, Article 2125 of the Civil Code reads:

Article 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage
may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the parties.

x x x x (Emphasis ours)

In Mobil Oil Philippines, Inc. v. Diocares, et al., 37 the trial court refused to order the foreclosure of the
mortgaged properties on the ground that while an unregistered REM contract created a personal obligation
between the parties, the same did not validly establish a REM. In reversing the trial court, the Court said:

The lower court predicated its inability to order the foreclosure in view of the categorical nature of the opening
sentence of [Article 2125] that it is indispensable, "in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property." Not[e] that it ignored the succeeding
sentence: "If the instrument is not recorded, the mortgage is nevertheless binding between the parties." Its
conclusion, however, is that what was thus created was merely "a personal obligation but did not establish a
[REM]."

Such a conclusion does not commend itself for approval. The codal provision is clear and explicit. Even if the
instrument were not recorded, "the mortgage is nevertheless binding between the parties." The law cannot be
any clearer. Effect must be given to it as written. The mortgage subsists; the parties are bound. As between
them, the mere fact that there is as yet no compliance with the requirement that it be recorded cannot be a bar
to foreclosure.

xxxx

Moreover to rule as the lower court did would be to show less than fealty to the purpose that animated the
legislators in giving expression to their will that the failure of the instrument to be recorded does not result in
the mortgage being any the less "binding between the parties." In the language of the Report of the Code
Commission: "In Article [2125] an additional provision is made that if the instrument of mortgage is not
recorded, the mortgage, is nevertheless binding between the parties." We are not free to adopt then an
interpretation, even assuming that the codal provision lacks the forthrightness and clarity that this particular
norm does and therefore requires construction, that would frustrate or nullify such legislative
objective. 38 (Citation omitted and emphasis and underlining ours)

Hence, even assuming that the parties indeed agreed to register only one of the two REMs, the subsequent
registration of both REMs did not affect an already validly executed REM if there was no other basis for the
declaration of its nullity. That the REMs were intended merely as "partial security" does not make PDCP's
argument more plausible because as aptly observed by the CA, the PDCP's act of surrendering all the titles to
the properties to FEBTC clearly establishes PDCP' s intent to mortgage all of the four properties in favor of
FEBTC to secure Sengkon's obligation under the Credit Line. The Court notes that the principal debtor,
Sengkon, has several obligations under its Omnibus Line corresponding to the several credit sub-facilities
made available to it by FEBTC. As found by the trial court, PDCP intended to be bound only for Sengkon' s
availments under the Credit Line sub-facility and not for just any of Sengkon's availments. Hence, it is in this
sense that the phrase "partial security" should be logically understood.

In this regard, PDCP argued that what its President signed is a pro-forma REM whose important details were
still left in blank at the time of its execution. But notably, nowhere in PDCP's Amended Complaint did it anchor
its cause of action for the nullity of the REMs on this ground. While it indeed alleged this circumstance, PDCP's
Amended Complaint is essentially premised on the supposed fraud employed on it by FEBTC consisting of the
latter's assurances that the REMs it already signed would not be registered. In Solidbank Corporation v.
Mindanao Ferroalloy Corporation, 39 the Court discussed the nature of fraud that would annul or avoid a
contract, thus:
Fraud refers to all kinds of deception - whether through insidious machination, manipulation, concealment or
misrepresentation- that would lead an ordinarily prudent person into error after taking the circumstances into
account. In contracts, a fraud known as dolo causante or causal fraud is basically a deception used by one
party prior to or simultaneous with the contract, in order to secure the consent of the other. Needless to say,
the deceit employed must be serious. In contradistinction, only some particular or accident of the obligation is
referred to by incidental fraud or dolo incidente, or that which is not serious in character and without which the
other party would have entered into the contract anyway. 40 (Citations omitted)

Under Article 1344 of the Civil Code, the fraud must be serious to annul or avoid a contract and render it
voidable. This fraud or deception must be so material that had it not been present, the defrauded party would
not have entered into the contract.

In the present case, even if FEB TC represented that it will not register one of the REMs, PDCP cannot disown
the REMs it executed after FEB TC reneged on its alleged promise. As earlier stated, with or without the
registration of the REMs, as between the parties thereto, the same is valid and PDCP is already bound
thereby. The signature of PDCP's President coupled with its act of surrendering the titles to the four properties
to FEBTC is proof that no fraud existed in the execution of the contract. Arguably at most, FEBTC's act of
registering the mortgage only amounted to dolo incidente which is not the kind of fraud that avoids a contract.

No novation took place

The Court likewise agrees with the CA that no novation took place in the present case. Novation is a mode of
extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the Civil Code
defines novation as "consists in substituting a new debtor in the place of the original one, [which] may be made
even without the knowledge or against the will of the latter, but not without the consent of the creditor."
However, while the consent of the creditor need not be expressed but may be inferred from the creditor's clear
and unmistakable acts,41to change the person of the debtor, the former debtor must be expressly released
from the obligation, and the third person or new debtor must assume the former's place in the
contractual 42 relation.

Thus, in Ajax Marketing and Development Corporation v. CA, 43 the Court had already ruled that:

The well-settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly shown
by express agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the
new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be
on every point incompatible with the new one. In the same vein, to effect a subjective novation by a change in
the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the
third person or new debtor assumes his place in the relation. There is no novation without such release as the
third person who has assumed the debtor's obligation becomes merely a co-debtor or surety. 44 (Emphasis
ours)

In the present case, PDCP failed to prove by preponderance of evidence that Sengkon was already expressly
released from the obligation and that STI assumed the former's obligation. Again, as correctly pointed out by
the CA, the Deed of Assumption of Line/Loan with Mortgage (Deed of Assumption) which was supposed to
embody STI's assumption of all the obligations of Sengkon under the line, including but not necessarily limited
to the repayment of all the outstanding availments thereon, as well as all applicable interests and other
charges, was not signed by the parties.

Contrary to PDCP's claim, the CA's rejection of its claim ofnovation is not based on the absence of the
mortgagor's conformity to the Deed of Assumption. The CA's rejection is based on the fact that the non-
execution of the Deed of Assumption by Sengkon, STI and FEBTC rendered the existence of novation doubtful
because of lack of clear proof that Sengkon is being expressly released from its obligation; that STI was
already assuming Sengkon's former place in the contractual relation; and that FEBTC is giving its conformity to
this arrangement. While FEBTC indeed approved Sengkon's request for the "change in account name" from
Sengkon to STI, such mere change in account name alone does not meet the required degree of certainty to
establish novation absent any other circumstance to bolster said conclusion.

The trial court's finding that Sengkon did not avail under the Credit Line taints the foreclosure of the
mortgage

PDCP also claims that the foreclosure of the mortgage was invalid because the PNs that formed the basis of
FEBTC's Petition for Extrajudicial Foreclosure of Mortgage were inadmissible in evidence. Rejecting this
argument, the CA ruled that the admissibility of the PNs is a non-issue in this case because in questioning the
validity of the REMs and the foreclosure proceedings, PDCP did not actually assail the validity or existence of
said PNs; what it raised as an issue was whether the foreclosure covered obligations other than Sengkon's
availment under the Credit Line. As the CA puts it:

[W]hat should have been the focal and critical question to be answered on the issue of whether the subject
[REMs] were validly foreclosed should have been whether the [REMs] executed by [PDCP] covered the
obligations of [Sengkon] as represented in those [PNs] or, stated in another way, were the [PNs] used by
defendant BPI in its foreclosure proceedings over [PDCP's] mortgages availments by [Sengkon] under its
Credit Line?

An examination of the subject [PNs] vis-a-vis the Agreement for Credit Line would yield an affirmative answer.

In the case at bar, a close look at the Agreement for Credit Line would reveal that the said credit facility for
Php60 Million was granted in favor of [Sengkon] for the purpose of "Additional Working Capital" and that it
would be "available by way of short term [PN]." In the same manner, an examination of [PNs] PN Nos. 2-002-
028618, 2-002-029436 and 2-002-029437 would reveal that the said [PNs] were availed of by [Sengkon] for
the purpose of "Additional Working Capital." 45 (Citations omitted and emphasis in the original)

The Court cannot agree with the CA. In order to determine whether the obligations sought to be satisfied by the
foreclosure proceedings were only Sengkon's availments under the Credit Line, the court necessarily needs to
refer to the PNs themselves, as what the CA in fact did. Thus, it is actually the contents of these PNs that are
in issue and the trial court did not err in applying the best evidence rule.

But even if the Court disregards the best evidence rule, the circumstances in this case militate against the CA's
conclusion. The trial court made a factual finding that Sengkon's availment under the Credit Line, which is the
one secured by PDCP's properties, may be made only within one year, or from April 19, 1996 to April 30, 1997.
While FEBTC claimed that the period of said credit line was extended up to July 31, 1997, PDCP was not
notified of the extension. At any rate, the RTC found that "no evidence had been adduced to show that
Sengkon availed of any loan under the credit line up to July 31, 1997," which was the period of the extension.

Notably, while PDCP demanded from FEBTC for the segregation of Sengkon's availments under the Credit
Line, FEBTC failed to heed PDCP's valid request and instead demanded for a comprehensive payment of
Sengkon's entire obligation, unmindful of the fact of PDCP's status as a mere third-party mortgagor and not a
principal debtor. As a third-party mortgagor, the limitation on its liability pertains not only to the properties it
mortgaged but also to the obligations specifically secured thereby. It is well settled that while a REM may
exceptionally secure future loans or advancements, these future debts must be specifically described in the
mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the
mortgage contract. 46

In this case, there was simply no evidence to support the conclusion that the PNs were in fact availments
under the Credit Line secured by PDCP's properties. The PNs that were used by FEBTC in its Petition for
Extrajudicial Foreclosure of Mortgage were all executed beyond the extended duration of Sengkon's Credit
Line (or until July 1997). While FEBTC wrote a letter 47 dated September 18, 1997, which is a few days short of
the date of the earliest PN (September 23, 1997), addressed to STI, approving the renewal of the debtor's
Credit Line subject to the condition that the Line "shall be partially secured" by the PDCP's mortgaged
properties, it is worthy to note that this letter did not bear the conforme of the debtor, lending credence to the
trial court's observation. In this light, FEBTC's failure to heed PDCP's request for the segregation of the
amounts secured by its properties assumes critical significance. The lack of proof that the availments subject
of the foreclosure proceedings were within the coverage of PDCP's REMs explains FEBTC's omission.

Despite the foregoing, however, particularly the variance between the duration of Sengkon's Credit Line and
the dates appearing on the face of the PNs, the CA upheld the validity of the foreclosure based merely on the
similarity in the purpose for which the Credit Line was granted and the purpose for which the PNs were
executed.

On the implied premise that what is material is only the identity of the debtor whose obligation the mortgagor
secures, the CA cited Prudential Bank v. Alviar 48 and applied the dragnet clause in PDCP's REMs. According
to the CA, since the REMs contain a dragnet clause, then PDCP's properties can be made to answer even if
the PNs supporting the Petition for Extrajudicial Foreclosure of Mortgage refer to Sengkon's obligations in its
other credit facilities. 49

The CA unfortunately misapplied the ruling in Prudential Bank. In that case, the Court's discussion on the
application of the blanket mortgage clause or dragnet clause was not as much as critically important as the
Court's novel application of the doctrine of reliance on security test.

A dragnet clause is a stipulation in a REM contract that extends the coverage of a mortgage to advances or
loans other than those already obtained or specified in the contract. Where there are several advances,
however, a mortgage containing a dragnet clause will not be extended to cover future advances, unless the
document evidencing the subsequent advance refers to the mortgage as providing security therefor or unless
there are clear and supportive evidence to the contrary. 50 This is especially true in this case where the
advances were not only several but were covered by different sub-facilities. Thus, in Prudential Bank, the Court
stated:

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account,
while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out
TOD CA 3923" and eventually by a deed of assignment on two [PNs] executed by Bancom Realty Corporation
with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and
transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue
is whether the "blanket mortgage" clause applies even to subsequent advancements for which other securities
were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates
that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one
specifically secured will be construed to cover a different debt, although such other debt is secured by another
mortgage. The contrary thinking maintains that a mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency
after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of
the mortgage, in the absence of a special contract excluding it from the arrangement.

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause"
or "dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that
subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first
mortgage. In other words, the sufficiency of the first security is a corollary component of the "dragnet clause."
But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other
securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security
was given it could not be inferred that such loan was made in reliance solely on the original security with the
"dragnet clause," but rather, on the new security given. This is the "reliance on the security test."

Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry
whether the second loan was made in reliance on the original security containing a "dragnet clause."
Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the
"dragnet clause" in the first security instrument constituted a continuing offer by the borrower to secure further
loans under the security of the first security instrument, and that when the lender accepted a different security
he did not accept the offer.

xxxx

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary
intention, a mortgage containing a "dragnet clause" will not be extended to cover future advances unless the
document evidencing the subsequent advance refers to the mortgage as providing security
therefor. 51 (Citations omitted and emphasis and underlining ours)

In the present case, PDCP's REMs indeed contain a blanket mortgage clause in the following language:

That, for and in consideration of credit accommodations obtained from the [FEBTC], and to secure the
payment of the same and those that may hereafter be obtained, the principal of all of which is hereby fixed at x
x x PESOS x x x, Philippine Currency, as well as those that the [FEBTC] may extend to the [PDCP], including
interest and expenses or any other obligation owing to the [FEBTC], whether direct or indirect, principal or
secondary, as appears in the accounts, books and records of the [FEBTC] x x x. 52

Nonetheless, the parties do not dispute that what the REMs secured were only Sengkon's availments under
the Credit Line and not all of Sengkon's availments under other sub-facilities which are also secured by other
collaterals.53 Since the liability of PDCP's properties was not unqualified, the PNs, used as basis of the Petition
for Extrajudicial

Foreclosure of Mortgage should sufficiently indicate that it is within the terms of PDCP's limited liability. In this
case, the PNs failed to make any reference to PDCP's availments, if any, under its Credit Line. In fact, it did
not even mention Sengkon's securities under the Credit Line. Notably, the Disclosure Statements, which were
"certified correct" by FEBTC's authorized representative, Ma. Luisa C. Ellescas, and which accompanied the
PNs, failed to disclose whether the loan secured thereby was actually secured or not.

Thus, even if the Court brushes aside the Best Evidence Rule, the foregoing observations clearly support the
trial court's observation that FEBTC's foreclosure did not actually cover the specific obligations secured by
PDCP's properties.

FEBTC's failure to send personal notice to the mortgagor is fatal to the validity of the foreclosure
proceedings

Indeed, FEBTC's failure to comply with its contractual obligation to send notice to PDCP of the foreclosure sale
is fatal to the validity of the foreclosure proceedings. In Metropolitan Bank v. Wong,54 the Court ruled that while
as a rule, personal notice to the mortgagor is not required, such notice may be subject of a contractual
stipulation, the breach of which is sufficient to nullify the foreclosure sale, thus:

In resolving the first query, we resort to the fundamental principle that a contract is the law between the parties
and, that absent any showing that its provisions are wholly or in part contrary to law, morals, good customs,
public order, or public policy, it shall be enforced to the letter by the courts. Section 3, Act No. 3135 reads:

xxxx

The Act only requires (1) the posting of notices of sale in three public places, and (2) the publication of the
same in a newspaper of general circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties to the mortgage contract are not precluded from exacting additional
requirements. In this case, petitioner and respondent in entering into a contract of [REM], agreed inter alia:
"all correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extra-judicial action shall be sent to the MORTGAGOR at 40-42 Aldeguer St.
Iloilo City, or at the address that may hereafter be given in writing by the MORTGAGOR to the MORTGAGEE."

Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which petitioner might
take on the subject property, thus according him the opportunity to safeguard his rights. When petitioner failed
to send the notice of foreclosure sale to respondent, he committed a contractual breach sufficient to render the
foreclosure sale on November 23, 1981 null and void. 55 (Citation omitted and italics in the original)

In trivializing FEBTC's failure to send personal notice to PDCP however, the CA, citing Philippine National
Bank v. Nepomuceno Productions, Inc., 56 ruled that since the principal object of a notice of sale is not so much
to notify the mortgagor but to inform the public in general of the particularities of the foreclosure, then personal
notice to the mortgagor may be disregarded.57 The cited case, however, is inapplicable because that case did
not in fact involve stipulations on personal notice to mortgagor nor the sending of notice to a wrong address.
The issue involved in that case is whether the parties to the mortgage can validly waive the statutory
requirements of posting and publication and not whether the bank can ignore a contractual stipulation for
personal notice. Neither is PNB v. Spouses Rabat 58 likewise cited by the CA applicable because the trial court
therein found that the mortgage contract did not in fact require that personal service of notice of foreclosure
sale be given to the mortgagors. The CA's cavalier disregard of the mortgagor's contractual right to notice of
the foreclosure sale runs contrary to jurisprudence. In Wong, 59 the Court already had the occasion to observe:

It is bad enough that the mortgagor has no choice but to yield his property in a foreclosure proceeding. It is
infinitely worse, if prior thereto, he was denied of his basic right to be informed of the impending loss of his
property. x x x. 60

While the CA acknowledged that there was indeed a contractual stipulation for notice to PDCP as mortgagor, it
considered the absence of a particular address in the space provided therefor in the mortgage contract as
merely evincing an expression of "general intent" between the parties and that this cannot prevail against their
"specific intent" that Act No. 3135 be the controlling law between them, citing Cortes v. Intermediate Appellate
Court. 61

The Court cannot agree with the CA. To begin with, the value of the doctrine enunciated in Cortes has long
been considered questionable by this Court. Thus, in Global Holiday Ownership Corporation v. Metropolitan
Bank and Trust Company, 62 the Court held:

But what is stated in Cortes no longer applies in light of the Court's rulings in Wong and all the subsequent
cases, which have been consistent. Cortes has never been cited in subsequent rulings of the Court, nor has
the doctrine therein ever been reiterated. Its doctrinal value has been diminished by the policy enunciated
in Wong and the subsequent cases; that is, that in addition to Section 3 of Act 3135, the parties may stipulate
that personal notice of foreclosure proceedings may be required. Act 3135 remains the controlling law, but the
parties may agree, in addition to posting and publication, to include personal notice to the mortgagor, the non-
observance of which renders the foreclosure proceedings null and void, since the foreclosure proceedings
become an illegal attempt by the mortgagee to appropriate the property for itself.

Thus, we restate: the general rule is that personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not necessary, and posting and publication will suffice. Sec. 3 of Act 3135 governing extra-
judicial foreclosure of [REMs], as amended by Act 4118, requires only posting of the notice of sale in three
public places and the publication of that notice in a newspaper of general circulation. The exception is when
the parties stipulate that personal notice is additionally required to be given the mortgagor. Failure to abide by
the general rule, or its exception, renders the foreclosure proceedings null and void. 63 (Citation omitted, italics
ours, and emphasis and underlining in the original deleted)

In fact, the 2002 case of Nepomuceno Productions,64 cited by the CA, already made it clear that while personal
notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary, this holds true only if the
parties did not stipulate therefor. Stated differently, personal notice is necessary if the parties so agreed in their
mortgage contract. In the present case, the parties provided in their REMs that:
12. All correspondence relative to this mortgage, including demand letters, summonses, subpoenas, or
notifications of any judicial or extrajudicial action shall be sent to the [PDCP] at or at the address that may
hereafter be given in writing by the [PDCP] to the [FEBTC]. x x x. 65

This provision clearly establishes the agreement between the parties that personal notice is required before
FEBTC may proceed with the foreclosure of the property and thus, FEBTC's act of proceeding with the
foreclosure despite the absence of personal notice to the mortgagor was its own lookout.

That the portion on the mortgagor's address was left in blank cannot be simply swept under the rug as "an
expression of general intent" that cannot prevail of the parties' specific intent not to require personal notice.
Apart from the fact that this reasoning is based on a questionable doctrine, the CA's ruling completely ignored
the fact that the mortgage contract containing said stipulation was a standard contract prepared by FEBTC
itself. If the latter did not intend to require personal notice, on top of the statutory requirements of posting and
publication, then said provision should not have at all been included in the mortgage contract. In other words,
the REMs in this case are contracts of adhesion, and in case of doubt, the doubt should be resolved against
the party who prepared it. 66

Accordingly, the CA should have considered the "doubt" created by the blank space in the mortgage contract
against FEBTC and not in its favor. Nonetheless, even if the Court ignores this particular rule of interpretation,
the fact that FEBTC caused the sending of a notice, albeit at a wrong address, to PDCP is itself a clear proof
that the parties did intend to impose a contractual requirement of personal notice, FEBTC's undisputed breach
of which sufficiently nullifies the foreclosure proceeding.

With the foregoing, the Court finds it unnecessary to discuss PDCP's argument based on the alleged violation
of its constitutional right against impairment of obligations and contract.

WHEREFORE, premises considered, the petition is GRANTED. The Decision dated November 25, 2009 and
Resolution dated February 2, 2010 of the Court of Appeals in CA-G.R. CV No. 89755 are hereby ANNULLED
and SET ASIDE. The Decision dated April 16, 2007 of the Regional Trial Court of Quezon City, Branch 222, in
Civil Case No. QOl-44630 is REINSTATED and AFFIRMED.

SO ORDERED.
G.R. No. 192971

FLORO MERCENE, Petitioner

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, Respondent

DECISION

MARTIRES, J.:

This petition for review on certiorari seeks to reverse and set aside the 29 April 2010 Decision1 and 20 July
2010 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 86615 which reversed the 15 September
2005 Decision3 of the Regional Trial Court, Branch 220, Quezon City (RTC).

THE FACTS

On 19 January 1965, petitioner Floro Mercene (Mercene) obtained a loan from respondent Government
Service Insurance System (GSIS) in the amount of ₱29,500.00. As security, a real estate mortgage was
executed over Mercene's property in Quezon City, registered under Transfer Certificate of Title No. 90535. The
mortgage was registered and annotated on the title on 24 March 1965.4

On 14 May 1968, Mercene contracted another loan with GSIS for the amount of ₱14,500.00. The loan was
likewise secured by a real estate mortgage on the same parcel of land. The following day, the loan was
registered and duly annotated on the title.5

On 11 June 2004, Mercene opted to file a complaint for Quieting of Title6 against GSIS. He alleged that: since
1968 until the time the complaint was filed, GSIS never exercised its rights as a mortgagee; the real estate
mortgage over his property constituted a cloud on the title; GSIS' right to foreclose had prescribed. In its
answer,7 GSIS assailed that the complaint failed to state a cause of action and that prescription does not run
against it because it is a government entity.

During the pre-trial conference, Mercene manifested that he would file a motion for judgment on the pleadings.
There being no objection, the RTC granted the motion for judgment on the pleadings.8
 The RTC Decision

In its 15 September 2005 decision, the RTC granted Mercene's complaint and ordered the cancellation of the
mortgages annotated on the title. It ruled that the real estate mortgages annotated on the title constituted a
cloud thereto, because the annotations appeared to be valid but was ineffective and prejudicial to the title. The
trial court opined that GSIS' right as a mortgagee had prescribed because more than ten (10) years had lapsed
from the time the cause of action had accrued. The R TC stated that prescription ran against GSIS because it
is a juridical person with a separate personality, and with the power to sue and be sued. The dispositive portion
reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1) Declaring the Real Estate Mortgage dated January 19, 1965, registered on March 24, 1965
and Real Estate Mortgage dated May 14, 1965 registered on May 15, 1968, both annotated at
the back of Transfer Certificate of Title No. 90435 of the Registry of Deeds of Quezon City,
registered in the name of plaintiff Floro Mercene married to Felisa Mercene, to be ineffective.

2) Ordering the Registry of Deeds of Quezon City to cancel the following entries annotated on
the subject title 1) Entry No. 4148/90535: mortgage to GSIS and; 2) Entry No. 4815/90535:
mortgage to GSIS.

3) The other claims and counter-claims are hereby denied for lack of merit.9

Aggrieved, GSIS appealed before the CA.

The CA Ruling

In its 30 January 2015 decision, the CA reversed the RTC decision. The appellate court posited that the trial
court erred in declaring that GSIS' right to foreclose the mortgaged properties had prescribed. It highlighted
that Mercene's complaint neither alleged the maturity date of the loans, nor the fact that a demand for payment
was made. The CA explained that prescription commences only upon the accrual of the cause of action, and
that a cause of action in a written contract accrues only when there is an actual breach or violation. Thus, the
appellate court surmised that no prescription had set in against GSIS because it has not made a demand to
Mercene. It ruled:

WHEREFORE, the appeal is GRANTED. The decision appealed from is REVERSED and SET ASIDE. The
complaint for Quieting of Title is hereby DISMISSED.10

Mercene moved for reconsideration, but the same was denied by the CA in its assailed 7 April 2011 resolution.

Hence, this present petition raising the following:

ISSUES

WHETHER THE COURT OF APPEALS ERRED IN CONSIDERING ISSUES NOT RAISED BEFORE THE
TRIAL COURT;

II

WHETHER THE COURT OF APPEALS ERRED IN DISREGARDING THE JUDICIAL ADMISSION

ALLEGEDLY MADE BY GSIS; AND

III
WHETHER THE COURT OF APPEALS ERRED IN RULING THAT THE REAL ESTATE MORTGAGES HAD
YET TO PRESCRIBE.

THE COURTS RULING

The petition has no merit.

Related issues addressed by the trial courts

Mercene assails the CA decision for entertaining issues that were not addressed by the trial court. He claims
that for the first time on appeal, GSIS raised the issue on whether the loans were still effective in view of his
nonpayment. A reading of the CA decision, however, reveals that the appellate court did not dwell on the issue
of nonpayment, but instead ruled that prescription had not commenced because the cause of action had not
yet accrued. Hence, it concluded that the complaint failed to state a cause of action. The appellate court did
not focus on the question of payment precisely because it was raised for the first time on appeal. It is
noteworthy that, in its answer, GSIS raised the affirmative defense that Mercene's complaint failed to state a
cause of action.

Only ultimate facts need be specifically denied

Further, Mercene insists that GSIS had judicially admitted that its right to foreclose the mortgage had
prescribed. He assails that GSIS failed to specifically deny the allegations in his complaint, particularly
paragraphs 11.1 and 11.2 which read:

11.1. The right of the defendant GSIS, to institute the necessary action in court, to enforce its right as a
mortgagee, under Real Estate Mortgages dated January 19, 1965 and May 14, 1968, respectively, by filing a
complaint for judicial foreclosure of Real Estate Mortgage, with the Regional Trial Court of Quezon City,
against the plaintiff, as the mortgagor, pursuant to Rule 68 of the 1997 Rules of Civil Procedures (Rules, for
brevity); or by filing a petition for extra-judicial foreclosure of real estate mortgage, under Act. 3135, as
amended, with the Sheriff, or with the Notary Public, of the place where the subject property is situated, for the
purpose of collecting the loan secured by the said real estate mortgages, or in lieu thereof, for the purpose of
consolidating title to the parcel of land xxx in the name of the defendant GSIS, has already prescribed, after ten
(10) years from May 15, 1968. More particularly, since May 15, 1968, up to the present, more than thirty-five
(35) years have already elapsed, without the mortgagee defendant GSIS, having instituted a mortgage
action[s] against the herein plaintiff-mortgagor.

xxx

11.2. Since the defendant GSIS has not brought any action to foreclose either the first or the second real
estate mortgage on the subject real property, so as to collect the loan secured by the said real estate
mortgages, or in lieu thereof, to consolidate title to the said parcel of land, covered by the documents entitled,
first and second real estate mortgages, in the name of the defendant GSIS, notwithstanding the lapse of ten
(10) years from the time the cause of action accrued, either then (10) years after May 15, 1968, or after the
alleged violation by the plaintiff of the terms and conditions of his real estate mortgages, therefore, the said
defendant GSIS, has lost its aforesaid mortgagee's right, not only by virtue of Article 1142, N.C.C., but also
under Article 476, N.C.C., which expressly provides that there may also be an action to quiet title, or remove a
cloud therefrom, when the contract, instrument or other obligation has been extinguished or has terminated, or
has been barred by extinctive prescription;11

The Court agrees with Mercene that material averments not specifically denied are deemed
admitted.12Nonetheless, his conclusion that GSIS judicially admitted that its right to foreclose had prescribed is
erroneous. It must be remembered that conclusions of fact and law stated in the complaint are not deemed
admitted by the failure to make a specific denial.13 This is true considering that only ultimate facts must be
alleged in any pleading and only material allegation of facts need to be specifically denied.14
A conclusion of law is a legal inference on a question of law made as a result of a factual showing where no
further evidence is required.15 The allegation of prescription in Mercene's complaint is a mere conclusion of
law. In Abad v. Court of First Instance of Pangasinan, 16 the Court ruled that the characterization of a contract
as void or voidable is a conclusion of law, to wit:

A pleading should state the ultimate facts essential to the rights of action or defense asserted, as distinguished
from mere conclusions of fact, or conclusions of law. General allegations that a contract is valid or legal, or is
just, fair and reasonable, are mere conclusions of law. Likewise, allegations that a contract is void, voidable,
invalid, illegal, ultra vires, or against public policy, without stating facts showing its invalidity, are mere
conclusions of law.

In the same vein, labelling-an obligation to have prescribed without specifying the circumstances behind it is a
mere conclusion of law. As would be discussed further, the fact that GSIS had not instituted any action within
ten (10) years after the loan had been contracted is insufficient to hold that prescription had set in. Thus, even
if GSIS' denial would not be considered as a specific denial, only the fact that GSIS had not commenced any
action, would be deemed admitted at the most. This is true considering that the circumstances to establish
prescription against GSIS have not been alleged with particularity.

Commencement of the prescriptive period for real estate mortgages material in determining cause of
action

In its answer, GSIS raised the affirmative defense, among others, that the complaint failed to state a cause of
action.1âwphi1 In turn, the CA ruled that Mercene's complaint did not state a cause of action because the
maturity date of the loans, or the demand for the satisfaction of the obligation, was never alleged.

In order for cause of action to arise, the following elements must be present: (1) a right in favor of the plaintiff
by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named
defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant
violative of the right of the plaintiff or constituting a breach of obligation of the defendant to the plaintiff. 17

In University of Mindanao, Inc. v. Bangko Sentral ng Pilipinas, et al., 18 the Court clarified that prescription runs
in mortgage contract from the time the cause of action arose and not from the time of its execution, to wit:

The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive
period necessarily run on the date when the loan becomes due and demandable. Prescriptive period runs from
the date of demand, subject to certain exceptions.

In other words, ten (10) years may lapse from the date of the execution of contract, without barring a cause of
action on the mortgage when there is a gap between the period of execution of the contract and the due date
or between the due date and the demand date in cases when demand is necessary.

The mortgage contracts in this case were executed by Saturnino Petalcorin in 1982. The maturity dates of
FISLAI's loans were repeatedly extended until the loans became due and demandable only in 1990.
Respondent informed petitioner of its decision to foreclose its properties and demanded payment in 1999.

The running of the prescriptive period of respondent's action on the mortgages did not start when it executed
the mortgage contracts with Saturnino Petalcorin in 1982.1âwphi1

The prescriptive period for filing an action may run either (1) from 1990 when the loan became due, if the
obligation was covered by the exceptions under Article 1169 of the Civil Code; (2) or from 1999 when
respondent demanded payment, if the obligation was not covered by the exceptions under Article 116919 of the
Civil Code. [emphasis supplied]
In Maybank Philippines, Inc. v. Spouses Tarrosa, 20 the Court explained that the right to foreclose prescribes
after ten (10) years from the time a demand for payment is made, or when then loan becomes due and
demandable in cases where demand is unnecessary, viz:

An action to enforce a right arising from a mortgage should be enforced within ten (10) years from the time the
right of action accrues, i.e., when the mortgagor defaults in the payment of his obligation to the mortgagee;
otherwise, it will be barred by prescription and the mortgagee will lose his rights under the mortgage. However,
mere delinquency in payment does not necessarily mean delay in the legal concept. To be in default is
different from mere delay in the grammatical sense, because it involves the beginning of a special condition or
status which has its own peculiar effects or results.

In order that the debtor may be in default, it is necessary that: (a) the obligation be demandable and already
liquidated; (b) the debtor delays performance; and (c) the creditor requires the performance judicially or
extrajudicially, unless demand is not necessary - i.e., when there is an express stipulation to that effect; where
the law so provides; when the period is the controlling motive or the principal inducement for the creation of the
obligation; and where demand would be useless. Moreover, it is not sufficient that the law or obligation fixes a
date for performance; it must further state expressly that after the period lapses, default will commence. Thus,
it is only when demand to pay is unnecessary in case of the aforementioned circumstances, or when required,
such demand is made and subsequently refused that the mortgagor can be considered in default and the
mortgagee obtains the right to file an action to collect the debt or foreclose the mortgage.

Thus, applying the pronouncements of the Court regarding prescription on the right to foreclose mortgages, the
Court finds that the CA did not err in concluding that Mercene's complaint failed to state a cause of action. It is
undisputed that his complaint merely stated the dates when the loan was contracted and when the mortgages
were annotated on the title of the lot used as a security. Conspicuously lacking were allegations concerning:
the maturity date of the loan contracted and whether demand was necessary under the terms and conditions of
the loan.

As such, the RTC erred in ruling that GSIS' right to foreclose had prescribed because the allegations in
Mercene's complaint were insufficient to establish prescription against GSIS. The only information the trial
court had were the dates of the execution of the loan, and the annotation of the mortgages on the title. As
elucidated in the above-mentioned decisions, prescription of the right to foreclose mortgages is not reckoned
from the date of execution of the contract. Rather, prescription commences from the time the cause of action
accrues; in other words, from the time the obligation becomes due and demandable, or upon demand by the
creditor/mortgagor, as the case may be.

In addition, there was no judicial admission on the part of GSIS with regard to prescription because treating the
obligation as prescribed, was merely a conclusion of law. It would have been different if Mercene's complaint
alleged details necessary to determine when GSIS' right to foreclose arose, i.e., date of maturity and whether
demand was necessary.

WHEREFORE, the petition is DENIED. The 29 April 2010 Decision and 20 July 2010 Resolution of the Court of
Appeals (CA) in CAG. R. CV No. 86615 are AFFIRMED in toto.

SO ORDERED.