Republic of the Philippines a contract of loan and real estate mortgage wherein the plaintiff extended to the said

SUPREME COURT defendants a loan of P45,000.00; that said defendants also agreed to buy from the plaintiff on
Manila cash basis their petroleum requirements in an amount of not less than 50,000 liters per month;
that the said defendants will pay to the plaintiff 9-1/2% per annum on the diminishing balance
of the amount of their loan; that the defendants will repay the said loan in monthly installments
EN BANC
of P950.88 for a period of five (5) years from February 9, 1965; that to secure the performance
of the foregoing obligation they executed a first mortgage on two parcels of land covered by
G.R. No. L-26371 September 30, 1969 Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds
of Bacolod City. The agreement further provided that in case of failure of the defendants to pay
any of the installments due and purchase their petroleum requirements in the minimum amount
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,
of 50,000 liters per month from the plaintiff, the latter has the right to foreclose the mortgage or
vs. recover the payment of the entire obligation or its remaining unpaid balance; that in case of
RUTH R. DIOCARES, ET AL., defendants-appellees.
foreclosure the plaintiff shall be entitled to 12% of the indebtedness as damages and attorney's
fees. A copy of the loan and real estate mortgage contract executed between the plaintiff and
Faylona, Berroya, Norte and Associates for plaintiff-appellant. the defendants is attached to the complaint and made a part thereof. The complaint further
Vivencio G. Ibrado Jr. for defendants-appellees. alleges that the defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a
balance of P43,098.24, excluding interest, on their indebtedness. The said defendants also
failed to buy on cash basis the minimum amount of petroleum which they agreed to purchase
from the plaintiff. The plaintiff, therefore, prayed that the defendants be ordered to pay the
amount of P43,098.24, with interest at 9-1/2% per annum from the date it fell due, and in default
FERNANDO, J.: of such payment that the mortgaged properties be sold and the proceeds applied to the
payment of defendants' obligation." 6
It may very well be, as noted by jurists of repute, that to stress the element of a promise as the
basis of contracts is to acknowledge the influence of natural law. 1 Nonetheless, it does not Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their
admit of doubt that whether under the civil law or the common law, the existence of a contract indebtedness as set forth above, denying merely the alleged refusal to pay, the truth, according
is unthinkable without one's word being plighted. So the New Civil Code provides: "A contract to them, being that they sought for an extension of time to do so, inasmuch as they were not in
is a meeting of minds between two persons whereby one binds himself, with respect to the a position to comply with their obligation. They further set forth that they did request plaintiff to
other, to give something or to render some service." 2 So it is likewise under American law. furnish them with the statement of accounts with the view of paying the same on installment
Thus: "A contract is a promise or a set of promises for the breach of which the law gives a basis, which request was, however, turned down by the plaintiff.
remedy, or the performance of which the law in some way recognizes as a duty." 3
Then came a motion from the plaintiff for a judgment on the pleadings, which motion was
The law may go further and require that certain formalities be executed. Thus, for a mortgage favorably acted on by the lower court. As was stated in the order appealed from: "The answer
to be validly constituted, "it is indispensable, ..., that the document in which it appears be of the defendants dated October 21, 1965 did not raise any issue. On the contrary, said answer
recorded in the Registry of Property." The same codal provision goes on: "If the instrument is admitted the material allegations of the complaint. The plaintiff is entitled to a judgment on the
not recorded, the mortgage is nevertheless binding between the parties." 4 pleadings." 7

The question before us in this appeal from a lower court decision, one we have to pass upon
for the first time, is the effect, if any, to be given to a mortgage contract admittedly not
registered, only the parties being involved in the suit. The lower court was of the opinion that
while it "created a personal obligation [it] did not establish a real estate mortgage." 5 It did not
decree foreclosure therefor. Plaintiff-appellant appealed. We view the matter differently and
reverse the lower court.
The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the
lower court order of February 25, 1966, subject of this appeal. Thus: "In its complaint plaintiff
alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope T. Diocares entered into
As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads
thus: "The Court cannot, however, order the foreclosure of the mortgage of properties, as
prayed for, because there is no allegation in the complaint nor does it appear from the copy of
the loan and real estate mortgage contract attached to the complaint that the mortgage had
been registered. The said loan agreement although binding among the parties merely created
a personal obligation but did not establish a real estate mortgage. The document should have
been registered. (Art. 2125, Civil Code of the Phil.)" 8 The dispositive portion is thus limited to
ordering defendants "to pay the plaintiff the account of P43,098.24, with interest at the rate of
9-1/2% per annum from the date of the filing of the complaint until fully paid, plus the amount
of P2,000.00 as attorneys' fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that
real estate mortgage was established and its consequent refusal to order the foreclosure of the in default of the payment of the above amount of P43,028.94 with interests at the rate of 9-
mortgaged properties. As set forth at the outset, we find the appeal meritorious. The lower court 1/2% per annum from the date of the filing of the complaint, that the mortgage be foreclosed
should not have held that no real estate mortgage was established and should have ordered with the properties subject thereof being sold and the proceeds of the sale applied to the
its foreclosure. payment of the amounts due the plaintiff in accordance with law. With costs against defendants-
appellees.
The lower court predicated its inability to order the foreclosure in view of the categorical nature
of the opening sentence of the governing article 10 that it is indispensable, "in order that a
mortgage may be validly constituted, that the document in which it appears be recorded in the
Registry of Property." Note that it ignored the succeeding sentence: "If the instrument is not
recorded, the mortgage is nevertheless binding between the parties." Its conclusion, however,
is that what was thus created was merely "a personal obligation but did not establish a real THIRD DIVISION
estate mortgage."

Such a conclusion does not commend itself for approval. The codal provision is clear and
explicit. Even if the instrument were not recorded, "the mortgage is nevertheless binding [G.R. No. 147788. March 19, 2002]
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.1awphîl.nèt
EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners, vs. BANCOM FINANCE
CORPORATION (NOW UNION BANK OF THE PHILIPPINES), respondent.
A contrary conclusion would manifest less than full respect to what the codal provision ordains.
The liability of the mortgagor is therein explicitly recognized. To hold, as the lower court did,
that no foreclosure would lie under the circumstances would be to render the provision in DECISION
question nugatory. That we are not allowed to do. What the law requires in unambiguous
language must be lived up to. No interpretation is needed, only its application, the undisputed PANGANIBAN, J.:
facts calling for it. 11
An absolutely simulated contract of sale is void ab initio and transfers no ownership
Moreover to rule as the lower court did would be to show less than fealty to the purpose that right. The purported buyer, not being the owner, cannot validly mortgage the subject
animated the legislators in giving expression to their will that the failure of the instrument to be property.Consequently, neither does the buyer at the foreclosure sale acquire any title thereto.
recorded does not result in the mortgage being any the less "binding between the parties." In
the language of the Report of the Code Commission: "In article [2125] an additional provision
is made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties." 12 We are not free to adopt then an interpretation, even assuming that Statement of the Case
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.
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
Nor is the reason difficult to discern why such an exception should be made to the rule that is assailing the March 30, 2001 Decision[1] of the Court of Appeals (CA) in CA-GR No. 58346. The
indispensable for a mortgage to be validly constituted that it be recorded. Equity so demands, decretal portion of the challenged Decision reads as follows:
and justice is served. There is thus full acknowledgment of the binding effect of a promise,
which must be lived up to, otherwise the freedom a contracting party is supposed to possess WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A new one
becomes meaningless. It could be said of course that to allow foreclosure in the absence of is rendered declaring BANCOMs right to the subject land as a purchaser in good faith and for value, and
such a formality is to offend against the demands of jural symmetry. What is "indispensable" ordering the cancellation of the Notice of Lis Pendens on TCT No. 248262-Bulacan. Without
may be dispense with. Such an objection is far from fatal. This would not be the first time when pronouncement as to costs.[2]
logic yields to what is fair and what is just. To such an overmastering requirement, law is not
immune.
The Facts
The factual antecedents of the case are summarized by the Court of Appeals thus:
Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a
339,335 square meter or 33.9335 hectare parcel of agricultural land together with improvements located
in Barangay Pulang Yantoc, Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978,
defendant Norma Sulit, after being introduced by Candelaria Sanchez to Fr. Cruz, offered to purchase
the land. Plaintiffs asking price for the land was P700,000.00, but Norma only had P25,000.00 which Fr.
Cruz accepted as earnest money with the agreement that titles would be transferred to Norma upon
payment of the balance of P675,000.00. Norma failed to pay the balance and proposed [to] Fr. Cruz to
transfer the property to her but the latter refused, obviously because he had no reason to trust Norma. But
capitalizing on the close relationship of Candelaria Sanchez with the plaintiffs, Norma succeeded in
having the plaintiffs execute a document of sale of the land in favor of Candelaria who would then obtain
a bank loan in her name using the plaintiffs land as collateral. On the same day, Candelaria executed
another Deed of Absolute Sale over the land in favor of Norma. In both documents, it appeared that the
consideration for the sale of the land was only P150,000.00. Pursuant to the sale, Norma was able to
effect the transfer of the title to the land in her name under TCT No. T-248262.
Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the amount
of P655,000.00 representing the balance of the actual price of the land. In a Special Agreement dated
September 1, 1978, Norma assumed Candelarias obligation, stipulating to pay the plaintiffs the said
amount within six months on pain of fine or penalty in case of non-fulfillment. Unknown to the plaintiffs,
Norma managed to obtain a loan from Bancom in the amount of P569,000.00 secured by a mortgage
over the land now titled in her name.
On account of Normas failure to pay the amount stipulated in the Special Agreement and her subsequent
disappearance from her usual address, plaintiffs were prompted to file the herein complaint for the
reconveyance of the land.
Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared
in default. On May 20, 1980, Bancom filed a motion for leave to intervene which was granted by the
trial court. In its Answer in Intervention, Bancom claimed priority as mortgagee in good faith; and that
its contract of mortgage with Norma had been executed before the annotation of plaintiffs interest in the
title.
Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was
foreclosed. At the subsequent auction sale, Bancom was declared the highest bidder and was issued the
corresponding certificate of sale over the land.
On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It
ruled that the contract of sale between plaintiffs and Candelaria was absolutely simulated. Consequently,
the second contract of sale, that is, between Candelaria and Norma, produced no legal effect. As for
Bancom, the trial court held that the Bank was not a mortgagee in good faith thus it can not claim priority
of rights over plaintiffs property.[3]
Ruling of the Court of Appeals
In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not
simulated. Thus, the Contract of Mortgage between Sulit and respondent was likewise valid.
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage,
because they did not seek to annul the same but instead executed a special agreement to
enforce payment of the balance of the price in the amount of P665,000.00.[4]
Furthermore, it upheld respondent as a mortgagee in good faith; ergo, it had a
preferential right to the land.
Hence, this Petition.[5]
Issues
In their Memorandum, petitioners raise the following issues for this Courts consideration:
I
Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners intended
to enter into a sale of the property in question and that the declarations of Petitioner Fr. Edilberto Cruz
in Court belied the court a quos finding that the Deeds of Sale in question were absolute simulations.
II
Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank was a
mortgagee in good faith, despite the fact that respondent Bancom was in truth and in fact a mortgagee in
bad faith over the subject property.
III
Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the title
[to] the property did not disclose any irregularity that would arouse suspicion by respondent bank as to
the condition of the subject land despite the fact that questions and circumstances abound which would
render respondent bank not a mortgagee in good faith, and that the case of Sunshine Finance Investment
Corporation vs. Intermediate Appellate Court applies to the instant case.
IV In Rongavilla v. Court of Appeals,[12] we held that a deed of sale, in which the stated
consideration had not in fact been paid, was a false contract; that is void ab
initio. Furthermore, Ocejo v. Flores,[13] ruled that a contract of purchase and sale is null and
Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank
void and produces no effect whatsoever where it appears that [the] same is without cause or
possesses a preferential right over petitioners on the subject land as a mortgagee in good faith.[6]
consideration which should have been the motive thereof, or the purchase price which appears
thereon as paid but which in fact has never been paid by the purchaser to the vendor.
The above issues can be summed up into two: (1) the validity of the Deeds of Sale and
Mortgage and (2) the good faith of the mortgagee. Although the Deed of Sale[14] between petitioners and Sanchez stipulated a
consideration of P150,000, there was actually no exchange of money between them. Petitioner
Edilberto Cruz narrated how the transaction came about:

ATTY. CABRERA:
This Courts Ruling
Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it
was Norma Sulit with whom you are transacting?
The Petition is meritorious.
A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon
acquiring the title from us, they can borrow money from the Bank. So it is a
way of acquiring the title from us, sir.
First Issue: Q. This deed of sale marked Exhibit D which you just identified, stipulates a
Validity of the Sale and the Mortgage consideration of P150,000.00. The question, Father, is - did you receive
the P150,000.00?

Petitioners claim that the Deed of Sale[7] they executed with Sanchez, as well as the ATTY. AGRAVANTE
Deed of Sale[8] executed between Sanchez and Sulit, was absolutely simulated; hence, null
Objection, your Honor, the document is the best evidence.
and void. On the other hand, echoing the appellate court, respondent contends that petitioners
intended to be bound by those Deeds, and that the real estate mortgage over the subject ATTY. CABRERA
property was valid.
This is an action to annul a certain contract.
As a general rule, when the terms of a contract are clear and unambiguous about the
intention of the contracting parties, the literal meaning of its stipulations shall control. But if the COURT
words appear to contravene the evident intention of the parties, the latter shall prevail over the
former.[9] The real nature of a contract may be determined from the express terms of the He received the consideration stated in the contract. The witness may
agreement, as well as from the contemporaneous and subsequent acts of the parties thereto. [10] answer.

On the other hand, simulation takes place when the parties do not really want the contract WITNESS
they have executed to produce the legal effects expressed by its wordings. [11] Simulation or
vices of declaration may be either absolute or relative. Article 1345 of the Civil Code A Not a single centavo we received from Candelaria Sanchez as if it is nominal,
distinguishes an absolute simulation from a relative one while Article 1346 discusses their sir.
effects, as follows: ATTY. CABRERA

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties Q If you did not receive this P150,000.00 stated in this deed of sale that you and
do not intend to be bound at all; the latter when the parties conceal their true agreement. your brother executed from Candelaria Sanchez, did you receive the said
amount from Norma Sulit or anybody else for that matter?

Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a A Not a single centavo, sir.[15]
third person and is not intended for any purpose contrary to law, morals, good customs, public order or
public policy binds the parties to their agreement.
 His claim was corroborated by Sanchez. She likewise said that the Deed of Sale[16] she
executed with Sulit, for which she did not receive any consideration was only for the purpose
of placing the title to the property in the latters name. She testified as follows:
Q And so you transferred the property in favor of Norma Sulit?
A Yes, sir.
Q I am showing to you this document which has already been marked when the
representative of the Register of Deeds produced the pertinent documents
before the court as Exhibit C, is this that document that you executed
transferring the property in the name of Norma Sulit?
A Yes, sir, this is it.
Q There is a consideration of P150,000.00 stated in this Exhibit C, were you paid
by Norma Sulit the amount of P150,000.00 appearing in this Exhibit C?
ATTY BUYCO:
The question is leading, Your Honor.
COURT:
Witness may answer.
A No amount was given, sir. We prepared this document to transfer the title [to]
her name only.[17]
Respondent never offered any evidence to refute the foregoing testimonies.[18] On the
contrary, it even admitted that the stipulated consideration of P150,000 in the two Deeds of
Sale had never been actually paid by Sanchez to petitioners;[19] neither by Sulit to the former.[20]
Another telling sign of simulation was the complete absence of any attempt on the part
of the buyers -- Sanchez and Sulit -- to assert their alleged rights of ownership over the subject
property.[21] This fact was confirmed by respondent which, however, tried to justify the non-
occupancy of the land by Sanchez and Sulit. Supposedly, because the two failed to pay the
purchase price of the land, they could not force petitioners to vacate it. [22]
The records clearly show that the two Deeds of Absolute Sale were executed over the
same property on the same date, June 21, 1978. Six days thereafter, on June 27, 1978, it was
mortgaged by Sulit to Federal Insurance Company for P500,000. The mortgage was cancelled
when she again mortgaged the property to respondent for P569,000 on August 22, 1979. It is
also undisputed that petitioners did not receive any portion of the proceeds of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as
collateral to secure a loan from a bank.[23] Being merely a subterfuge, these agreements could
not have been the source of any consideration for the supposed sales.[24] Indeed, the execution
of the two documents on the same day sustains the position of petitioners that the Contracts
of Sale were absolutely simulated, and that they received no consideration therefor.[25]
The failure of Sulit to take possession of the property purportedly sold to her was a clear
badge of simulation that rendered the whole transaction void and without force and effect,
pursuant to Article 1409[26] of the Civil Code.[27] The fact that she was able to secure a
Certificate of Title to the subject property in her name did not vest her with ownership over
it.[28] A simulated deed of sale has no legal effect; consequently any transfer certificate of title
(TCT) issued in consequence thereof should be cancelled. [29] A simulated contract is not a
recognized mode of acquiring ownership.[30]
Second Issue:
Good Faith of Mortgagee
Petitioners argue that respondent was not a mortgagee in good faith because, at the time
it registered the real estate mortgage over the subject property, their adverse claim and notice
of lis pendens had already been annotated on the TCT (on October 30, 1979 and December
10, 1979, respectively). On the other hand, respondent maintains that petitioners were the ones
in bad faith, because they already had knowledge of the existence of the mortgage over the
property when they caused the annotation of their adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on the
correctness of the certificate of title and is no longer required to look behind the certificate in
order to determine the actual owner.[31] To do so would be contrary to the evident purpose of
Section 39 of Act 496 which we quote hereunder:
Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold
the same free of all encumbrances except those noted on said certificate, and any of the following
encumbrances which may be subsisting, namely:
First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or
of the Philippine Islands which the statutes of the Philippine Islands cannot require to appear of record
in the Registry.
Second. Taxes within two years after the same became due and payable.
Third. Any public highway, way, private way established by law, or any Government irrigation canal or
lateral thereof, where the certificate of title does not state that the boundaries of such highway, way, or
irrigation canal or lateral thereof, have been determined.
But if there are easements or other rights appurtenant to a parcel of registered land which for any reason
have failed to be registered, such easements or rights shall remain so appurtenant notwithstanding such
failure, and shall be held to pass with the land until cut off or extinguished by the registration of the
servient estate, or in any other manner.
 This rule is, however, subject to the right of a person deprived of land through fraud to
bring an action for reconveyance, provided the rights of innocent purchasers for value and in
good faith are not prejudiced. An innocent purchaser for value or any equivalent phrase shall
be deemed, under Section 38 of the same Act,[32] to include an innocent lessee, mortgagee or
any other encumbrancer for value.[33]
Respondent claims that, being an innocent mortgagee, it should not be required to
conduct an exhaustive investigation on the history of the mortgagors title before it could extend
a loan.[34]
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such,
unlike private individuals, it is expected to exercise greater care and prudence in its dealings,
including those involving registered lands.[35] A banking institution is expected to exercise due
diligence before entering into a mortgage contract.[36] The ascertainment of the status or
condition of a property offered to it as security for a loan must be a standard and indispensable
part of its operations.[37]
In Rural Bank of Compostela v. CA,[38] we held that a bank that failed to observe due
diligence was not a mortgagee in good faith. In the words of the ponencia:
x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does
not apply to banks.
Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than
private individuals, for their business is one affected with public interest, keeping in trust money
belonging to their depositors, which they should guard against loss by not committing any act of
negligence which amounts to lack of good faith by which they would be denied the protective mantle of
the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as
well as to mortgagees of the same character and description. (Citations omitted)
Recently, in Adriano v. Pangilinan,[39] we said that the due diligence required of banks
extended even to persons regularly engaged in the business of lending money secured by real
estate mortgages.
The evidence before us indicates that respondent bank was not a mortgagee in good
faith.[40] First, at the time the property was mortgaged to it, it failed to conduct an ocular
inspection.[41] Judicial notice is taken of the standard practice for banks before they approve a
loan: to send representatives to the premises of the land offered as collateral and to investigate
the ownership thereof.[42] As correctly observed by the RTC, respondent, before constituting
the mortgage over the subject property, should have taken into consideration the following
questions:
1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978?
2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the
same date, June 21, 1978 when she supposedly acquired it from the plaintiffs?
3) Being agricultural land, didnt it occur to the intervenors that there would be tenants to be compensated
or who might pose as obstacles to the mortgagees exercise of acts of dominion?
4) In an area as big as that property, [why] did they not verify if there were squatters?
5) What benefits or prospects thereof could the ultimate owner expect out of the property?
Verily, the foregoing circumstances should have been looked into, for if either or both companies did,
they could have discovered that possession of the land was neither with Candelaria nor with Norma.[43]
Respondent was clearly wanting in the observance of the necessary precautions to
ascertain the flaws in the title of Sulit and to examine the condition of the property she sought
to mortgage.[44] It should not have simply relied on the face of the Certificate of Title to the
property, as its ancillary function of investing funds required a greater degree of
diligence.[45]Considering the substantial loan involved at the time, it should have exercised more
caution.[46]
Moreover, the subject property, being situated in Bulacan, could have been easily and
conveniently inspected by respondent. A person who deliberately ignores a significant fact that
would create suspicion in an otherwise reasonable person is not an innocent purchaser for
value.[47]
Second, respondent was already aware that there was an adverse claim and notice of lis
pendens annotated on the Certificate of Title when it registered the mortgage on March 14,
1980. Unless duly registered, a mortgage does not affect third parties like herein petitioners,
as provided under Section 51 of PD NO. 1529,[48] which we reproduce hereunder:
SEC. 51. Conveyance and other dealings by registered owner. - An owner of registered land may
convey, mortgage, lease, charge or otherwise deal with the same in accordance with existing laws. He
may use such forms of deeds, mortgages, leases or other voluntary instruments [as] are sufficient in
law. But no deed, mortgage, lease, or other voluntary instrument except a will, purporting to convey or
affect registered land, shall take effect as a conveyance or bind the land, but shall operate only as a
contract between the parties and as evidence of authority to the clerk or register of deeds to make
registration.
The act of registration shall be the operative act to convey and affect the land, and in all cases under this
Act the registration shall be made in the office of the register of deeds for the province or city, where the
land lies.
True, registration is not the operative act for a mortgage to be binding between the
parties. But to third persons, it is indispensible.[49] In the present case, the adverse claim and
the notice of lis pendens were annotated on the title on October 30, 1979 and December 10,
1979, respectively; the real estate mortgage over the subject property was registered by
respondent only on March 14, 1980. Settled in this jurisdiction is the doctrine that a prior
registration of a lien creates a preference. [50] Even a subsequent registration of the prior
mortgage will not diminish this preference, which retroacts to the date of the annotation of the
notice of lis pendens and the adverse claim.[51] Thus, respondents failure to register the real
estate mortgage[52] prior to these annotations, resulted in the mortgage being binding only
between it and the mortgagor, Sulit. Petitioners, being third parties to the mortgage, were not
bound by it.[53] Contrary to respondents claim that petitioners were in bad faith because they
already had knowledge of the existence of the mortgage in favor of respondent when they
caused the aforesaid annotations, petitioner Edilberto Cruz said that they only knew of this
mortgage when respondent intervened in the RTC proceedings.[54]
On the question of who has a preferential right over the property, the long-standing rule,
as provided by Article 2085[55] of the Civil Code,[56] is that only the absolute owner of the
property can constitute a valid mortgage on it. In case of foreclosure, a sale would result in the
transmission only of whatever rights the seller had over of the thing sold.[57]
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and
void.[58] Thus, they did not convey any rights that could ripen into valid titles.[59] Necessarily, the
subsequent real estate mortgage constituted by Sulit in favor of respondent was also null and
void, because the former was not the owner thereof. There being no valid real estate mortgage,
there could also be no valid foreclosure or valid auction sale, either. At bottom, respondent
cannot be considered either as a mortgagee or as a purchaser in good faith. This being so,
petitioners would be in the same position as they were before they executed the simulated
Deed of Sale in favor of Sanchez. They are still the owners of the property. [60]
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The
Decision of the RTC of Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No
costs.
SO ORDERED.
DIONISIO MOJICA, in behalf of Spouses LEONARDO MOJICA (now deceased) and MARINA
RUFIDO, petitioner,
vs.
HON. COURT OF APPEALS, and RURAL BANK OF YAWIT, INC., respondents.
Lorenzo F. Miravite for petitioner.
Esteban C. Manuel for private respondent.
PARAS, J.:p
This is a petition for review on certiorari which seeks to reverse and set aside: the decision * of the
Court of Appeals dated February 15, 1990 in AC-G.R. CV No. 05987 entitled "Dionisio Mojica, in behalf
of spouses Leonardo Mojica (now deceased) and Marina Rufido v. Rural Bank of Kawit, Inc.", which
affirmed in toto the decision of the trial court and (2) the resolution dated June 4, 1990 denying the
motion for reconsideration.
The facts of the case as gathered from the records are as follows:
On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted a loan of P20,000.00 from
defendant Rural Bank of Kawit, Inc. (now respondent). This loan was secured by a real estate mortgage
executed on the same date by the plaintiffs spouses Leonardo Mojica and Marina Rufido (Rollo, Annex
"C" p. 40).
The real estate mortgage contract states among others:
... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already
obtained or still to be obtained by the mortgagors ...
2. ... but if the mortgagors shall well and truly fulfill the obligation above stated according to the terms
thereof then this mortgage shall become null and void. (Rollo Petitioner's Memorandum, pp. 86-87)
The spouses mortgaged to the Rural Bank of Kawit, a parcel of land consisting of 218,794 square
meters, located in Naic, Cavite, covered by Transfer Certificate of Title No. RT-155 (Rollo, Annex "A", p.
31). The real estate mortgage was duly registered under Entry No. 74661 of the Registry of Deeds of
Cavite (Rollo, Annex "C", p. 41).
The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid (Ibid.).
On March 5, 1974, a new loan in the amount of P18,000.00 was obtained by plaintiffs spouses from the
defendant Rural Bank which loan matured on March 5, 1975 (Rollo, pp. 32; 41).
No formal deed of real mortgage was constituted over any property of the borrowers, although the top
of the promissory note dated March 5, 1974, contained the following notation.
This promissory note is secured by a Real Estate Mortgage executed before the Notary Public of the
Municipality of Kawit, Mrs. Felisa Senti under Doc. No. 62, Page No. 86, Book No.__, Series of 1971.
The Real Estate Mortgage mentioned above is the registered mortgage which guaranteed the already
paid loan of P20,000.00 granted on February 1, 1971 (Rollo, p. 8,7).
The spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its maturity on
March 5, 1975. Respondent rural bank extrajudicially foreclosed the real estate mortgage on the
justification that it was adopted as a mortgage for the new loan of P18,000.00 (Rollo, pp. 32; 41).
The subject property was set for auction sale by the Provincial Sheriff of Cavite for June 27, 1979. In
that auction sale, defendant rural bank was the highest bidder, and its bid corresponded to the total
outstanding obligation of plaintiffs spouses Mojica and Rufido (Reno, p. 32).
The proceeds from the sale of the piece of land of plaintiffs spouses were applied to their outstanding
obligation with defendant bank (Ibid.)
The corresponding certificate of sale in favor of defendant bank was executed by the Provincial Sheriff
also on June 27, 1979, and the instrument was recorded in the Office of the Register of Deeds of Cavite
on June 29, 1979. The one year period for redemption elapses after June 1980 without plaintiffs
spouses having redeemed the foreclosure property (Ibid.)
Meanwhile, on July 19, 1980, Dionisio Mojica, the son of petitioners-spouses, in an apparent attempt
to pay the debt of P18,000.00 made a partial payment in the amount of P24,658.00 (P19,958.00 of this
amount in check bounced) which the defendant rural bank received and accepted with the issuance of
the defendant's official receipt No. 101 269, ackowledging the payment as partial payment of 'past due
loan', together with the "interest on past due lose (Rollo, p. 33).
On August 11, 1980, another partial payment was made by Dionisio Mojica in the amount of P9,958.00
in payment also of 64 past due loan' plus "interest on past due loan 7 which payment was received by
the defendant rural bank and acknowledged with the issuance of official receipt No. 101844. These
payments were, however, considered by the bank as deposit for the repurchase of the foreclosed
property (Ibid., p. 33).
On August 14, 1981, upon inquiry by Dionisio Mojica on the unpaid balance of the loan, the respondent
rural bank issued a 'Computation Slip" indicating therein, that as of August 14, 1981, the outstanding
balance plus interest computed from March 5, 1975 was P21,272.50 (Ibid.).
On November 10, 1981, said bank executed an affidavit of consolidation of ownership, which it
subsequently filed with the Register of Deeds of Cavite. As a result, Transfer Certificate of Title No. T-
123964, covering the foreclosed piece of land, was issued in its favor by the Register of Deeds on
January 19, 1982. After having consolidated its ownership over the foreclosed property, defendant
bank scheduled the parcel of land to be sold at public auction on February 26, 1982, pursuant to the
requirement of the law regarding the disposal by a bank of its acquired assets. Dionisio Mojica and one
Teodorico Rufido, brother-in-law of plaintiff Leonardo Mojica, were notified of such auction sale
However, no sale was consummated during that scheduled sale and the property concerned up to now
still remains in the possession of respondent bank (Ibid.).
The refusal of the same bank to allow Dionisio Mojica to pay the unpaid balance of the loan as per the
"Computation Slip" amounting to P21,272.50, resulted in the filing of a complaint (Rollo, p. 42).
On September 3, 1984, the trial court rendered judgment dismissing the complaint. On November 5,
1984, petitioner filed a motion for reconsideration of the decision, which motion was denied in the
order dated November 17, 1984. On January 2, 1985, a notice of appeal was filed in the Intermediate
Appellate Court (Rollo, p. 42).
On February 15, 1990, the Appellate Court, rendered its decision, aiming in toto the decision of the
trial court. The dispositive portion of the decision of the appellate court reads:
WHEREFORE, finding no reversible error in the decision appealed from, the game is hereby AFFIRMED
in toto. With costs against plaintiffs-appellants.
The motion for reconsideration of said decision was denied in a resolution dated June 4, 1990 (Rollo,
Annex "B", p. 39).
Hence, this petition.
This Court in its resolution dated September 3, 1990 dismissed the petition for non-compliance with
certain requisites but later in its resolution dated November 5, 1990, it reinstated the petition (Rollo,
Petition pp. 9-28); Resolutions, pp. 52-53; 61).
The petition is devoid of merit.
The pivotal issue in this case is whether or not the foreclosure sale by the Sheriff on June 27, 1979, had
for its basis, a valid and subsisting mortgage contract. Otherwise stated, there is a need to ascertain
the intention of the parties as to the coverage of the mortgage in question with respect to future
advancements.
Contracts which are not ambiguous are to be interpreted according to their literal meaning and should
not be interpreted beyond their obvious intendment (Plastic Town Center Corp. v. NLRC, 172 SCRA 580
[1989]). Thus, where the intent of the parties has been shown unmistakably with clarity by the language
used, the literal meaning shall control (Paramount Surety & Ins. Co., Inc. v. Ago, 171 SCRA 481 [1989]).
Correspondingly, stipulations in the mortgage document constitute the law between the parties, which
must be complied with faithfully (Community and Loan Assn., Inc. v. Court of Appeals, 153 SCRA 564
[1987]).
As earlier stated, the Real Estate Mortgage in the case at bar expressly stipulates that it serves as
guaranty —
... for the payment of the loan ... of P20,000.00 and such other loans or other advances already obtained
or still to be obtained by the mortgagors as makers ... (Rollo, p. 14).
It has long been settled by a long line of decisions that mortgages given to secure future advancements
are valid and legal contracts; that the amounts named as consideration in said contract do not limit the
amount for which the mortgage may stand as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be gathered. A mortgage given to secure
advancements is a continuing security and is not discharged by repayment of the amount named in the
mortgage, until the full amount of the advancements are paid (Lim Julian v. Lutero, 49 Phil. 704-705
[1926]). In fact, it has also been held that where the annotation on the back of a certificate of title
about a first mortgage states "that the mortgage secured the payment of a certain amount of money
plus interest plus other obligations arising there under' there was no necessity for any notation of the
later loans on the mortgagors' title. It was incumbent upon any subsequent mortgagee or
encumbrances of the property in question to e e the books and records of the bank, as first mortgagee,
regarding the credit standing of the debtors Tady-Y v. PNB, 12 SCRA 19-20 [1964]).
The evidence on record shows that the amounts of P4,700.00 and P9,958.00 were accepted by the
bank on July 19 and August 11, 1980 as deposits for conventional redemption after the property
covered by real estate mortgage became the acquired asset of the bank and priced at P85,000.00 and
after petitioner had lost all rights of legal redemption because more than one year had already elapsed
from June 29, 1979, the date the certificate of sale was registered in the office of the Registry of Deeds
of Cavite. Indeed, the conventional redemption was subject to be exercised up to March 3, 1982 and
was extended up to April 19, 1982 for a fixed amount of P85,000.00. The respondent bank even favored
the petitioner by giving them the first preference to repurchase the property but they failed to avail of
this opportunity, although the bank "is certainly disposed to release at anytime" the deposits.
Further, the evidence on record also shows that the mortgage property was auctioned on June 27,
1979. The only bidder was the respondent bank which bid for P26,387.04. As the highest bidder, the
respondent bank can rightfully consolidate its title over the property. As aptly stated by respondent
Court:
It would then be unfair to impute that the trial court allowed defendant bank to appropriate the
mortgage property, because after the plaintiff-appellants failed to repurchase the property and filed
this action with 'lis pendens', the actions prevented the bank from negotiating for the sale of the
property to other buyers. (p. 36, Rollo)
PREMISES CONSIDERED, the petition is DISMISSED and the assailed decision and resolution of the
Intermediate Appellate Court (Court of Appeals) are AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 77502 January 15, 1988
EMILIA B. SANTIAGO, plaintiff-appellant,
vs.
PIONEER SAVINGS AND LOAN BANK, ET. AL., defendants-appellees.
MELENCIO-HERRERA, J.:
An appeal certified by the Court of Appeals to this Tribunal for determination since only a question of
law is involved.
The facts are not controverted.
Plaintiff-appellant, Emilia P. Santiago, is the registered owner of a parcel of land situated at Polo,
Valenzuela, Metro Manila, with an area of approximately 39,007 square meters, covered by T.C.T. No.
B-41669 (briefly, the Title) of the Register of Deeds of Caloocan City (hereinafter, simply the Disputed
Property).
On 7 April 1983, plaintiff-appellant executed a Special Power of Attorney in favor of Construction
Resources Corporation of the Philippines (CRCP, for short) authorizing and empowering CRCP:
1. To borrow money and make, execute, sign and deliver mortgages of real estate now owned by me
and standing in my name and to make, sign, execute and deliver any and all promissory notes necessary
in the premises.
2. For the purpose of these presents, or for the purpose of securing the payment of any loan,
indebtedness or obligation which my attorney-in-fact may obtain or contract with the bank, its renewal,
extension of payment of the whole or any part thereof, said attorney-in-fact is hereby authorized and
empowered to transfer and convey by way of mortgage in favor of the bank, ... (the Disputed Property).
On 8 April 1983, CRCP executed a Real Estate Mortgage over the Disputed Property in favor of FINASIA
Investment and Finance Corporation to secure a loan of P1 million. The mortgage contract specifically
provided that in the event of default in payment, the mortgagee may immediately foreclose the
mortgage judicially or extrajudicially. The promissory note evidencing the indebtedness was dated 4
March 1983.
The Special Power of Attorney executed by plaintiff-appellant in CRCP's favor, the Real Estate Mortgage
by CRCP in favor of FINASIA, together with the Board Resolution dated 28 March 1983 authorizing the
CRCP President to sign for and on its behalf, were duly annotated on the Title on 12 April 1983.
On 29 July 1983, FINASIA executed in favor of defendant-appellee, Pioneer Savings & Loan Bank, Inc.
(Defendant Bank, for brevity), an "Outright Sale of Receivables without Recourse" including the
receivable of P610,752.59 from CRCP.
On 21 May 1984, FINASIA executed a "Supplemental Deed of Assignment" in favor of Defendant Bank
confirming and ratifying the assignment in the latter's favor of the receivable of P610,752.59 from CRCP
and of the mortgage constituted by CRCP over the disputed property.
On 12 July 1984, the aforesaid Supplemental Deed of Assignment was inscribed on the Title.
CRCP failed to settle its obligation and Defendant Bank opted for extrajudicial foreclosure of the
mortgage. The notice of auction sale was scheduled on 16 May 1985.
On 13 May 1985, on learning of the intended sale, plaintiff-appellant filed before the Regional Trial
Court of Valenzuela, Metro Manila, Branch CLXXII, an action for declaration of nullity of the real estate
mortgage with an application for a Writ of Preliminary Injunction (Civil Case No. 2231-V-55).
On 14 May 1985, the Trial Court 1 issued a Temporary Restraining Order enjoining the sale at public
auction of the Disputed Property.
Basically, plaintiff-appellant claimed in her Complaint that she was not aware of any real estate
mortgage she had executed in favor of Defendant Bank; that she had not authorized anyone to execute
any document for the extrajudicial foreclosure of the real estate mortgage constituted on the Disputed
Property and that since the notice of Sheriffs sale did not include her as a party to the foreclosure
proceedings, it is not binding on her nor on her property.
Defendant Bank opposed the application for Preliminary Injunction and asserted its right to
extrajudicially foreclose the mortgage on the Disputed Property based on recorded public documents.
During the hearing on the petition for Preliminary Injunction, plaintiff-appellant, through counsel,
admitted the due execution of plaintiff-appellant's Special Power of Attorney in favor of CRCP, the Real
Estate Mortgage by CRCP to FINASIA, the Outright Sale of Receivables by FINASIA to Defendant Bank,
as well the Supplemental Deed of Assignment by FINASIA to Defendant Bank.
On 30 May 1985, the Trial Court granted the Petition for Preliminary Injunction enjoining the public
auction sale of the mortgaged property upon plaintiff-appellant's posting of a bond in the amount of
P100,000.00.
On 7 June 1985, Defendant Bank filed a Motion to Dismiss the main case on the ground that the
complaint did not state a cause of action followed on 24 June 1985 with a Motion for Reconsideration
of the Order granting the Writ of Preliminary Injunction, both of which Motions plaintiff-appellant
opposed.
On 30 August 1985, the Trial Court reconsidered its Order of 30 May 1985, dissolved the Writ of
Preliminary Injunction, and ordered the dismissal of the case for lack of cause of action.
Plaintiff-appellant appealed to the Court of Appeals, which, as stated at the outset, certified the case
to us on a pure question of law.
In the meantime, with the dissolution of the Preliminary Injunction, it appears that defendant Bank
completed its extrajudicial foreclosure and the Disputed Property was sold at public auction on January
1986, after a re-publication of the notice of sale, since the first scheduled sale was enjoined by the Trial
Court.
Plaintiff-appellant maintains that:
I. The Lower Court erred in dismissing the complaint and lifting the Preliminary Injunction by relying
solely on the admission of the counsel of the plaintiff-appellant of certain documentary exhibits
presented by the counsel of the defendant-appellee.
II. The Lower Court erred in relying on the case of Wenceslao Vinzons Tan vs. Director of Forestry which
it qualifies as "on all fours with the case at bar."
III. The Lower Court erred in ignoring the pertinent doctrines in the Supreme Court cases cited by the
plaintiff-appellant in her Opposition to Motion to Dismiss.
IV. The Lower Court erred in holding that notice of the scheduled sale of the land sent to the agent
(CRCP) is also Notice to the principal (Plaintiff Appellant), the land owner.
and prays that she be given "a real day in Court" so that she may testify and give her side of the case.
Upon the factual and legal context, the errors assigned are without merit.
It is true that the determination of the sufficiency of a cause of action must be limited to the facts
alleged in the Complaint and no other should be considered. 2 In this case, however, a hearing was held
and documentary evidence was presented, not on the Motion to Dismiss but on the question of
granting or denying plaintiff-appellant's application for a Writ of Preliminary Injunction, Counsel for
plaintiff-appellant admitted an the evidence presented. That being so, the Trial Court committed no
reversible error in considering said evidence in the resolution of the Motion to Dismiss.
Furthermore, "even if the complaint stated a valid cause of action, a motion to dismiss for insufficiency
of cause of action will be granted if documentary evidence admitted by stipulation disclosing facts
sufficient to defeat the claim enabled the court to go beyond disclosure in the complaint" (LOCALS No.
1470, No. 1469, and No. 1512 of the International Longshoremen's Association vs. Southern Pacific Co.,
6 Fed. Rules Service, p. 107; U.S. Circuit Court of Appeals, Fifth Circuit, Dec. 7, 1952; 131 F. 2d 605).
Thus, although the evidence of the parties were presented on the question of granting or denying
petitioner-appellant's application for a writ of preliminary injunction, the trial court correctly applied
said evidence in the resolution of the motion to dismiss. ... 3
While, as contended by plaintiff-appellant, some aspects of this case differ from those in Tan, the
doctrinal ruling therein, as quoted above, is squarely applicable to the case at bar. The cases which
plaintiff-appellant cites express the general rule when there is no "documentary evidence admitted by
stipulation disclosing facts sufficient to defeat the claim." Where, however, such evidence is before the
Court and has been stipulated upon, a Court can go "beyond the disclosure in the complaint." 4
Moreover, the rule is explicit that "rules of procedure are not to be applied in a very rigid, technical
sense; rules of procedure are used only to help secure substantial justice." 5
The evidence on record sufficiently defeats plaintiff-appellant's claim for relief from extrajudicial
foreclosure. Her Special Power of Attorney in favor of CRCP specifically included the authority to
mortgage the Disputed Property. The Real Estate Mortgage in favor of FINASIA explicitly authorized
foreclosure in the event of default. Indeed, foreclosure is but a necessary consequence of non-payment
of a mortgage indebtedness. Plaintiff-appellant, therefore, cannot rightfully claim that FINASIA, as the
assignee of the mortgagee, cannot extrajudicially foreclose the mortgaged property. A mortgage
directly and immediately subjects the property upon which it is imposed to the fulfillment of the
obligation for whose security it was constituted. 6 Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners
The assignment of receivables made by the original mortgagee, FINASIA, to Defendant Bank was valid, of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title
since a mortgage credit may be alienated or assigned to a third person, in whole or in part, with the (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a
formalities required by law. 7 Said formalities were complied with in this case. The assignment was deed of real estate mortgage in favor of petitioner Prudential Bank to secure the
made in a public instrument and proper recording in the Registry of Property was made. 8 While notice payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back of
may not have been given to plaintiff-appellant personally, the publication of the Notice of Sheriff's Sale, TCT No. 438157. On 4 August 1975, respondents executed the corresponding
as required by law, is notice to the whole world. promissory note, PN BD#75/C-252, covering the said loan, which provides that the
The full-dress hearing that plaintiff-appellant prays for wherein she intends to prove that she tried to loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2%
contact the President of CRCP to urge him to pay the mortgage loan, that she had failed to do so despite service charge, and that the note is secured by a real estate mortgage as
several attempts; that she did not know that FINASIA had sold its receivables including that of CRCP to aforementioned.[3] Significantly, the real estate mortgage contained the following
clause:
Defendant Bank; and that she was not informed by CRCP of the scheduled foreclosure sale will not tilt
the scales of justice in her favor in the face of incontrovertible documentary evidence before the Court.
That for and in consideration of certain loans, overdraft and other credit
Plaintiff-appellant's recourse is against CRCP, specially considering her allegation that the latter had
accommodations obtained from the Mortgagee by the Mortgagor and/or
failed to observe their agreement.
________________ hereinafter referred to, irrespective of number, as DEBTOR, and to
WHEREFORE, the Order appealed from is hereby AFFIRMED, with costs against plaintiff-appellant. secure the payment of the same and those that may hereafter be obtained, the
SO ORDERED. principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation
SECOND DIVISION owing to the Mortgagee, whether direct or indirect, principal or secondary as appears
PRUDENTIAL BANK, G.R. No. 150197 in the accounts, books and records of the Mortgagee, the Mortgagor does hereby
Petitioner, transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns,
Present: the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements
PUNO, J., now existing or which may hereafter be erected or constructed thereon, of which the
Chairman, Mortgagor declares that he/it is the absolute owner free from all liens and
- versus - AUSTRIA-MARTINEZ, incumbrances. . . .[4]
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ. On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-
DON A. ALVIAR and GEORGIA 345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was
B. ALVIAR, secured by a hold-out on the mortgagors foreign currency savings account with the
Respondents. Promulgated: bank under Account No. 129, and that the mortgagors passbook is to be surrendered
July 28, 2005 to the bank until the amount secured by the hold-out is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of
x-------------------------------------------------------------------x which the husband and wife were President and Chairman of the Board and Vice
President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As provided in
the note, the loan is secured by Clean-Phase out TOD CA 3923, which means that
DECISION the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be
converted into an ordinary loan in compliance with a Central Bank circular directing
TINGA, J.: the discontinuance of overdrafts.[7]

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Prudential Bank seeks the reversal of the Decision[1]of the Court of Appeals
dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the
Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its
approval of a straight loan of P545,000.00, the proceeds of which shall be used to
liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned
that the securities for the loan were the deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co. and the chattel mortgage on various heavy and transportation
equipment.[8]
On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the
obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real
estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam
Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment
was acknowledged by petitioner who accordingly released the mortgage over the two
properties.[9]
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the
mortgage on the property covered by TCT No. 438157. Per petitioners computation,
respondents had the total obligation of P1,608,256.68, covering the three (3)
promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345
for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due
interests and penalty charges. The public auction sale of the mortgaged property was
set on 15 January 1980.[10]
Respondents filed a complaint for damages with a prayer for the issuance of a writ of
preliminary injunction with the RTC of Pasig,[11] claiming that they have paid their
principal loan secured by the mortgaged property, and thus the mortgage should not
be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made
on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty
and Development Inc., which has a separate loan with the bank secured by a separate
mortgage.[12]
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to
proceed with the extra-judicial foreclosure.[13]Respondents sought reconsideration of
the decision.[14] On 24 August 1994, the trial court issued an Order setting aside its
earlier decision and awarded attorneys fees to respondents.[15] It found that only
the P250,000.00 loan is secured by the mortgage on the land covered by TCT No.
438157. On the other hand, the P382,680.83 loan is secured by the foreign currency
deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured
loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in
compliance with a Central Bank circular. According to the trial court, the blanket
mortgage clause relied upon by petitioner applies only to future loans obtained by the
mortgagors, and not by parties other than the said mortgagors, such as Donalco
Trading, Inc., for which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only
the promissory note BD#75/C-252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345
for P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by the
real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430
for P545,000.00 is not covered by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract
of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-
appellees attorneys fees for P20,000.00.[16]
The Court of Appeals affirmed the Order of the trial court but deleted the award of
attorneys fees.[17] It ruled that while a continuing loan or credit accommodation based
on only one security or mortgage is a common practice in financial and commercial
institutions, such agreement must be clear and unequivocal. In the instant case, the
parties executed different promissory notes agreeing to a particular security for each
loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the
property for the three loans is improper.[18]
The Court of Appeals, however, found that respondents have not yet paid
the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of G.B. Alviar Realty and
Development, Inc.[19]
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors
raised in the Court of Appeals as grounds herein.
Petitioner maintains that the blanket mortgage clause or the dragnet clause in the
real estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-
252, but also the two other promissory notes included in the application for
extrajudicial foreclosure of real estate mortgage.[20] Thus, it claims that it acted within
the terms of the mortgage contract when it filed its petition for extrajudicial
foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v.
Lutero,[21] Tad-Y v. Philippine National Bank,[22] Quimson v. Philippine National
Bank,[23] C & C Commercial v. Philippine National Bank,[24] Mojica v. Court of
Appeals,[25] and China Banking Corporation v. Court of Appeals,[26]all of which upheld
the validity of mortgage contracts securing future advancements.
Anent the Court of Appeals conclusion that the parties did not intend to include PN
BD#76/C-345 in the real estate mortgage because the same was specifically secured
by a foreign currency deposit account, petitioner states that there is no law or rule
which prohibits an obligation from being covered by more than one
security.[27] Besides, respondents even continued to withdraw from the same foreign
currency account even while the promissory note was still outstanding, strengthening
the belief that it was the real estate mortgage that principally secured all of
respondents promissory notes.[28] As for PN BD#76/C-345, which the Court of
Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner
posits that such security is not exclusive, as the dragnet clause of the real estate
mortgage covers all the obligations of the respondents.[29]
Moreover, petitioner insists that respondents attempt to evade foreclosure by the
expediency of stating that the promissory notes were executed by them not in their
personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in
fact for home construction and personal consumption of respondents. Thus, it states
that there is a need to pierce the veil of corporate fiction.[30]
Finally, petitioner alleges that the mortgage contract was executed by respondents
with knowledge and understanding of the dragnet clause, being highly educated
individuals, seasoned businesspersons, and political personalities.[31] There was no
oppressive use of superior bargaining power in the execution of the promissory notes
and the real estate mortgage.[32]
For their part, respondents claim that the dragnet clause cannot be applied to the
subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans
are covered by separate promissory notes that expressly provide for a different form
of security.[33] They reiterate the holding of the trial court that the blanket mortgage
clause would apply only to loans obtained jointly by respondents, and not to loans
obtained by other parties.[34] Respondents also place a premium on the finding of the
lower courts that the real estate mortgage clause is a contract of adhesion and must
be strictly construed against petitioner bank.[35]
The instant case thus poses the following issues pertaining to: (i) the validity of the
blanket mortgage clause or the dragnet clause; (ii) the coverage of the blanket
mortgage clause; and consequently, (iii) the propriety of seeking foreclosure of the
mortgaged property for the non-payment of the three loans.
At this point, it is important to note that one of the loans sought to be included in the
blanket mortgage clause was obtained by respondents for Donalco Trading, Inc.
Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading,
Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of
corporate fiction and hold respondents liable even for obligations they incurred for
the corporation. The mortgage contract states that the mortgage covers as well as
those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct
or indirect, principal or secondary. Well-settled is the rule that a corporation has a
personality separate and distinct from that of its officers and stockholders. Officers of
a corporation are not personally liable for their acts as such officers unless it is shown
that they have exceeded their authority.[36] However, the legal fiction that a
corporation has a personality separate and distinct from stockholders and members
may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to
confuse legitimate issues.[37] PN BD#76/C-430, being an obligation of Donalco
Trading, Inc., and not of the respondents, is not within the contemplation of the
blanket mortgage clause. Moreover, petitioner is unable to show that respondents are
hiding behind the corporate structure to evade payment of their obligations. Save for
the notation in the promissory note that the loan was for house construction and
personal consumption, there is no proof showing that the loan was indeed for
respondents personal consumption. Besides, petitioner agreed to the terms of the
promissory note. If respondents were indeed the real parties to the loan, petitioner, a
big, well-established institution of long standing that it is, should have insisted that
the note be made in the name of respondents themselves, and not to Donalco Trading
Inc., and that they sign the note in their personal capacity and not as officers of the
corporation.
Now on the main issues.
A blanket mortgage clause, also known as a dragnet clause in American
jurisprudence, is one which is specifically phrased to subsume all debts of past or
future origins. Such clauses are carefully scrutinized and strictly
construed.[38] Mortgages of this character enable the parties to provide continuous
dealings, the nature or extent of which may not be known or anticipated at the time,
and they avoid the expense and inconvenience of executing a new security on each
new transaction.[39] A dragnet clause operates as a convenience and accommodation
to the borrowers as it makes available additional funds without their having to execute
additional security documents, thereby saving time, travel, loan closing costs, costs
of extra legal services, recording fees, et cetera.[40] Indeed, it has been settled in a long
line of decisions that mortgages given to secure future advancements are valid and
legal contracts,[41] and the amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as security if from the four corners
of the instrument the intent to secure future and other indebtedness can be
gathered.[42]
The blanket mortgage clause in the instant case states:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that may hereafter be obtained, the
principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation
owing to the Mortgagee, whether direct or indirect, principal or secondary as appears
in the accounts, books and records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns,
the parcels of land which are described in the list inserted on the back of this
document, and/or appended hereto, together with all the buildings and improvements
now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .[43] (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
intended the real estate mortgage to secure not only the P250,000.00 loan from the
petitioner, but also future credit facilities and advancements that may be obtained by
the respondents. The terms of the above provision being clear and unambiguous,
there is neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of dragnet clauses or blanket
mortgage clauses, are of a different factual milieu from the instant case. There, the
subsequent loans were not covered by any security other than that for the mortgage
deeds which uniformly contained the dragnet clause.
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 promissory notes 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.[44] 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,[45] such deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it from the arrangement.[46]
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.[47]
In another case, it was held that a mortgage with a dragnet clause is an offer by the
mortgagor to the bank to provide the security of the mortgage for advances of and
when they were made. Thus, it was concluded that the offer was not accepted by the
bank when a subsequent advance was made because (1) the second note was secured
by a chattel mortgage on certain vehicles, and the clause therein stated that the note
was secured by such chattel mortgage; (2) there was no reference in the second note
or chattel mortgage indicating a connection between the real estate mortgage and the
advance; (3) the mortgagor signed the real estate mortgage by her name alone,
whereas the second note and chattel mortgage were signed by the mortgagor doing
business under an assumed name; and (4) there was no allegation by the bank, and
apparently no proof, that it relied on the security of the real estate mortgage in making
the advance.[48]
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.[49]
It was therefore improper for petitioner in this case to seek foreclosure of the
mortgaged property because of non-payment of all the three promissory notes. While
the existence and validity of the dragnet clause cannot be denied, there is a need to
respect the existence of the other security given for PN BD#76/C-345. The foreclosure
of the mortgaged property should only be for the P250,000.00 loan covered by PN
BD#75/C-252, and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in form were executed to
secure any and all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security given for the payment of
such note, was in the absence of a special agreement to the contrary, within the
protection of the mortgage, notwithstanding the giving of the special security.[50] This
is recognition that while the dragnet clause subsists, the security specifically executed
for subsequent loans must first be exhausted before the mortgaged property can be
resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes
subject of this case, is a contract of adhesion, to which respondents only participation
was the affixing of their signatures or adhesion thereto.[51] A contract of adhesion is
one in which a party imposes a ready-made form of contract which the other party
may accept or reject, but which the latter cannot modify.[52]
The real estate mortgage in issue appears in a standard form, drafted and prepared
solely by petitioner, and which, according to jurisprudence must be strictly construed
against the party responsible for its preparation.[53] If the parties intended that the
blanket mortgage clause shall cover subsequent advancement secured by separate
securities, then the same should have been indicated in the mortgage contract.
Consequently, any ambiguity is to be taken contra proferentum, that is, construed
against the party who caused the ambiguity which could have avoided it by the
exercise of a little more care.[54] To be more emphatic, any ambiguity in a contract
whose terms are susceptible of different interpretations must be read against the
party who drafted it,[55] which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by
petitioner, and as such are likewise contracts of adhesion. Being of such nature, the
same should be interpreted strictly against petitioner and with even more reason since
having been accomplished by respondents in the presence of petitioners personnel
and approved by its manager, they could not have been unaware of the import and
extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial
court found that respondents have not yet paid the P250,000.00, and gave no
credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly
subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-
345, has been exhausted, subject of course to defenses which are available to Pursuant to the notice, the properties were sold at public auction on November 5, 1991. The auction
respondents. began at 9:00 a.m. and was concluded after 20 minutes with petitioner as the highest bidder. [6]
On March 16, 1993, respondent spouses filed in the Regional Trial Court (RTC) of Ormoc City, Branch
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA- 12 a complaint for annulment of extrajudicial foreclosure of real estate mortgage and the November 5,
G.R. CV No. 59543 is AFFIRMED. 1991 auction sale.[7] They invoked Section 4 of Act 3135 which provides:
Costs against petitioner.
SO ORDERED. Section 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 peace of the municipality in which such sale has to be made, or of a notary public of said
FIRST DIVISION municipality, who shall be entitled to collect a fee of Five pesos for each day of actual work performed,
in addition to his expenses. (emphasis supplied)

PHILIPPINE NATIONAL BANK, G.R. No. 167058 Petitioners claimed that the provision quoted above must be observed strictly. Thus, because the public
Petitioner, auction of the foreclosed properties was held for only 20 minutes (instead of seven hours as required by
Present: law), the consequent sale was void.

PUNO, C.J., Chairperson, On November 4, 2004, the RTC issued an order[8] annulling the November 5, 1991 sale at public auction.
CARPIO, It held:
- v e r s u s - CORONA,
AZCUNA and [T]he rationale behind the holding of auction sale between the hours of 9:00 in the morning and 4:00 in
LEONARDO-DE CASTRO, JJ. the afternoon of a particular day as mandated in Section 4 of Act 3135 is to give opportunity to more
would-be bidders to participate in the auction sale thus giving the judgment-debtor more opportunity to
recover the value of his or her property subject of the auction sale.
SPOUSES TOMAS CABATINGAN
and AGAPITA EDULLANTES Petitioner moved for reconsideration but it was denied in an order dated February 7, 2005. [9] Hence, this
Represented by RAMIRO DIAZ petition.
as Their Attorney-in-Fact,
Respondents. Promulgated: The issue here is whether a sale at public auction, to be valid, must be conducted the whole day from
July 9, 2008 9:00 a.m. until 4:00 p.m. of the scheduled auction day.

x--------------------------------------------------x Petitioner contends that the RTC erred in interpreting Section 4 of Act 3135. The law only prohibits the
conduct of a sale at any time before nine in the morning and after four in the afternoon. Thus, a sale held
within the intervening period (i.e., at any time between 9:00 a.m. and 4:00 p.m.), regardless of duration,
RESOLUTION is valid.

CORONA, J.: We grant the petition.

Respondent spouses Tomas Cabatingan and Agapita Edullantes obtained two loans, secured by a real
estate mortgage,[1] in the total amount of P421,200[2] from petitioner Philippine National Bank.
However, they were unable to fully pay their obligation despite having been granted more than enough
time to do so.[3] Thus, on September 25, 1991, petitioner extrajudicially foreclosed on the mortgage
pursuant to Act 3135.[4]
Thereafter, a notice of extrajudicial sale[5] was issued stating that the foreclosed properties would be sold
at public auction on November 5, 1991 between 9:00 a.m. and 4:00 p.m. at the main entrance of the
office of the Clerk of Court on San Pedro St., Ormoc City.
We note that neither the previous rule (Administrative Order No. 3) [10] nor the current rules (A.M. No.
99-10-05-O, as amended, and the guidelines for its enforcement, Circular No. 7-2002)[11] governing the
conduct of foreclosure proceedings provide a clear answer to the question at hand.
Statutes should be sensibly construed to give effect to the legislative intention.[12] Act 3135 regulates the
extrajudicial sale of mortgaged real properties[13] by prescribing a procedure which effectively
safeguards the rights of both debtor and creditor. Thus, its construction (or interpretation) must be
equally and mutually beneficial to both parties.
Section 4 of Act 3135 provides that the sale must take place between the hours of nine in the morning
and four in the afternoon. Pursuant to this provision, Section 5 of Circular No. 7-2002 states:
Section 5. Conduct of extrajudicial foreclosure sale-- DECISION
GARCIA, J.:
It happened before; it will likely happen again. A developer embarks on an aggressive marketing
a. The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall campaign and succeeds in selling units in a yet to-be completed condominium project. Short of funds,
conduct the sale between the hours of 9 a.m. and 4 p.m. of the date of the auction (Act 3135, Sec. the developer borrows money from a bank and, without apprising the latter of the pre-selling
4).[14] The property mortgaged shall be awarded to the party submitting the highest bid and, in case of a transactions, mortgages the condominium complex, but also without informing the buyers of the
tie, an open bidding shall be conducted between the highest bidders. Payment of the winning bid shall mortgage constitution. Saddled with debts, the developer fails to meet its part of the bargain. The
be made in either cash or in manager's check, in Philippine Currency, within five (5) days from
defaulting developer is soon sued by the fully-paid unit buyers for specific performance or refund and
notice. (emphasis supplied)
is threatened at the same time with a foreclosure of mortgage. Having his hands full parrying legal
xxxxxxxxx blows from different directions, the developer seeks a declaration of suspension of payment, followed
by a petition for rehabilitation with suspension of action.
With a slight variation, the scenario thus depicted describes the instant case which features respondent
A creditor may foreclose on a real estate mortgage only if the debtor fails to pay the principal obligation ASB Development Corporation (ASB, for short), as the defaulting developer of the BSA Twin Towers
when it falls due.[15] Nonetheless, the foreclosure of a mortgage does not ipso facto extinguish a debtors Condominium Project (BSA Towers or Project, for short) situated at Ortigas Center, Mandaluyong City,
obligation to his creditor. The proceeds of a sale at public auction may not be sufficient to extinguish the and respondents Danilo A. Dylanco and SLGT Holdings, Inc. (Dylanco and SLGT, respectively,
liability of the former to the latter.[16] For this reason, we favor a construction of Section 4 of Act 3135 hereinafter) as the unit buyers. Petitioners Metropolitan Bank and Trust Company, Inc. (Metrobank)
that affords the creditor greater opportunity to satisfy his claim without unduly rewarding the debtor for and United Coconut Planters Bank (UCPB) are the lending-mortgagee banks.
not paying his just debt. And now to the case:
Before the Court are these separate petitions for review under Rule 45 of the Rules of Court separately
The word between ordinarily means in the time interval that separates.[17] Thus, between the hours of interposed by Metrobank and UCPB to nullify and set aside the consolidated Decision1 and
nine in the morning and four in the afternoon merely provides a time frame within which an auction sale Resolution2 dated June 29, 2006, and October 31, 2006, respectively, of the Court of Appeals (CA) in CA-
may be conducted. Therefore, a sale at public auction held within the intervening period provided by law G.R. SP No. 92807, CA-G.R. SP No. 92808 and CA-G.R. SP No. 92882.
(i.e., at any time from 9:00 a.m. until 4:00 p.m.) is valid, without regard to the duration or length of time The first assailed issuance affirmed the earlier Decision3 dated October 10, 2005 of the Office of the
it took the auctioneer to conduct the proceedings.
President (OP, hereinafter), as modified in its Order4 of December 22, 2005, in consolidated OP Case
No. 05-F-212 and OP Case No. 05-G-215. The second assailed issuance, on the other hand, denied
In this case, the November 5, 1991 sale at public auction took place from 9:00 a.m. to 9:20 a.m. Since it
was conducted within the time frame provided by law, the sale was valid. reconsideration of the first.
Per its Resolution5 of March 26, 2007, the Court ordered the consolidation of these petitions.
WHEREFORE, the petition is hereby GRANTED. The November 4, 2004 and February 7, 2005 orders From the petitions and the comments thereon, with their respective annexes, and other pleadings, the
of the Regional Trial Court of Ormoc City, Branch 12 in Civil Case No. 3111-0 Court gathers the following facts:
are REVERSED and SET ASIDE. On October 25, 1995, Dylanco and SLGT each entered into a contract to sell with ASB for the purchase
of a unit (Unit 1106 for Dylanco and Unit 1211 for SLGT) at BSA Towers then being developed by the
latter. As stipulated, ASB will deliver the units thus sold upon completion of the construction or before
December 1999. Relying on this and other undertakings, Dylanco and SLGT each paid in full the contract
Republic of the Philippines price of their respective units. The promised completion date came and went, but ASB failed to deliver,
SUPREME COURT as the Project remained unfinished at that time. To make matters worse, they learned that the lots on
Manila which the BSA Towers were to be erected had been mortgaged6 to Metrobank, as the lead bank, and
FIRST DIVISION UCPB7 without the prior written approval of the Housing and Land Use Regulatory Board (HLURB).
G.R. Nos. 175181-82 September 14, 2007 Alarmed by this foregoing turn of events, Dylanco, on August 10, 2004, filed with the HLURB a
METROPOLITAN BANK and TRUST COMPANY, INC., petitioner, complaint8for delivery of property and title and for the declaration of nullity of mortgage. A similar
vs. complaint9 filed by SLGT followed three (3) days later. At this time, it appears that the ASB Group of
SLGT HOLDINGS, INC., DANILO A. DYLANCO and ASB DEVELOPMENT CORPORATION, respondents. Companies, which included ASB, had already filed with the Securities and Exchange Commission a
x - - - - - - - - - - - - - - - - - - - - - - - -x petition for rehabilitation and a rehabilitation receiver had in fact been appointed.
G.R. Nos. 175354 & 175387-88 September 14, 2007 What happened next are laid out in the OP decision adverted to above, thus:
UNITED COCONUT PLANTERS BANK, petitioner, In response to the above complaints, ASB alleged … that it encountered liquidity problems sometime
vs. in … 2000 after its creditors [UCPB and Metrobank] simultaneously demanded payments of their
SLGT HOLDINGS, INC. and ASB DEVELOPMENT CORPORATION, respondents.
loans…; that on May 4, 2000, the … Commission (SEC) granted its petition for rehabilitation; that it
negotiated with UCPB and Metrobank … but nothing came out positive from their negotiation ….
On the other hand, Metrobank claims that complainants [Dylanco and SLGT] have no personality to ask
for the nullification of the mortgage because they are not parties to the mortgage transaction …; that
the complaints must be dismissed because of the ongoing rehabilitation of ASB; xxx that its claim
against ASB, including the mortgage to the [Project] have already been transferred to Asia Recovery
Corporation; xxx.
UCPB, for its part, denies its liability to SLGT [for lack of privity of contract] … [and] questioned the
personality of SLGT to challenge the validity of the mortgage reasoning that the latter is not party to
the mortgage contract … [and] maintains that the mortgage transaction was done in good faith….
Finally, it prays for the suspension of the proceedings because of the on-going rehabilitation of ASB.
In resolving the complaint in favor of Dylanco and SLGT, the Housing Arbiter ruled that the mortgage
constituted over the lots is invalid for lack of mortgage clearance from the HLURB. He also rebuffed the
banks’ request to suspend the proceedings under Section 5 © of Presidential Decree (PD) No. 902-A as
the banks are parties under receivership. xxx
The HLURB Board of Commissioners, [per its separate Decision both dated April 21, 2005] affirmed the
above rulings … with the modification that ASB should cause the subdivision of the mother titles into
condominium certificates of title of Dylanco and SLGT free from all liens and encumbrances. [On June
28, 2005 the HLURB denied the separate motions of Metrobank and UCPB for reconsideration. (Words
in brackets and emphasis added).
For perspective, the decretal portion of the HLURB’s underlying decision10 with respect to
the Dylanco case, docketed thereat as REM-A-050208-0021, reads as follows:
WHEREFORE, the appeals are dismissed for lack of merit and the decision of the office below is modified
as follows:
1. Declaring the mortgage over the subject condominium unit in favor of respondent [Metrobank] as
null and void for violation of Section 18 of [PD] No. 957;
2. Directing respondent bank to cancel/release the mortgage on the subject condominium unit [Unit
1106]; and accordingly, surrender/release the title thereof to the complainant;
3. Directing respondent Bank to release to respondent ASB the transfer certificate of title of the lots
covering the BSA Twin Towers Project; directing ASB to cause the subdivision of the mother titles into
condominium certificates of tile within 90 days and to thereafter deliver title to complainant [Dylanco]
free from all liens and encumbrances; [and]
4. Ordering respondent ASB to complete the subject condominium project as per SEC Order dated 03
November 2004. (Words in brackets added)
On the other hand, the HLURB decision11 on the SLGT case, docketed as REM-A-050208-0020, was, on
all material points, of the same tenor as in the Dylanco case, albeit the unit involved is different and
the banks referred to in SLGT are UCPB and Metrobank.
From the HLURB resolutions in REM-A-050208-0020 and REM-A-050208-0021, Metrobank appealed to
the OP, followed by UCPB’s own appeal from the resolution in REM-A-050208-0020. Owing to the
obvious similarities in both cases, the OP had them consolidated, the Dylanco case docketed as O.P.
Case No. 05-F-212 and the SLGT case as O.P. Case No. 05-F-215.
On October 10, 2005, the OP rendered a decision12 against Metrobank and UCPB, disposing as follows:
WHEREFORE, premises considered, the appeals filed by Metropolitan Bank and Trust Company and the
United Coconut Planters Bank are hereby DISMISSED for lack of merit.
SO ORDERED.
From the October 10, 2005 OP Decision, petitioner banks and SLGT interposed their respective motions
for reconsideration, SLGT excepting to that portion of the decision declaring the mortgage contract as
void only insofar as it and Dylanco are concerned. To SLGT, the indivisibility of a mortgage contract
requires that a declaration of nullity – or a validity for that matter - should cover the entire mortgage.
On December 22, 2005, the OP issued an Order13 acting favorably on SLGT’s motion, but denying those
of Metrobank and UCPB. The fallo of the OP’s Order reads:
"WHEREFORE, the Motions for Reconsideration of [Metrobank] and [UCPB] are hereby DENIED. With
respect to the partial motion for reconsideration of SLGT …, the same is hereby GRANTED. Accordingly,
the mortgage contract executed between ASB Development Corporation and respondent banks
(Metrobank and UCPB) is hereby declared null and void in its entirety. Respondents-appellants are
hereby ordered to release to ASBDC [TCT] Nos. 9834 and 9835, and for ASBDC to cause the subdivision
of the mother titles into condominium certificates of title, and thereafter deliver to complainants [SLGT
and Dylanco] their respective condominium certificates of title free of lien and encumbrances.
The records of the instant cases are hereby remanded to [HLURB] for its appropriate disposition.
SO ORDERED. (Emphasis and words in brackets added)
In time, petitioner banks went to the CA on a petition for review under Rule 43 of the Rules of Court
whereat the appellate recourses were likewise consolidated and docketed as CA-G.R. SP No. 92807, CA-
G.R. SP No. 92808 and CA-G.R. SP No. 92882.
As stated at the threshold hereof, the appellate court, in its assailed Decision14 of June 29, 2006,
affirmed the OP’s October 10, 2005 Decision as modified in its December 22, 2005 Order, the
affirmance being predicated, in gist, on the following main premises:
1. A mortgage constituted on a condominium project without the approval of the HLURB in violation
of the prescription of Presidential Decree (PD) 957, like the ASB-Metrobank-Trust Division mortgage
contract, is void; a mortgage is indivisible and cannot be divided into a valid and invalid parts.
2. The complaints of Dylanco and SLGT are not covered by the order issued by the SEC suspending all
actions and proceedings against ASB.
Petitioner banks’ separate motions for reconsideration were later denied in the CA’s equally assailed
resolution15dated October 31, 2006.
Hence, these separate petitions.
Although formulated a bit differently, the grounds and arguments advanced in support of the petitions
converge and focus on two issues, to wit:
1. The declaration of nullity of the entire mortgage constituted on the project land site and the
improvements thereon; and
2. The applicability to this case of the suspension order granted by SEC to ASB.
We DENY.
As to the first issue, it is the petitioners’ posture that the CA, and, before it, the OP, erred when it
declared the subject mortgage contract void in its entirety and then directed both petitioner banks to
release the mortgage on the Project.
We are not persuaded.
Both petitioners do not dispute executing the mortgage in question without the HLURB’s prior written
approval and notice to both individual respondents. Section 18 of Presidential Decree No. (PD) 957
– The Subdivision and Condominium Buyers’ Protective Decree – provides:
SEC. 18. Mortgages. - No mortgage of any unit or lot shall be made by the owner or developer without
prior written approval of the [HLURB]. Such approval shall not be granted unless it is shown that the
proceeds of the mortgage loan shall be used for the development of the condominium or subdivision
project …. The loan value of each lot or unit covered by the mortgage shall be determined and the
buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his option, pay
his installment for the lot or unit directly to the mortgagee who shall apply the payments to the
corresponding mortgage indebtedness secured by the particular lot or unit being paid for …. (Emphasis
and word in bracket added)
There can thus be no quibbling that the project lot/s and the improvements introduced or be
introduced thereon were mortgaged in clear violation of the aforequoted provision of PD 957. And to
be sure, Dylanco and SLGT, as Project unit buyers, were not notified of the mortgage before the release
of the loan proceeds by petitioner banks.
As it were, PD 957 aims to protect innocent subdivision lot and condominium unit buyers against
fraudulent real estate practices. Its preambulatory clauses say so and the Court need not belabor the
matter presently. Section 18, supra, of the decree directly addresses the problem of fraud and other
manipulative practices perpetrated against buyers when the lot or unit they have contracted to
acquire, and which they religiously paid for, is mortgaged without their knowledge, let alone their
consent. The avowed purpose of PD 957 compels, as the OP correctly stated, the reading of Section 18
as prohibitory and acts committed contrary to it are void.16 Any less stringent construal would only
accord unscrupulous developers and their financiers unbridled discretion to follow or not to follow PD
957 and thus defeat the very lofty purpose of that decree. It thus stands to reason that a mortgage
contract executed in breach of Section 18 of the decree is null and void.
In Philippine National Bank v. Office of the President,17 involving a defaulting mortgagor-subdivision
developer, a mortgagee-bank and a lot buyer, the Court expounded on the rationale behind PD 957, as
a tool to protect subdivision lot and/or condominium unit buyers against developers and mortgaging
banks, in the following wise:
xxx [T]he unmistakable intent of the law [is] to protect innocent lot buyers from scheming subdivision
developers. As between these small lot buyers and the gigantic financial institutions which the
developers deal with, it is obvious that the law – as an instrument of social justice – must favor the
weak. Indeed, the petitioner bank had at its disposal vast resources with which it could adequately
protect its loan activities, and therefore is presumed to have conducted the usual "due diligence"
checking and ascertaining … the actual status, condition, utilization and occupancy of the property
offered as collateral. xxx On the other hand, private respondents obviously were powerless to discover
the attempt of the land developer to hypothecate the property being sold to them. It was precisely in
order to deal with this kind of situation that P.D. 957 was enacted, its very essence and intendment
being to provide a protective mantle over helpless citizens who may fall prey to the razzmatazz of what
P.D. 957 termed "unscrupulous subdivision and condominium sellers."
The Court then quoted with approval the following instructive comments of the Solicitor General:
Verily, if P.D. 957 were to exclude from its coverage the aforecited mortgage contract, the vigorous
regulation which P.D. 957 seeks to impose on unconscientious subdivision sellers will be translated into
a feeble exercise of police power just because the iron hand of the state cannot particularly touch
mortgage contracts badged with the unfortunate accident of having been constituted prior to the
enactment of P.D. 957. Indeed, it would be illogical in the extreme if P.D. 957 is to be given full force
and effect and yet, the fraudulent practices and manipulations it seeks to curb. xxx
Given the foregoing perspective, the next question to be addressed turns on whether or not the nullity
extends to the entire mortgage contract.
The poser should be resolved, as the CA and OP did resolve it, in the affirmative. This disposition stems
from the basic postulate that a mortgage contract is, by nature, indivisible.18 Consequent to this
feature, a debtor cannot ask for the release of any portion of the mortgaged property or of one or
some of the several properties mortgaged unless and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial fulfillment of the obligation. Hence, it is provided
that the debtor who has paid a part of the debt cannot ask for the proportionate extinguishments of
the mortgage as long as the debt is not completely satisfied.
The situation obtaining in the case at bench is within the purview of the aforesaid rule on the
indivisibility of mortgage. It may be that Section 18 of PD 957 allows partial redemption of the mortgage
in the sense that the buyer is entitled to pay his installment for the lot or unit directly to the mortgagee
so as to enable him - the said buyer - to obtain title over the lot or unit after full payment thereof. Such
accommodation statutorily given to a unit/lot buyer does not, however, render the mortgage contract
also divisible. Generally, the divisibility of the principal obligation is not affected by the indivisibility of
the mortgage. The real estate mortgage voluntarily constituted by the debtor (ASB) on the lots or units
is one and indivisible. In this case, the mortgage contract executed between ASB and the petitioner
banks is considered indivisible, that is, it cannot be divided among the different buildings or units of
the Project. Necessarily, partial extinguishment of the mortgage cannot be allowed. In the same token,
the annulment of the mortgage is an all or nothing proposition. It cannot be divided into valid or invalid
parts. The mortgage is either valid in its entirety or not valid at all. In the present case, there is doubtless
only one mortgage to speak of. Ergo, a declaration of nullity for violation of Section 18 of PD 957 should
result to the mortgage being nullified wholly.
It will not avail the petitioners any to feign ignorance of PD 957 requiring prior written approval of the
HLURB, they being charged with knowledge of such requirement since granting loans secured by a real
estate mortgage is an ordinary part of their business.
Neither could they rightly claim to be mortgagees in good faith. We shall explain.
The unyielding rule is that persons dealing with property brought under the Torrens system of land
registration have the right to rely on what appears on the certificate of title without inquiring
further;19 that in the absence of anything to excite or arouse suspicion that should impel a reasonably
cautious person to make such further inquiry, a would-be mortgagee is without obligation to look
beyond the certificate and investigate the title of the mortgagor. Such rule, however, does not apply
to mortgagee-banks,20 their business being one affected with public interest, holding as they do and
keeping, in trust, money pertaining to the depositing public which they should guard with earnest.
Unlike private individuals, it behooves banks to exercise greater care and prudence in their dealings,
including those involving registered lands.21 As we wrote in Cruz v. Bancom Finance Corporation,22 "a
banking institution is expected to exercise due diligence before entering into a mortgage contract. The
ascertainment of the status or condition of a property offered to it as a security must be standard and
indispensable part of its operations." A bank that failed to observe due diligence cannot be accorded
the status of a bona fide mortgagee.23
Surely, petitioner banks cannot plausibly assert compliance with the due diligence requirement exacted
contextually by the situation. For, have they done so, they could have easily discovered that there is an
on-going condominium project on the lots offered as mortgage collateral and, as such, could have
aroused their suspicion that the developer may have engaged in pre-selling, or, with like effect, that
there may be unit buyers therein, as was the case here. Having been short in care and prudence,
petitioners cannot be deemed to be mortgagees in good faith entitled to the benefits arising from such
status.
This thus brings us to the next issue of whether or not the HLURB, OP and, necessarily, the CA reversibly
erred in continuing with the resolution of this case notwithstanding the rehabilitation proceedings
before, and the appointment by, the SEC of a receiver for ASB which, under Section 6 (c)24 of PD 902-
A, as amended,25necessarily suspended "all actions for claims" against distressed corporations.
Petitioners maintain that individual respondents’ demands initially filed with the HLURB partake of the
nature of "claim" within the contemplation of the aforesaid suspensive section of PD 902-A. They
cite Sobrejuanite v. ASB Development Corporation26 to drive home the idea of the encompassing reach
of the word "claim" which they deem to include any and all claims or demands of whatever nature and
character.
The Court is unable to accommodate the petitioners.
As we articulated in Arranza v. B.F. Homes, Inc.,27 the fact that respondent B.F. Homes is under
receivership does not preclude the continuance before the HLURB of the case for specific performance
of a real estate developer’s obligation under PD 957. For, "[E]"ven if respondent is under receivership,
its obligations as a real estate developer under P.D. 957 are not suspended. Section 6 (C) of P.D. No.
902-A, as amended …, on ‘suspension of all actions for claims against corporations’ refers solely to
monetary claims."28 Says the Court further:
xxx The appointment of a receiver does not dissolve the corporation, nor does it interfere with the
exercise of corporate rights. In this case where there appears to be no restraints imposed upon
respondent as it undergoes rehabilitation receivership, respondent … continues or should continue to
perform its contractual and statutory responsibilities to petitioners as homeowners.
xxx xxx xxx
No violation of the SEC order suspending payments to creditors would result as far as petitioners’
complaint before the HLURB is concerned. To reiterate, what petitioners seek to enforce are
respondent’s obligation as subdivision developer [for which the HLURB, not the SEC, is equipped with
the expertise to deal with the matter]. Such claims are basically not pecuniary in nature.29
Arranza actually complemented the earlier case of Finasia Investments and Finance Corporation v.
CA30 where the Court defined and explained the term "claim" in the following wise:
We agree … that the word "claim" as used in Sec. 6 (c) of P.D. 902-A, as amended, refers to debts or
demands of a pecuniary nature. It means "the assertion of a right to have money paid. It is used in
special proceedings like those before administrative court, on insolvency. Consequently, the word
"claim"
Petitioners’ citation and undue reliance on Sobrejuanite is quite misplaced in view of differing set of
facts. In that case, the Court held that the HLURB is bereft of jurisdiction to proceed with the case
during the pendency of the rehabilitation proceedings since the spouses Sobrejuanite’s claim involves
pecuniary consideration, or a claim for refund of the purchase price paid, with interest, to be precise.
Unlike the spouses Sobrejuanite in Sobrejuanite, SLGT’s and Dylanco’s complaints in the instant case
did not seek monetary recovery or to touch the corporate coffers of ASB ahead of others. They did not
even consider themselves as money claimants. All they ask was for the enforcement of ASB’s statutory
and contractual obligations as a condominium developer. In the concrete, they pressed for the delivery
of their units free from all liens and encumbrances and the declaration of nullity of the mortgage in
question arising from the breach of Section 18 of PD 957.
Significantly, in Sobrejuanite, the Court stated the observation, in reference to the Arranza case, that
"the proceedings before the HLURB [may] be suspended during the rehabilitation [of the ailing
corporation]" "if the claim was for monetary awards."31
The Court is very much aware of A.M. No. 00-8-10-SC or the Interim Rules on Corporate
Rehabilitation32 which defines the term "claim" as including all claims or demands of whatever
character against a debtor or its property, whether for money or otherwise. But as aptly explained by
the CA, Section 2433 of the interim rules limits the coverage of the Rules on rehabilitation and
consequently the rule of suspension of action to those who stand in the category or debtors and
creditors. The relationship between the petitioner banks, as mortgagor of the ASB property, on one
hand, and respondents SLGT and Dylanco, as unit buyers, on the other, cannot be that of a debtor-
creditor as to bring the case within the purview of the rules on corporate recovery, let alone
the Sobrejuanite case. Then, too, the vinculum that binds SLGT/Dylanco, as unit buyers and as suitors
before the HLURB, and ASB is far from being akin to that of debtor-creditor. As it were, SLGT/Dylanco
sued ASB for having constituted, in breach of PD 957, a mortgage on the condominium project without
prior HLURB approval and so much as notifying them of the loan release for which reason they prayed
for the delivery of their units free from all liens and encumbrances. With the view we take of the case,
the complaint of individual respondents is not in the nature of "claims" that should be covered by the
suspensive effect of a rehabilitation proceeding.
Looking beyond the strictly legal issues involved in this case, however, the pendency of the
rehabilitation proceedings ought not, as stressed in the Order34 of the OP, be invoked to defeat or deny
the claim of individual respondents. Suspending the proceedings would only perpetuate and compound
the injustice committed by ASB on SLGT and Dylanco. It would reduce to pure jargon the beneficent
provisions and render illusory the purpose of PD 957 which, to repeat, is to protect innocent unit and
lot buyers from scheming subdivision/condominium owners/developers. As a matter of good
conscience, the Court cannot allow it under the factual and legal premises surrounding this case.
WHEREFORE, the instant petitions are DENIED and the assailed CA Decision and Resolution
are AFFIRMED.
Cost against the petitioners.
SO ORDERED.
FIRST DIVISION
SPOUSES FRANCISCO D. YAP and WHELMA S. YAP, G.R. No. 171868
Petitioners,
- versus -
SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES MARCELINO
MAXINO and REMEDIOS L. MAXINO, PROVINCIAL SHERIFF OF NEGROSORIENTAL
and DUMAGUETE RURAL BANK, INC., Respondents.
x-------------------------x
DUMAGUETE RURAL BANK, INC. (DRBI) herein represented by Mr.
William D.S. Dichoso,
Petitioners,
G.R. No. 171991
Present:
-versus-
CORONA, C.J.,
Chairperson,
LEONARDO-DE CASTRO,
 SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY, SPOUSES BERSAMIN, On July 6, 1983, or twelve (12) days after the sale was registered, DRBI sold Lots 1, 3 and 6 to the
MARCELINO MAXINO and REMEDIOS MAXINO, and SPOUSES DEL CASTILLO, and spouses Francisco D. Yap and Whelma D. Yap (the Yaps) under a Deed of Sale with Agreement to
FRANCISCO D. YAP and WHELMA S. YAP, VILLARAMA, JR., JJ. Mortgage.[8] It is important to note, however, that Lot 3 was not among the five properties foreclosed
Respondents. and bought by DRBI at public auction.
On August 8, 1983, or well within the redemption period, the Yaps filed a Motion for Writ of
Possession[9] alleging that they have acquired all the rights and interests of DRBI over the foreclosed
Promulgated: properties and are entitled to immediate possession of the same because the one-year redemption
period has lapsed without any redemption being made. Said motion, however, was ordered withdrawn
July 27, 2011 on August 22, 1983[10] upon motion of the Yaps, who gave no reason therefor.[11] Three days later, or
x--------------------------------------------------x on August 25, 1983, the Yaps again filed a Motion for Writ of Possession.[12] This time the motion was
DECISION granted, and a Writ of Possession[13] over Lots 1, 3 and 6 was issued in favor of the Yaps on September
VILLARAMA, JR., J.: 5, 1983. They were placed in possession of Lots 1, 3 and 6 seven days later.
May persons to whom several mortgaged lands were transferred without the knowledge and consent On May 22, 1984, roughly a month before the one-year redemption period was set to expire, the Dys
of the creditor redeem only several parcels if all the lands were sold together for a single price at the and the Maxinos attempted to redeem Lots 1, 3 and 6. They tendered the amount of P40,000.00 to
foreclosure sale? This is the principal issue presented to us for resolution in these two petitions for DRBI and the Yaps,[14] but both refused, contending that the redemption should be for the full amount
review on certiorari assailing the May 17, 2005 Decision[1] and March 15, 2006 Resolution[2] of the Court of the winning bid of P216,040.93 plus interest for all the foreclosed properties.
of Appeals (CA) in CA-G.R. C.V. No. 57205. Thus, on May 28, 1984, the Dys and the Maxinos went to the Office of the Sheriff of Negros Oriental
The antecedents are as follows: and paid P50,625.29 (P40,000.00 for the principal plus P10,625.29 for interests and Sheriffs
The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the registered owners of several Commission) to effect the redemption.[15] Noticing that Lot 3 was not included in the foreclosure
parcels of land located in Ayungon, Negros Oriental, registered under Transfer Certificate of Title (TCT) proceedings, Benjamin V. Diputado, Clerk of Court and Provincial Sheriff, issued a Certificate of
Nos. T-14794, T-14777, T-14780, T-14781, T-14783 and T-20301 of the Registry of Deeds of Negros Redemption[16] in favor of the Dys and the Maxinos only for Lots 1 and 6, and stated in said certificate
Oriental, and more particularly designated as follows: that Lot 3 is not included in the foreclosure proceedings. By letter[17] of even date, Atty. Diputado also
(1) TCT No. T-14777 Lot 1 of Plan Pcs-11728 61,371
duly sq.m.
notified the Yaps of the redemption of Lots 1 and 6 by the Dys and the Maxinos, as well as the
(2) TCT No. T-20301 Lot 3 of Plan Psu-124376 17,373
non-inclusion
sq.m. of Lot 3 among the foreclosed properties. He advised the Yaps to personally claim the
(3) TCT No. T-14780 Lot 4 of Plan Pcs-11728 27,875
redemption
sq.m. money or send a representative to do so.
(4) TCT No. T-14794 Lot 5 of Plan Psu-124376 2,900
In asq.m.
letter to the Provincial Sheriff on May 31, 1984, the Yaps refused to take delivery of the redemption
(5) TCT No. T-14781 Lot 6 of Plan Pcs-11728 16,087
pricesq.m.
arguing that one of the characteristics of a mortgage is its indivisibility and that one cannot
(6) TCT No. T-14783 Lot 8 of Plan Pcs-11728 39,888
redeemsq.monly some of the lots foreclosed because all the parcels were sold for a single price at the
The Tirambulos likewise own a parcel of land denominated as Lot 846, covered by Tax Declaration No. auction sale.[18]
08109. On June 1, 1984, the Provincial Sheriff wrote the Dys and the Maxinos informing them of the Yaps
On December 3, 1976, the Tirambulos executed a Real Estate Mortgage[3] over Lots 1, 4, 5, 6 and 8 refusal to take delivery of the redemption money and that in view of said development, the tender of
in favor of the Rural Bank of Dumaguete, Inc., predecessor of Dumaguete Rural Bank, Inc. (DRBI), to the redemption money was being considered as a consignation.[19]
secure a P105,000 loan extended by the latter to them. Later, the Tirambulos obtained a second loan On June 15, 1984, the Dys and the Maxinos filed Civil Case No. 8426 with the Regional Trial Court of
for P28,000 and also executed a Real Estate Mortgage[4] over Lots 3 and 846 in favor of the same bank Negros Oriental for accounting, injunction, declaration of nullity (with regard to Lot 3) of the Deed of
on August 3, 1978. Sale with Agreement to Mortgage, and damages against the Yaps and DRBI. In their complaint,[20] they
Subsequently, on October 27, 1979, the Tirambulos sold all seven mortgaged lots to the spouses prayed
Zosimo Dy, Sr. and Natividad Chiu (the Dys) and the spouses Marcelino C. Maxino and Remedios Lasola a) That the Deed of Sale With Agreement to Mortgage be declared null and void ab initio;
(the Maxinos) without the consent and knowledge of DRBI. This sale, which was embodied in a Deed b) That defendant Yap[s] possession of Lot No. 3, TCT No. T20301 based as it was on a void sale, be
of Absolute Sale,[5] was followed by a default on the part of the Tirambulos to pay their loans to declared illegal from the very beginning;
DRBI. Thus, DRBI extrajudicially foreclosed the December 3, 1976 mortgage and had Lots 1, 4, 5, 6 and c) That defendants be ordered to render to plaintiffs a fair accounting of the harvests and income
8 sold at public auction on March 31, 1982. which defendants made from said Lot No. 3 and, in addition, be ordered to pay to plaintiffs damages
At the auction sale, DRBI was proclaimed the highest bidder and bought said lots for P216,040.93. The for wrongfully depriving plaintiffs of the use and enjoyment of said property;
Sheriffs Certificate of Sale[6] stated that the sale is subject to the rights of redemption of the mortgagor d) That the redemption which plaintiffs made of Lot No. 1, TCT No. 14777, and Lot No. 6, TCT No.
(s) or any other persons authorized by law so to do, within a period of one (1) year from registration 14781, through the Provincial Sheriff of Negros Oriental, be declared valid and binding on the
hereof.[7] The certificate of sale, however, was not registered until almost a year later, or on June 24, defendants, thereby releasing and freeing said parcels of land from whatever liens or claims that said
1983. defendants might have on them;
e) That defendants be likewise ordered to render to plaintiffs full and fair accounting of all the
harvests, fruits, and income that they or either of them might have derived from said two parcels of
land starting from the time defendant Yap first took possession thereof and harvested the coconuts in
September, 1983;
f) That, after the accounting herein prayed for, defendants be required to deliver to plaintiffs the
net proceeds of the income from the three parcels of land subject of this case, together with interest
at the legal rate;
g) That for his acts of misrepresentation and deceit in obtaining a writ of possession over the three
parcels of land subject of this case, and for the highly irregular and anomalous procedures and
maneuvers employed by defendant Yap in securing said writ, as well as for harvesting the coconuts
even after knowing that plaintiffs had already fully redeemed the properties in question and, with
respect to Lot No. 3, after knowing that the same was not in fact included in the foreclosure and,
therefore, could not have been validly sold by the bank to him, said defendant Yap be condemned to
pay plaintiffs moral damages in the amount of P200,000.00, plus punitive and exemplary damages in
the amount of P100,000.00;
h) That for falsifying the Sheriffs Certificate of Sale and selling unlawfully Lot No. 3, TCT No. T-20301,
to its co-defendant Yap, defendant DRBI be condemned to pay to plaintiffs actual damages in the
amount of P50,000.00; moral damages in the amount of P200,000.00; and punitive and exemplary
damages in the amount of P100,000.00;
i) That defendants be condemned to pay solidarily to plaintiffs attorneys fees in the amount
of P50,000.00; other legitimate expenses of litigation in the amount of P30,000.00; and the costs of
suit;
j) That pending hearing of this case, a writ of preliminary injunction be issued enjoining and
restraining the defendants, particularly defendant Yap, from disturbing and interfering the plaintiffs
possession and other rights of ownership over the land in question;
k) That pending hearing of the petition for preliminary injunction, a temporary restraining order be
issued against the defendants, particularly against defendant Yap, to serve the same purpose for which
the writ of preliminary injunction is herein prayed for; and
l) That, after hearing of the main case, said preliminary injunction be made permanent.
Furthermore, plaintiffs pray for all other reliefs which may be just and equitable in the premises.[21]
Thereafter, on June 19, 1984, the Dys and the Maxinos consigned to the trial court an additional sum
of P83,850.50 plus sheriffs commission fee of P419.25 representing the remaining balance of the
purchase price that the Yaps still owed DRBI by virtue of the sale to them by the DRBI of Lots 1, 3 and
6.[22]
Meanwhile, by letter[23] dated June 27, 1984, the Yaps told DRBI that no redemption has been made by
the Tirambulos or their successors-in-interest and requested DRBI to consolidate its title over the
foreclosed properties by requesting the Provincial Sheriff to execute the final deed of sale in favor of
the bank so that the latter can transfer the titles of the two foreclosed properties to them.
On the same date, the Yaps also wrote the Maxinos informing the latter that during the last harvest of
the lots bought from DRBI, they excluded from the harvest Lot 3 to show their good faith. Also, they
told the Maxinos that they were formally turning over the possession of Lot 3 to the Maxinos, without
prejudice to the final determination of the legal implications concerning Lot 3. As to Lots 1 and 6,
however, the Yaps stated that they intended to consolidate ownership over them since there has been
no redemption as contemplated by law. Included in the letter was a liquidation of the copra proceeds
harvested from September 7, 1983 to April 30, 1984 for Lots 1, 3 and 6.[24]
Later, on July 5, 1984, the Yaps filed Civil Case No. 8439 for consolidation of ownership, annulment of
certificate of redemption, and damages against the Dys, the Maxinos, the Provincial Sheriff of Negros
Oriental and DRBI. In their complaint,[25] the Yaps prayed
1. That [they] be declared the exclusive owners of Lot No. 1 covered by TCT No. T-14777 and Lot No.
6 covered by TCT No. T-14781 for failure on the part of defendants Zosimo Dy, Sr., and Marcelino
Maxino to redeem the properties in question within one (1) year from the auction sale.
2. That defendants be [declared] solidarily liable to pay moral damages in the amount of ONE
HUNDRED THOUSAND PESOS (P100,000.00), THIRTY[-]FIVE THOUSAND PESOS (P35,000.00) as
attorneys fees and FIFTEEN THOUSAND PESOS (P15,000.00) as exemplary damages;
3. That the Provincial Sheriff be required to execute the final Deed of Sale in favor of the bank and
the bank be in turn required to transfer the property to the plaintiffs in accordance with the Deed of
Sale with Mortgage.
4. That the court grant such other relief as may be deemed just and equitable under the premises.[26]
Civil Case Nos. 8426 and 8439 were tried jointly.
On October 24, 1985, the Yaps, by counsel, filed a motion to withdraw from the provincial sheriff the
redemption money amounting to P50,373.42.[27] Said motion was granted on October 28, 1985 after a
Special Power of Attorney executed by Francisco Yap in favor of his brother Valiente Yap authorizing
the latter to receive the P50,373.42 redemption money was presented in court.[28]
On February 12, 1997, the trial court rendered decision[29] in favor of the Yaps. The fallo reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Dismissing the complaint of Dy and Maxino spouses in Civil Case No. 8426 as well as the bank and
the Yap spouses counterclaim for lack of factual and legal basis;
2. In Civil Case No. 8439:
a) Declaring the Yap spouses, plaintiffs therein, the exclusive owners of Lot No. 1 covered by TCT No.
T-14777 and Lot No. 6 covered by TCT No. T-14781 for failure on the part of the Dy and Maxino spouses,
defendants therein, to redeem the properties in question within one (1) year from the auction sale.
b) Directing the Provincial Sheriff of Negros Oriental to execute the Final Deed of Sale in favor of the
bank and the latter to transfer the subject properties to the Yap spouses in accordance with the Deed
of Sale With Mortgage.
SO ORDERED.[30]
On March 7, 1997, the trial court amended the above dispositive portion upon motion of DRBI, as
follows:
Wherefore, judgment is hereby rendered as follows:
1. The Certificate of Redemption issued by the Provincial Sheriff (Exh. M) is hereby declared null and
void;
2. The Provincial Sheriff of Negros Oriental is hereby ordered to execute a Final Deed of Sale of the
foreclosed properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to the rights of the
Yap spouses acquired in accordance with the Deed of Sale with Mortgage;
3. The Deed of Sale dated [October] 27, 1979, made by Tirambulo and Estorco in favor of the Dys
and Maxinos covering all the seven (7) parcels of land in question, is hereby declared null and void;
4. In Civil Case No. 8439, declaring the Yap Spouses, the exclusive owners of Lot No. 1, covered by
TCT No. T-14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy and
Maxino Spouses, to redeem said properties within one (1) year from the date of the registration of the
auction sale;
5. All other claims and counterclaims are hereby dismissed for lack of merit.
SO ORDERED.[31]
The trial court held that the Dys and the Maxinos failed to formally offer their evidence; hence, the
court could not consider the same. It also upheld the Deed of Sale with Agreement to Mortgage
between the Yaps and DRBI, ruling that its genuineness and due execution has been admitted by the
Dys and the Maxinos and that it is not contrary to law, morals, good customs, public policy or public
order. Thus, ownership of Lots 1, 3 and 6 was transferred to the Yaps.
The trial court further held that the Dys and the Maxinos failed to exercise their rights of redemption
properly and timely. They merely deposited the amount of P50,625.29 with the Sheriff, whereas the
amount due on the mortgage deed is P216,040.93.
Aggrieved by the above ruling, the Dys and the Maxinos elevated the case to the CA. They argued that
the trial court erred in:
1) ... failing to consider plaintiffs evidence [testimonial, including the testimony of the Provincial
Sheriff of Negros Oriental (Attorney Benjamin V. Diputado) and plaintiff Attorney Marcelino C. Maxino]
and documentary [Exhibits A through TT (admitted under Order of 3 March 1995)];
2) failing to declare void or annul the purported contract of sale by Dumaguete Rural Bank, Inc. to
Francisco D. Yap and Whelma S. Yap of Lots 1, 3, and 6, during the redemption period [the purported
seller (bank) not being the owner thereof, and Lot 3 not being included in the foreclosure/auction sale
and could not have been acquired by the Bank thereat];
3) not holding that the parcels of land had been properly and validly redeemed in good faith,
defendant Yap, the Provincial Sheriff, the Clerk of Court, and Mr. Mario Dy, having accepted
redemption/consignation (or, in not fixing the redemption price and allowing redemption);
4) not holding that by withdrawing the redemption money consigned/deposited by plaintiffs to the
Court, and turning over possession of the parcels of land to plaintiffs, defendants Yap accepted, ratified,
and confirmed redemption by plaintiffs of the parcels of land acquired at foreclosure/auction sale by
the Bank and purportedly sold by it to and purchased by Yap;
5) not finding and holding that all the parcels of land covered by the foreclosed mortgage held by
Dumaguete Rural Bank had been acquired by and are in the possession of plaintiffs as owners and that
defendants bank and Yap had disposed of and/or lost their rights and interests and/or any cause of
action and their claims had been extinguished and mooted or otherwise settled, waived and/or merged
in plaintiffs-appellants;
6) not holding that defendants Yap have no cause of action to quiet title as they had no title or
possession of the parcels of land in question and in declaring defendants Yap spouses the exclusive
owners of Lot No. 1 covered by TCT No. T-14777 and Lot No. 6 covered by TCT No. T-14781 and in
directing the Provincial Sheriff to execute the final deed of sale in favor of the bank and the latter to
transfer the subject properties to the Yap spouses in accordance with the Deed of Sale with Mortgage
which included Lot No. 3 which was not foreclosed by the Sheriff and was not included in the certificate
of sale issued by him and despite their acceptance, ratification, and confirmation of the redemption as
well as acknowledgment of possession of the parcels of land by plaintiffs;
7) issuing an amended decision after perfection of plaintiffs appeal and without waiting for their
comment (declaring the Certificate of Redemption issued by the Provincial Sheriff (Exh. M) null and
void; ordering the Provincial Sheriff of Negros Oriental to execute a Final Deed of Sale of the foreclosed
properties in favor of the defendant Dumaguete Rural Bank, Inc., subject to the rights of the Yap
spouses acquired in accordance with the Deed of Sale with Mortgage (Exh. B-Maxino and Dy;
Exh. 1 Yap); declaring null and void the Deed of Sale dated Oct[ober] 27, 1979, made by Tirambulo and
Estorco in favor of the Dys and Maxinos covering all the seven (7) parcels of land in question; in Civil
Case No. 8439, declaring the Yap spouses, the exclusive owners of Lot No. 1, covered by TCT No. T-
14777, and Lot No. 6, covered by TCT No. T-14781, for failure on the part of the Dy and Maxino spouses,
to redeem said properties within (1) year from the date of registration of the auction sale) after
plaintiffs had perfected appeal of the 12 February 1997 decision, without hearing or awaiting plaintiffs
comment, and in the face of the records showing that the issues were never raised, much less litigated,
insofar as Tirambulo, as well in the face of the foregoing circumstances, especially dismissal of
defendants claims and counterclaims and acquisition of ownership and possession of the parcels of
land by plaintiffs as well as disposition and/or loss of defendants rights and interests and cause of action
in respect thereof and/or settlement, waiver, and/or extinguishment of their claims, and merger in
plaintiffs-appellants, and without stating clearly the facts and the law upon which it is based[; and]
8) not finding, holding and ruling that defendants acted in bad faith and in an abusive and oppressive
manner, if not contrary to law; and in not awarding plaintiffs damages.[32]
On May 17, 2005, the CA rendered a decision reversing the March 7, 1997 amended decision of the
trial court. The dispositive portion of the assailed CA decision reads:
IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended decision
of the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is hereby rendered
as follows:
1. Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma Yap with
respect to Lot No. 3 under TCT No. T-20301 as null and void;
2. Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot No. 6
under TCT No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;
3. Ordering defendants, Sps. Yap, to deliver the possession and ownership thereof to Sps. Dy and
Sps. Maxino; to give a fair accounting of the proceeds of these three parcels of land and to tender and
deliver the corresponding amount of income from October 24, 1985 until the finality of this judgment[;
and]
4. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the amount
of P20,000.00 as moral damages and P200,000.00 as exemplary damages and attorneys fees in the
amount of P50,000.00.
All other claims are dismissed.
Costs against the appellees.
SO ORDERED.[33]
The CA held that the trial court erred in ruling that it could not consider the evidence for the Dys and
the Maxinos allegedly because they failed to formally offer the same. The CA noted that although the
testimonies of Attys. Marcelino C. Maxino and Benjamin V. Diputado were not formally offered, the
procedural lapse was cured when the opposing counsel cross-examined said witnesses. Also, while the
original TSNs of the witnesses for the plaintiffs in Civil Case No. 8426 were burned, the latters counsel
who had copies thereof, furnished the Yaps copies for their scrutiny and comment. The CA further
noted that the trial court also admitted all the documentary exhibits of the Dys and the Maxinos
on March 3, 1995. Unfortunately, however, the trial court simply failed to locate the pertinent
documents in the voluminous records of the cases.
On the merits, the CA ruled that the Dys and the Maxinos had proven their cause of action sufficiently.
The CA noted that their claim that Lot 3 was not among the properties foreclosed was duly
corroborated by Atty. Diputado, the Provincial Sheriff who conducted the foreclosure sale. The Yaps
also failed to rebut their contention regarding the formers acceptance of the redemption money and
their delivery of the possession of the three parcels of land to the Dys and the Maxinos. The CA also
noted that not only did the Yaps deliver possession of Lot 3 to the Dys and the Maxinos, they also filed
a Motion to Withdraw the Redemption Money from the Provincial Sheriff and withdrew the
redemption money.
As to the question whether the redemption was valid or not, the CA found no need to discuss the
issue. It found that the bank was in bad faith and therefore cannot insist on the protection of the law
regarding the need for compliance with all the requirements for a valid redemption while estoppel and
unjust enrichment operate against the Yaps who had already withdrawn the redemption money.
Upon motion for reconsideration of the Yaps, however, the CA amended its decision on March 15,
2006 as follows:
IN LIGHT OF THE FOREGOING, this appeal is GRANTED. The decision as well as the amended decision
of the Regional Trial Court is REVERSED AND SET ASIDE. In lieu thereof[,] judgment is hereby rendered
as follows:
1.Declaring the sale made by Dumaguete Rural Bank Inc. to Sps. Francisco and Whelma Yap with
respect to Lot No. 3 under TCT No. T-20301 null and void;
2.Declaring the redemption made by Spouses Dy and Spouses Maxino with regards to Lot No. 6 under
TCT No. T-14781 and Lot No. 1 under TCT No. [T-]14777 as valid;
3. Condemning the defendant bank to pay damages to Spouses Dy and Spouses Maxino the amount
of P20,000.00 as moral damages and P200,000.00 as exemplary damages and attorneys fees in the
amount of P50,000.00.
All other claims are dismissed.
Costs against the appellees.
SO ORDERED.[34]
Hence, the consolidated petitions assailing the appellate courts decision.
The Yaps argue in the main that there is no valid redemption of the properties extrajudicially
foreclosed. They contend that the P40,000.00 cannot be considered a valid tender of redemption since
the amount of the auction sale is P216,040.93. They also argue that a valid tender of payment for
redemption can only be made to DRBI since at that time, their rights were subordinate to the final
consolidation of ownership by the bank.
DRBI, aside from insisting that all seven mortgaged properties (which thus includes Lot 3) were validly
foreclosed, argues, for its part, that the appellate court erred in sustaining the redemption made by
the Dys and Maxinos. It anchors its argument on the fact that the sale of the Tirambulos to the Dys and
Maxinos was without the banks consent. The Dys and Maxinos therefore could not have assumed the
character of debtors because a novation of the contract of mortgage between the Tirambulos and DRBI
did not take place as such a novation is proscribed by Article 1293 of the Civil Code. And there being
no valid redemption within the contemplation of law and DRBI being the highest bidder during the
auction sale, DRBI has become the absolute owner of the properties mortgaged when the redemption
period expired.
DRBI further argues that it was unfair and unjust for them to be held liable for damages for supposedly
wrongfully foreclosing on Lot 3, depriving the Dys and the Maxinos of the use of the land, and
registering the Certificate of Sale which included Lot 3 when it should have excluded the same. DRBI
argues that as a juridical person, it only authorized and consented, through its Board of Directors, to
lawful processes. The unlawful acts of the Sheriff, who is considered as an agent of the bank in the
foreclosure proceedings, cannot bind DRBI. Moreover, DRBI cannot be liable for damages on the basis
of an affidavit that was submitted only before the CA as the bank had no chance to cross-examine the
affiant and determine the veracity and propriety of the statements narrated in said affidavit.
Thus, the issues to be resolved in the instant case are essentially as follows: (1) Is Lot 3 among the
foreclosed properties? (2) To whom should the payment of redemption money be made? (3) Did the
Dys and Maxinos validly redeem Lots 1 and 6? and (4) Is DRBI liable for damages?
As to the first issue, we find that the CA correctly ruled that the Dys and Maxinos were able to prove
their claim that Lot 3 was not among the properties foreclosed and that it was merely inserted by the
bank in the Sheriffs Certificate of Sale. As Atty. Diputado, the Provincial Sheriff, testified, the application
for foreclosure was only for five parcels of land, namely, Lots 1, 4, 5, 6 and 8. Accordingly, only said five
parcels of land were included in the publication and sold at the foreclosure sale. When he was shown
a copy of the Sheriffs Certificate of Sale consisting of three pages, he testified that it was altered
because Lot 3 and Lot 846 were included beyond the xxx that marked the end of the enumeration of
the lots foreclosed.[35] Also, a perusal of DRBIs application for foreclosure of real estate
mortgage[36] shows that it explicitly refers to only one deed of mortgage to settle the Tirambulos
indebtedness amounting to P216,040.93. This is consistent with the Notice of Extrajudicial Sale of
Mortgaged Property, published in the Dumaguete Star Informer on February 18, 25 and March 4,
1982,[37] announcing the sale of Lots 1, 4, 5, 6 and 8 for the satisfaction of the indebtedness amounting
to P216,040.93. It is also consistent with the fact that Lots 1, 4, 5, 6 and 8 are covered by only one
real estate mortgage, the Real Estate Mortgage[38] dated December 3, 1976.Indeed, that the foreclosure
sale refers only to Lots 1, 4, 5, 6 and 8 is clear from the fact that Lots 1, 4, 5, 6 and 8 and Lot 3 are covered
by two separate real estate mortgages. DRBI failed to refute these pieces of evidence against it.
As to the second issue regarding the question as to whom payment of the redemption money should
be made, Section 31,[39] Rule 39 of the Rules of Court then applicable provides:
SEC. 31. Effect of redemption by judgment debtor, and a certificate to be delivered and recorded
thereupon. To whom payments on redemption made.If the judgment debtor redeem, he must make
the same payments as are required to effect a redemption by a redemptioner, whereupon the effect
of the sale is terminated and he is restored to his estate, and the person to whom the payment is made
must execute and deliver to him a certificate of redemption acknowledged or approved before a notary
public or other officer authorized to take acknowledgments of conveyances of real property. Such
certificate must be filed and recorded in the office of the registrar of deeds of the province in which
the property is situated, and the registrar of deeds must note the record thereof on the margin of the
record of the certificate of sale. The payments mentioned in this and the last preceding sections may
be made to the purchaser or redemptioner, or for him to the officer who made the sale. (Emphasis
supplied.)
Here, the Dys and the Maxinos complied with the above-quoted provision. Well within the redemption
period, they initially attempted to pay the redemption money not only to the purchaser, DRBI, but also
to the Yaps. Both DRBI and the Yaps however refused, insisting that the Dys and Maxinos should pay
the whole purchase price at which all the foreclosed properties were sold during the foreclosure sale.
Because of said refusal, the Dys and Maxinos correctly availed of the alternative remedy by going to
the sheriff who made the sale. As held in Natino v. Intermediate Appellate Court,[40] the tender of the
redemption money may be made to the purchaser of the land or to the sheriff. If made to the sheriff,
it is his duty to accept the tender and execute the certificate of redemption.
But were the Dys and Maxinos entitled to redeem Lots 1 and 6 in the first place? We rule in the
affirmative.
The Dys and the Maxinos have legal personality to redeem the subject properties.
Contrary to petitioners contention, the Dys and Maxinos have legal personality to redeem the subject
properties despite the fact that the sale to the Dys and Maxinos was without DRBIs consent. In Litonjua
v. L & R Corporation,[41] this Court declared valid the sale by the mortgagor of mortgaged property to a
third person notwithstanding the lack of written consent by the mortgagee, and likewise recognized
the third persons right to redeem the foreclosed property, to wit:
Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses
Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged
properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on
account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem
the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it the
assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the
mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the
Escuetas shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts
would and could be enforced against the property subject of the assignment. Stated otherwise, the
Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject
thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as
regards the first mortgage, to be exercised within the time and in the manner prescribed by law and
the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet
unforeclosed, they had the so-called equity of redemption.
The right of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which
gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest. As vendee
of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.[42]
Likewise, we rule that the Dys and the Maxinos validly redeemed Lots 1 and 6.
The requisites of a valid redemption are present
The requisites for a valid redemption are: (1) the redemption must be made within twelve (12) months
from the time of the registration of the sale in the Office of the Register of Deeds; (2) payment of the
purchase price of the property involved, plus 1% interest per month thereon in addition, up to the time
of redemption, together with the amount of any assessments or taxes which the purchaser may have
paid thereon after the purchase, also with 1% interest on such last named amount; and (3) written
notice of the redemption must be served on the officer who made the sale and a duplicate filed with
the Register of Deeds of the province.[43]
There is no issue as to the first and third requisites. It is undisputed that the Dys and the Maxinos made
the redemption within the 12-month period from the registration of the sale. The Dys and Maxinos
effected the redemption on May 24, 1984, when they deposited P50,373.42 with the Provincial Sheriff,
and on June 19, 1984, when they deposited an additional P83,850.50. Both dates were well within the
one-year redemption period reckoned from the June 24, 1983 date of registration of the foreclosure
sale. Likewise, the Provincial Sheriff who made the sale was properly notified of the redemption since
the Dys and Maxinos deposited with him the redemption money after both DRBI and the Yaps refused
to accept it.
The second requisite, the proper redemption price, is the main subject of contention of the opposing
parties.
The Yaps argue that P40,000.00 cannot be a valid tender of redemption since the amount of the auction
sale was P216,040.93. They further contend that the mortgage is indivisible so in order for the tender
to be valid and effectual, it must be for the entire auction price plus legal interest.
We cannot subscribe to the Yaps argument on the indivisibility of the mortgage. As held in the case
of Philippine National Bank v. De los Reyes,[44] the doctrine of indivisibility of mortgage does not apply
once the mortgage is extinguished by a complete foreclosure thereof as in the instant case. The Court
held:
The parties were accordingly embroiled in a hermeneutic disparity on their aforesaid contending
positions. Yet, the rule on the indivisibility of mortgage finds no application to the case at bar. The
particular provision of the Civil Code referred to provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.
Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditors heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of these guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the
portion of the debt for which each thing is specially answerable is satisfied.
From the foregoing, it is apparent that what the law proscribes is the foreclosure of only a portion of
the property or a number of the several properties mortgaged corresponding to the unpaid portion of
the debt where before foreclosure proceedings partial payment was made by the debtor on his total
outstanding loan or obligation. This also means that the debtor cannot ask for the release of any portion
of the mortgaged property or of one or some of the several lots mortgaged unless and until the loan
thus, secured has been fully paid, notwithstanding the fact that there has been a partial fulfillment of
the obligation. Hence, it is provided that the debtor who has paid a part of the debt cannot ask for the
proportionate extinguishment of the mortgage as long as the debt is not completely satisfied.
That the situation obtaining in the case at bar is not within the purview of the aforesaid rule on
indivisibility is obvious since the aggregate number of the lots which comprise the collaterals for the
mortgage had already been foreclosed and sold at public auction. There is no partial payment nor
partial extinguishment of the obligation to speak of. The aforesaid doctrine, which is actually intended
for the protection of the mortgagee, specifically refers to the release of the mortgage which secures
the satisfaction of the indebtedness and naturally presupposes that the mortgage is existing. Once the
mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility ceases to
apply since, with the full payment of the debt, there is nothing more to secure.[45] (Emphasis supplied.)
Nothing in the law prohibits the piecemeal redemption of properties sold at one foreclosure
proceeding. In fact, in several early cases decided by this Court, the right of the mortgagor or
redemptioner to redeem one or some of the foreclosed properties was recognized.
In the 1962 case of Castillo v. Nagtalon,[46] ten parcels of land were sold at public auction. Nagtalon,
who owned three of the ten parcels of land sold, wanted to redeem her properties. Though the amount
she tendered was found as insufficient to effectively release her properties, the Court held that the
tender of payment was made timely and in good faith and thus, in the interest of justice, Nagtalon was
given the opportunity to complete the redemption purchase of three of the ten parcels of land
foreclosed.
Also, in the later case of Dulay v. Carriaga,[47] wherein Dulay redeemed eight of the seventeen parcels
of land sold at public auction, the trial court declared the piecemeal redemption of Dulay as void. Said
order, however, was annulled and set aside by the Court on certiorari and the Court upheld the
redemption of the eight parcels of land sold at public auction.
Clearly, the Dys and Maxinos can effect the redemption of even only two of the five properties
foreclosed. And since they can effect a partial redemption, they are not required to pay
the P216,040.93 considering that it is the purchase price for all the five properties foreclosed.
So what amount should the Dys and Maxinos pay in order for their redemption of the two properties (5) properties for foreclosure. Yet, it caused the registration of the Certificate of Sale under public
be deemed valid considering that when the five properties were auctioned, they were not separately auction which listed more properties than what was foreclosed. On this aspect, exemplary damages in
valued? the amount of P200,000.00 are in order.[49]
Contrary to the Yaps contention, the amount paid by the Dys and Maxinos within the redemption There being an award of exemplary damages, the award of attorneys fees is likewise proper as provided
period for the redemption of just two parcels of land was not only P40,000.00 but totaled in paragraph 1, Article 2208 of the Civil Code.
to P134,223.92 (P50,373.42 paid on May 28, 1984 plus P83,850.50 paid on June 19, 1984). That is more WHEREFORE, the petitions for review on certiorari are DENIED for lack of merit. The Decision dated
than 60% of the purchase price for the five foreclosed properties, to think the Dys and Maxinos were May 17, 2005 and Resolution dated March 15, 2006 of the Court of Appeals in CA-G.R. C.V. No. 57205
only redeeming two properties. We find that it can be considered a sufficient amount if we were to are hereby AFFIRMED with the MODIFICATION that the case is REMANDED to the Regional Trial Court
base the proper purchase price on the proportion of the size of Lots 1 and 6 with the total size of the of Negros Oriental, Branch 44, Dumaguete City, for the computation of the pro-rata value of properties
five foreclosed properties, which had the following respective sizes: covered by TCT No. T-14777 (Lot 1) and TCT No. T-14781 (Lot 6) of the Registry of Deeds of Negros
Lot 1 61,371 square meters Oriental at the time of redemption to determine if there is a deficiency to be settled by or overpayment
Lot 6 16,087 square meters to be refunded to respondent Spouses Zosimo Dy, Sr. and Natividad Chiu and Spouses Marcelino C.
Lot 5 2,900 square meters Maxino and Remedios Lasola with regard to the redemption money they paid.
Lot 4 27,875 square meters With costs against the petitioners.
Lot 8 39,888 square meters SO ORDERED.
TOTAL 148,121 square meters
The two subject properties to be redeemed, Lots 1 and 6, have a total area of 77,458 square meters or Republic of the Philippines
roughly 52% of the total area of the foreclosed properties. Even with this rough approximation, we rule Supreme Court
that there is no reason to invalidate the redemption of the Dys and Maxinos since they tendered 60% Manila
of the total purchase price for properties constituting only 52% of the total area. However, there is a FIRST DIVISION
need to remand the case for computation of the pro-rata value of Lots 1 and 6 based on their true
values at that time of redemption for the purposes of determining if there is any deficiency or SPOUSES FRANCISCO and MERCED G.R. No. 158755
overpayment on the part of the Dys and Maxinos. RABAT,
Petitioners, Present:
As to the award of damages in favor of the Dys and Maxinos, we agree with the appellate court for
granting the same.
LEONARDO-DE CASTRO,
The CA correctly observed that the act of DRBI in falsifying the Sheriffs Certificate of Sale to include Acting Chairperson,
Lots 3 and 846, even if said additional lots were not among the properties foreclosed, was the *PERALTA,
proximate cause of the pecuniary loss suffered by the Dys and Maxinos in the form of lost income - versus - BERSAMIN,
from Lot 3. DEL CASTILLO, and
Likewise, the CA also correctly awarded moral damages. Paragraph 10, Article 2219 of the Civil PERLAS-BERNABE, JJ.
Code provides that moral damages may be recovered in case of acts and actions referred to in Article Promulgated:
21 of the same Code. Article 21 reads: PHILIPPINE NATIONAL BANK,
ART. 21 Any person who willfully causes loss or injury to another in a manner that is contrary to morals, Respondent. June 18, 2012
good customs or public policy shall compensate the latter for the damage. x-----------------------------------------------------------------------------------------x
As previously discussed, DRBIs act of maliciously including two additional properties in the Sheriffs
Certificate of Sale even if they were not included in the foreclosed properties caused the Dys and DECISION
Maxinos pecuniary loss. Hence, DRBI is liable to pay moral damages.
The award of exemplary damages is similarly proper. Exemplary or corrective damages are imposed, BERSAMIN, J.:
by way of example or correction for the public good, in addition to the moral, temperate, liquidated or
The inadequacy of the bid price in an extrajudicial foreclosure sale of mortgaged properties will not per
compensatory damages.[48] We cannot agree more with the following ratio of the appellate court in
se invalidate the sale. Additionally, the foreclosing mortgagee is not precluded from recovering the
granting the same:
deficiency should the proceeds of the sale be insufficient to cover the entire debt.
Additionally, what is alarming to the sensibilities of the Court is the deception employed by the bank Antecedents
in adding other properties in the certificate of sale under public auction without them being included
in the public auction conducted. It cannot be overemphasized that being a lending institution, prudence The parties are before the Court a second time to thresh out an issue relating to the foreclosure sale of
dictates that it should employ good faith and due diligence with the properties entrusted to it. It was the petitioners mortgaged properties. The first time was in G.R. No. 134406 entitled Philippine National
the bank which submitted the properties ought to be foreclosed to the sheriff. It only submitted five
Bank v. Spouses Francisco and Merced Rabat, decided on November 15, 2000.[1] In G.R. No. 134406,
the Court observed that
The RABATs did not appeal from the decision of the trial court. As a matter of fact, in their Appellees
Brief filed with the Court of Appeals they prayed that said decision be affirmed in toto. As against the
RABATs the trial courts findings of fact and conclusion are already settled and final. More specifically,
they are deemed to have unqualifiedly agreed with the trial court that the foreclosure proceedings were
valid in all respects, except as to the bid price.[2]
Accordingly, we extract the antecedent facts from the narrative of the decision in G.R. No. 134406, as
follows:
On 25 August 1979, respondent spouses Francisco and Merced Rabat (hereafter RABATs) applied for a
loan with PNB. Subsequently, the RABATs were granted on 14 January 1980 a medium-term loan
of P4.0 Million to mature three years from the date of implementation.
On 28 January 1980, the RABATs signed a Credit Agreement and executed a Real Estate Mortgage over
twelve (12) parcels of land which stipulated that the loan would be subject to interest at the rate of 17%
per annum, plus the appropriate service charge and penalty charge of 3% per annum on any amount
remaining unpaid or not renewed when due.
On 25 September 1980, the RABATs executed another document denominated as "Amendment to the
Credit Agreement" purposely to increase the interest rate from 17% to 21% per annum, inclusive of
service charge and a penalty charge of 3% per annum to be imposed on any amount remaining unpaid
or not renewed when due. They also executed another Real Estate Mortgage over nine (9) parcels of land
as additional security for their medium-term loan of Four Million (P4.0 M). These parcels of land are
agricultural, commercial and residential lots situated in Mati, Davao Oriental.
The several availments of the loan accommodation on various dates by the RABATs reached the
aggregate amount of THREE MILLION FIVE HUNDRED SEVENTEEN THOUSAND THREE
HUNDRED EIGHTY (P3,517,380), as evidenced by the several promissory notes, all of which were
due on 14 March 1983.
The RABATs failed to pay their outstanding balance on due date.
In its letter of 24 July 1986, in response to the letter of the RABATs of 16 June 1986 requesting for more
time within which to arrive at a viable proposal for the settlement of their account, PNB informed the
RABATs that their request has been denied and gave the RABATs until 30 August 1986 to settle their
account. The PNB sent the letter to 197 Wilson Street, San Juan, Metro Manila.
For failure of the RABATs to pay their obligation, the PNB filed a petition for the extrajudicial
foreclosure of the real estate mortgage executed by the RABATs. After due notice and publication, the
mortgaged parcels of land were sold at a public auction held on 20 February 1987 and 14 April 1987.
The PNB was the lone and highest bidder with a bid of P3,874,800.00.
As the proceeds of the public auction were not enough to satisfy the entire obligation of the RABATs,
the PNB sent anew demand letters. The letter dated 15 November 1990 was sent to the RABATs at 197
Wilson Street, San Juan, Metro Manila; while another dated 30 August 1991 was sent to the RABATs
at 197 Wilson Street, Greenhills, San Juan, Metro Manila, and also in Mati, Davao Oriental.
Upon failure of the RABATs to comply with the demand to settle their remaining outstanding obligation
which then stood at P14,745,398.25, including interest, penalties and other charges, PNB eventually filed
on 5 May 1992 a complaint for a sum of money before the Regional Trial Court of Manila. The case was
docketed as Civil Case No. 92-61122, which was assigned to Branch 14 thereof.
The RABATs filed their answer with counterclaim on 28 July 1992 to which PNB filed its Reply and
Answer to Counterclaim. On 2 January 1993, the RABATs filed an amended answer. The RABATs
admitted their loan availments from PNB and their default in the payment thereof. However, they
assailed the validity of the auction sales for want of notice to them before and after the foreclosure sales.
They further added that as residents of Mati, Davao Oriental since 1970 up to the present, they never
received any notice nor heard about the foreclosure proceeding in spite of the claim of PNB that the
foreclosure proceeding had been duly published in the San Pedro Times, which is not a newspaper of
general circulation.
The RABATs likewise averred that the bid price was grossly inadequate and unconscionable.
Lastly, the RABATs attacked the validity of the accumulated interest and penalty charges because since
their properties were sold in 1987, and yet PNB waited until 1992 before filing the case. Consequently,
the RABATs contended that they should not be made to suffer for the interest and penalty charges from
May 1987 up to the present. Otherwise, PNB would be allowed to profit from its questionable scheme.
The PNB filed on 5 February 1993 its Reply to the Amended Answer and Answer to Counterclaim.[3]
On June 14, 1994, the Regional Trial Court, Branch 14, in Manila (RTC) rendered its decision in Civil
Case No. 92-61122,[4] disposing thus:
WHEREFORE, and in view of the foregoing considerations, judgment is hereby rendered dismissing the
complaint.
On the counterclaim, the two (2) auction sales of the mortgaged properties are hereby set aside and
ordering the plaintiff to reconvey to the defendants the remaining properties after the sale [of] sufficient
properties for the satisfaction of the obligation of the defendants.
The parties will bear their respective cost.
So ordered.
Only PNB appealed to the CA (CA-G.R. CV No. 49800), assigning the following two errors to the
RTC,[5] to wit:
I
WHETHER OR NOT THE TRIAL COURT ERRED IN NULLIFYING THE SHERIFF'S AUCTION
SALE ON THE GROUND THAT THE PNBS WINNING BID IS VERY LOW.
II
WHETHER OR NOT THE TRIAL COURT ERRED IN RULING THAT THE DEFENDANTS-
APPELLEES ARE NOT LIABLE TO PAY INTEREST AND PENALTY CHARGES AFTER THE
AUCTION SALES UP TO THE FILING OF THIS CASE.
On their part, the Spouses Rabat simply urged in their appellees brief that the decision of the RTC be
entirely affirmed.[6]
On June 29, 1998, the CA upheld the RTCs decision to nullify the foreclosure sales but rested its ruling
upon a different ground,[7] in that the Spouses Rabat could not have known of the foreclosure sales
because they had not actually received personal notices about the foreclosure proceedings. The CA
concluded:
An examination of the exhibits show that the defendant-appellees given address is Mati, Davao Oriental
and not 197 Wilson Street, Greenhills, San Juan, Metro Manila as alleged by the plaintiff-appellant
(Exhibit C to J, pp. 208, 217, 220, 229, 236-239, Records). Records further show that all subsequent
communications by plaintiff-appellant was sent to defendant-appellees address at Wilson Street,
Greenhills, San Juan. This was the very reason why defendant-appellees were not aware of the
foreclosure proceedings.
As correctly found out by the trial court, there is a need for the setting aside of the two (2) auction sales
hence, there is yet no deficiency judgment to speak of.
WHEREFORE, the decision of the trial court dated 14 June 1994, is hereby affirmed in toto.
SO ORDERED.
PNB appealed in due course (G.R. No. 134406),[8] positing:
WHETHER OR NOT THE COURT OF APPEALS MAY REVIEW AND PASS UPON THE TRIAL
COURTS FINDING AND CONCLUSION ON AN ISSUE WHICH WAS NEVER RAISED ON
APPEAL, AND, THEREFORE, HAD ATTAINED FINALITY.
1. THE COURT OF APPEALS HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS WHEN IT DECIDED AND RESOLVED A QUESTION
OR ISSUE NOT RAISED IN PETITIONER PNBS APPEAL;
2. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT
REVERSED THE FINDING AND CONCLUSION OF THE TRIAL COURT ON AN ISSUE WHICH
HAD ALREADY ATTAINED FINALITY.
PNB argued that it had not raised the issue of lack of notice about the foreclosure sales because the fact
that the Spouses Rabat had not appealed the RTCs ruling as regards the lack of notice but had in fact
prayed for the affirmance of the RTCs judgment had rendered final the RTCs rejection of their allegation
of lack of personal notice; and that, consequently, the CA had committed grave abuse of discretion in
still resolving the issue of lack of notice despite its not having been raised during the appeal.[9]
On November 15, 2000, the Court promulgated its decision in G.R. No. 134406, decreeing:
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals of 29 July 1998 in CA-
G.R. CV No. 49800 is hereby SET ASIDE. The Court of Appeals is directed to DECIDE, with reasonable
dispatch, CA-G.R. CV No. 49800 on the basis of the errors raised by petitioner Philippine National Bank
in its Appellants Brief.
No pronouncement as to costs.
SO ORDERED.[10]
To conform to the decision in G.R. No. 134406, the CA amended its decision on January 24, 2003 by
resolving the errors specifically assigned by PNB in its appellants brief.[11] The CA nonetheless affirmed
the RTCs decision, declaring that the bid price had been very low and observing that the mortgaged
properties might have been sold for a higher value had PNB first conducted a reappraisal of the
properties.
Upon PNBs motion for reconsideration, however, the CA promulgated its questioned second amended
decision on March 26, 2003,[12] holding and ruling as follows:
After a thorough and conscientious review of the records and relevant laws and jurisprudence, We find
the motion for reconsideration to be meritorious.
While indeed no evidence was presented by appellant as to whether a reappraisal of the mortgaged
properties was conducted by it before submitting the bid price of ₱3,874,800.00 at the auction sale, said
amount approximates the loan value under its original appraisal in 1980, which was ₱4 million.
There is no dispute that mere inadequacy of price per se will not set aside a judicial sale of real property.
Nevertheless, where the inadequacy of the price is purely shocking to the conscience such that the mind
revolts at it and such that a reasonable man would neither directly nor indirectly be likely to consent to
it, the sale shall be declared null and void. Said rule, however, does not strictly apply in the case
of extrajudicial foreclosure sales so that when a supposed unconscionably low price paid by the bank-
mortgagee for the mortgaged properties at the public auction sale is assailed, the sale is not thereby
readily set aside on account of such low purchase price. It is well-settled that alleged gross inadequacy
of price is not material when the law gives the owner the right to redeem as when a sale is made at a
public auction, upon the theory that the lesser the price the easier it is for the owner to effect the
redemption. In fact, the property may be sold for less than its fair market value.
Here, it may be that after the lapse of seven (7) years, the mortgaged properties may have indeed
appreciated in value but under the general rule cited above which had been consistently applied to
extrajudicial foreclosure sales. We are not inclined to invalidate the auction sale of appellees mortgaged
properties solely on the alleged gross inadequacy of purchase price of ₱3,874,800.00 which is actually
almost the equivalent of the loan value of appellees twenty-one (21) parcels of land under the Real Estate
Mortgage executed in favor of appellant PNB in 1980. It has been held that no such disadvantage is
suffered by the mortgagor as he stands to gain with a reduced price because he possesses the right of
redemption. Thus, the re-appraisal of the mortgaged properties resulting in the appellant PNBs bid price
of approximately the original loan value of their mortgaged properties is beneficial rather than harmful
considering the right of redemption granted to appellees under the law. The claim of financial hardship
or losses in their business is not an excuse for appellees-mortgagors to evade their clear obligation to the
bank-mortgagee.
Further, the fact that the mortgaged property is sold at an amount less than its actual market value should
not militate against the right of appellant PNB to the recovery of the deficiency in the loan obligation of
appellees. Our Supreme Court had ruled in several cases that in extrajudicial foreclosure of mortgage,
where the proceeds of the sale are insufficient to pay the debt, the mortgagee has the right to recover the
deficiency from the debtor. A claim of deficiency arising from the extrajudicial foreclosure sale is
allowed. As to appellees claim of allegedly excessive penalty interest charges, the same is without merit.
We note that the promissory notes expressly provide for a penalty charge of 3% per annum to be imposed
on any unpaid amount on due date.
WHEREFORE, premises considered, the present motion for reconsideration is hereby GRANTED.
Consequently, Our Amended Decision of January 24, 2003 is hereby SET ASIDE and a new one is
hereby entered GRANTING the appeal of plaintiff PNB. The decision appealed from in Civil Case No.
92-61122 is hereby REVERSED and SET ASIDE. Judgment is hereby rendered ordering the appellees
to pay, jointly and severally, to appellant PNB: (1) the amount of ₱14,745,398.25 plus accrued interest,
service charge and penalty charge of 3% per annum from February 29, 1992 until the same shall have
been fully paid; (2) Ten Percent (10%) of the total amount due as attorneys fees; and (3) the costs of suit.
No pronouncement as to costs.
SO ORDERED.[13]
The Spouses Rabat thereafter moved for the reconsideration of the second amended decision, but the CA
denied their motion.[14]
Hence, this appeal by the Spouses Rabat.
Issues
The Spouses Rabat frame the following issues for this appeal, thuswise:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF
THE SUBJECT AUCTION SALES AND ADJUDGING PAYMENT OF DEFICIENCY SUM,
INTERESTS, PENALTY AND SERVICE CHARGES AND ATTORNEYS FEES, IN COMPLETE
AND ABSOLUTE DISREGARD OF ITS EARLIER PRONOUNCEMENTS, THE ARGUMENTS OF
HEREIN PETITIONERS AND EVIDENCE BORNE IN THE RECORDS OF THE INSTANT CASE.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN DEPARTING FROM ITS FINDING
OF FACTS AND CONCLUSIONS OF LAW AS STATED IN THE EARLIER RENDERED FIRST
AMENDED DECISION DATED 24 JANUARY 2003.[15]
The Spouses Rabat insist that the CAs reversal of the amended decision was unjustified. They pray that
the amended decision of the CA (which affirmed the RTCs judgment) be reinstated. They contend that
PNB was not entitled to recover any deficiency due to the invalidity of the forced sales.[16]
In its comment,[17] PNB counters that the petition for review does not raise a valid question of law; and
that the CAs second amended decision was regularly promulgated because the CA thereby acted well
within its right to correct itself considering that the amended decision did not yet attain finality under the
pertinent rules and jurisprudence.
Accordingly, the Court must pass upon and resolve three distinct issues. The first is whether the
inadequacy of the bid price of PNB invalidated the forced sale of the properties. The second is whether
PNB was entitled to recover any deficiency from the Spouses Rabat. The third is whether the CA validly
rendered its second amended decision.
Ruling
The appeal has no merit.
Anent the first issue, we rule against the Spouses Rabat. We have consistently held that the inadequacy
of the bid price at a forced sale, unlike that in an ordinary sale, is immaterial and does not nullify the
sale; in fact, in a forced sale, a low price is considered more beneficial to the mortgage debtor because it
makes redemption of the property easier.[18]
In Bank of the Philippine Islands, etc. v. Reyes,[19] the Court discoursed on the effect of the inadequacy
of the price in a forced sale, stating:
Throughout a long line of jurisprudence, we have declared that unlike in an ordinary sale, inadequacy of
the price at a forced sale is immaterial and does not nullify a sale since, in a forced sale, a low price is
more beneficial to the mortgage debtor for it makes redemption of the property easier.
In the early case of The National Loan and Investment Board v. Meneses, we also had the occasion to
state that:
As to the inadequacy of the price of the sale, this court has repeatedly held that the fact that a property
is sold at public auction for a price lower than its alleged value, is not of itself sufficient to annul said
sale, where there has been strict compliance with all the requisites marked out by law to obtain the
highest possible price, and where there is no showing that a better price is obtainable. (Government of
the Philippines vs. De Asis, G. R. No. 45483, April 12, 1939; Guerrero vs. Guerrero, 57 Phil., 442; La
Urbana vs. Belando, 54 Phil., 930; Bank of the Philippine Islands v . Green, 52 Phil., 491.) (Emphases
supplied.)
In Hulst v. PR Builders, Inc., we further elaborated on this principle:
[G]ross inadequacy of price does not nullify an execution sale. In an ordinary sale, for reason of equity,
a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks
ones conscience as to justify the courts to interfere; such does not follow when the law gives the owner
the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the
easier it is for the owner to effect redemption. When there is a right to redeem, inadequacy of price
should not be material because the judgment debtor may re-acquire the property or else sell his right to
redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the
execution sale. Thus, respondent stood to gain rather than be harmed by the low sale value of the
auctioned properties because it possesses the right of redemption. x x x (Emphasis supplied.)
It bears also to stress that the mode of forced sale utilized by petitioner was an extrajudicial foreclosure
of real estate mortgage which is governed by Act No. 3135, as amended. An examination of the said law
reveals nothing to the effect that there should be a minimum bid price or that the winning bid should be
equal to the appraised value of the foreclosed property or to the amount owed by the mortgage
debtor. What is clearly provided, however, is that a mortgage debtor is given the opportunity to redeem
the foreclosed property within the term of one year from and after the date of sale. In the case at bar,
other than the mere inadequacy of the bid price at the foreclosure sale, respondent did not allege any
irregularity in the foreclosure proceedings nor did she prove that a better price could be had for her
property under the circumstances.
At any rate, we consider it notable enough that PNBs bid price of ₱3,874,800.00 might not even be said
to be outrageously low as to be shocking to the conscience. As the CA cogently noted in the second
amended decision,[20] that bid price was almost equal to both the ₱4,000,000.00 applied for by the
Spouses Rabat as loan, and to the total sum of ₱3,517,380.00 of their actual availment from PNB.
Resolving the second issue, we rule that PNB had the legal right to recover the deficiency amount.
In Philippine National Bank v. Court of Appeals,[21] we held that:
xxx it is settled that if the proceeds of the sale are insufficient to cover the debt in an extrajudicial
foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from the debtor. For when
the legislature intends to deny the right of a creditor to sue for any deficiency resulting from foreclosure
of security given to guarantee an obligation it expressly provides as in the case of pledges [Civil Code,
Art. 2115] and in chattel mortgages of a thing sold on installment basis [Civil Code, Art. 1484(3)]. Act
No. 3135, which governs the extrajudicial foreclosure of mortgages, while silent as to the mortgagees
right to recover, does not, on the other hand, prohibit recovery of deficiency. Accordingly, it has been
held that a deficiency claim arising from the extrajudicial foreclosure is allowed. [22]
Indeed, as we indicated in Prudential Bank v. Martinez,[23] the fact that the mortgaged property was sold
at an amount less than its actual market value should not militate against the right to such recovery. [24]
There should be no question that PNB was legally entitled to recover the penalty charge of 3% per
annum and attorneys fees equivalent to 10% of the total amount due. The documents relating to the loan
and the real estate mortgage showed that the Spouses Rabat had expressly conformed to such additional
liabilities; hence, they could not now insist otherwise. To be sure, the law authorizes the contracting
parties to make any stipulations in their covenants provided the stipulations are not contrary to law,
morals, good customs, public order or public policy.[25] Equally axiomatic are that a contract is the law
between the contracting parties, and that they have the autonomy to include therein such stipulations,
clauses, terms and conditions as they may want to include. [26] Inasmuch as the Spouses Rabat did not
challenge the legitimacy and efficacy of the additional liabilities being charged by PNB, they could not
now bar PNB from recovering the deficiency representing the additional pecuniary liabilities that the
proceeds of the forced sales did not cover.
Lastly, we uphold the CAs promulgation of the second amended decision. Verily, all courts of law have
the unquestioned power to alter, modify, or set aside their decisions before they become final and
unalterable.[27] A judgment that has attained finality becomes immutable and unalterable, and may
thereafter no longer be modified in any respecteven if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the court that rendered it or by the highest
court of the land.[28]The reason for the rule of immutability is that if, on the application of one party, the
court could change its judgment to the prejudice of the other, the court could thereafter, on application
of the latter, again change the judgment and continue this practice indefinitely. [29] The equity of a
particular case must yield to the overmastering need of certainty and unalterability of judicial
pronouncements.[30] The doctrine of immutability and inalterability of a final judgment has a two-
fold purpose, namely: (a) to avoid delay in the administration of justice and, thus, procedurally, to make
orderly the discharge of judicial business; and (b) to put an end to judicial controversies, at the risk of
occasional errors, which is precisely why courts exist. Indeed, controversies cannot drag on indefinitely;
the rights and obligations of every litigant must not hang in suspense for an indefinite period of
time.[31] As such, the doctrine of immutability is not a mere technicality to be easily brushed aside, but a
matter of public policy as well as a time-honored principle of procedural law.
It is no different herein. The amended decision that favored the Spouses Rabat would have attained
finality only after the lapse of 15 days from notice thereof to the parties without a motion for
reconsideration being timely filed or an appeal being seasonably taken.[32] Had that happened, the
amended decision might have become final and immutable. However, considering that PNB timely filed
its motion for reconsideration vis--vis the amended decision, the CAs reversal of the amended decision
and its promulgation of the second amended decision were valid and proper.
WHEREFORE, we AFFIRM the SECOND AMENDED DECISION promulgated on March 26, 2003
in CA-G.R. CV No. 49800 entitled Philippine National Bank v. Spouses Francisco and Merced Rabat.
The petitioners shall pay the costs of suit.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 195540 March 13, 2013
GOLDENWAY MERCHANDISING CORPORATION, Petitioner,
vs.
EQUITABLE PCI BANK, Respondent.
DECISION
VILLARAMA, JR., J.:
Before the Court is a petition for review on certiorari which seeks to reverse and set aside the
Decision1 dated November 19, 2010 and Resolution2 dated January 31, 2011 of the Court of Appeals
(CA) in CA-G.R. CV No. 91120. The CA affirmed the Decision3 dated January 8, 2007 of the Regional Trial
Court (RTC) of- Valenzuela City, Branch 171 dismissing the complaint in Civil Case No. 295-V -01.
The facts are undisputed.
On November 29, 1985, Goldenway Merchandising Corporation (petitioner) executed a Real Estate
Mortgage in favor of Equitable PCI Bank (respondent) over its real properties situated in Valenzuela,
Bulacan (now Valenzuela City) and covered by Transfer Certificate of Title (TCT) Nos. T-152630, T-
151655 and T-214528 of the Registry of Deeds for the Province of Bulacan. The mortgage secured the
Two Million Pesos (P2,000,000.00) loan granted by respondent to petitioner and was duly registered.4
As petitioner failed to settle its loan obligation, respondent extrajudicially foreclosed the mortgage on
December 13, 2000. During the public auction, the mortgaged properties were sold for P3,500,000.00
to respondent. Accordingly, a Certificate of Sale was issued to respondent on January 26, 2001. On
February 16, 2001, the Certificate of Sale was registered and inscribed on TCT Nos. T-152630, T-151655
and T-214528.5
In a letter dated March 8, 2001, petitioner’s counsel offered to redeem the foreclosed properties by
tendering a check in the amount of P3,500,000.00. On March 12, 2001, petitioner’s counsel met with
respondent’s counsel reiterating petitioner’s intention to exercise the right of redemption.6 However,
petitioner was told that such redemption is no longer possible because the certificate of sale had
already been registered. Petitioner also verified with the Registry of Deeds that title to the foreclosed
properties had already been consolidated in favor of respondent and that new certificates of title were
issued in the name of respondent on March 9, 2001.
On December 7, 2001, petitioner filed a complaint7 for specific performance and damages against the
respondent, asserting that it is the one-year period of redemption under Act No. 3135 which should
apply and not the shorter redemption period provided in Republic Act (R.A.) No. 8791. Petitioner
argued that applying Section 47 of R.A. 8791 to the real estate mortgage executed in 1985 would result
in the impairment of obligation of contracts and violation of the equal protection clause under the
Constitution. Additionally, petitioner faulted the respondent for allegedly failing to furnish it and the
Office of the Clerk of Court, RTC of Valenzuela City with a Statement of Account as directed in the
Certificate of Sale, due to which petitioner was not apprised of the assessment and fees incurred by
respondent, thus depriving petitioner of the opportunity to exercise its right of redemption prior to the
registration of the certificate of sale.
In its Answer with Counterclaim,8 respondent pointed out that petitioner cannot claim that it was
unaware of the redemption price which is clearly provided in Section 47 of R.A. No. 8791, and that
petitioner had all the opportune time to redeem the foreclosed properties from the time it received
the letter of demand and the notice of sale before the registration of the certificate of sale. As to the
check payment tendered by petitioner, respondent said that even assuming arguendo such redemption
was timely made, it was not for the amount as required by law.
On January 8, 2007, the trial court rendered its decision dismissing the complaint as well as the
counterclaim. It noted that the issue of constitutionality of Sec. 47 of R.A. No. 8791 was never raised
by the petitioner during the pre-trial and the trial. Aside from the fact that petitioner’s attempt to
redeem was already late, there was no valid redemption made because Atty. Judy Ann Abat-Vera who
talked to Atty. Joseph E. Mabilog of the Legal Division of respondent bank, was not properly authorized
by petitioner’s Board of Directors to transact for and in its behalf; it was only a certain Chan Guan Pue,
the alleged President of petitioner corporation, who gave instruction to Atty. Abat-Vera to redeem the
foreclosed properties.9
Aggrieved, petitioner appealed to the CA which affirmed the trial court’s decision. According to the CA,
petitioner failed to justify why Section 47 of R.A. No. 8791 should be declared unconstitutional.
Furthermore, the appellate court concluded that a reading of Section 47 plainly reveals the intention
to shorten the period of redemption for juridical persons and that the foreclosure of the mortgaged
properties in this case when R.A. No. 8791 was already in effect clearly falls within the purview of the
said provision.10
Petitioner’s motion for reconsideration was likewise denied by the CA.
In the present petition, it is contended that Section 47 of R.A. No. 8791 is inapplicable considering that
the contracting parties expressly and categorically agreed that the foreclosure of the real estate
mortgage shall be in accordance with Act No. 3135. Citing Co v. Philippine National Bank 11 petitioner
contended that the right of redemption is part and parcel of the Deed of Real Estate Mortgage itself
and attaches thereto upon its execution, a vested right flowing out of and made dependent upon the
law governing the contract of mortgage and not on the mortgagee’s act of extrajudicially foreclosing
the mortgaged properties. This Court thus held in said case that "Under the terms of the mortgage
contract, the terms and conditions under which redemption may be exercised are deemed part and
parcel thereof whether the same be merely conventional or imposed by law."
Petitioner then argues that applying Section 47 of R.A. No. 8791 to the present case would be a
substantial impairment of its vested right of redemption under the real estate mortgage contract. Such
impairment would be violative of the constitutional proscription against impairment of obligations of
contract, a patent derogation of petitioner’s vested right and clearly changes the intention of the
contracting parties. Moreover, citing this Court’s ruling in Rural Bank of Davao City, Inc. v. Court of
Appeals12 where it was held that "Section 119 prevails over statutes which provide for a shorter period
of redemption in extrajudicial foreclosure sales", and in Sulit
v. Court of Appeals,13 petitioner stresses that it has always been the policy of this Court to aid rather
than defeat the mortgagor’s right to redeem his property.
Petitioner further argues that since R.A. No. 8791 does not provide for its retroactive application, courts
therefore cannot retroactively apply its provisions to contracts executed and consummated before its
effectivity. Also, since R.A. 8791 is a general law pertaining to the banking industry while Act No. 3135
is a special law specifically governing real estate mortgage and foreclosure, under the rules of statutory
construction that in case of conflict a special law prevails over a general law regardless of the dates of
enactment of both laws, Act No. 3135 clearly should prevail on the redemption period to be applied in
this case.
The constitutional issue having been squarely raised in the pleadings filed in the trial and appellate
courts, we shall proceed to resolve the same.
The law governing cases of extrajudicial foreclosure of mortgage is Act No. 3135,14 as amended by Act
No. 4118. Section 6 thereof provides:
SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred
to, the debtor, his successors-in-interest or any judicial creditor or judgment creditor of said debtor, or
any person having a lien on the property subsequent to the mortgage or deed of
trust under which the property is sold, may redeem the same at any time within the term of one year
from and after the date of the sale; and such redemption shall be governed by the provisions of sections
four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of
Civil Procedure,15 in so far as these are not inconsistent with the provisions of this Act.
The one-year period of redemption is counted from the date of the registration of the certificate of
sale. In this case, the parties provided in their real estate mortgage contract that upon petitioner’s
default and the latter’s entire loan obligation becoming due, respondent may immediately foreclose
the mortgage judicially in accordance with the Rules of Court, or extrajudicially in accordance with Act
No. 3135, as amended.
However, Section 47 of R.A. No. 8791 otherwise known as "The General Banking Law of 2000" which
took effect on June 13, 2000, amended Act No. 3135. Said provision reads:
SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or
extrajudicially, of any mortgage on real estate which is security for any loan or other credit
accommodation granted, the mortgagor or debtor whose real property has been sold for the full or
partial payment of his obligation shall have the right within one year after the sale of the real estate,
to redeem the property by paying the amount due under the mortgage deed, with interest thereon at
the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution
from the sale and custody of said property less the income derived therefrom. However, the purchaser
at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to
enter upon and take possession of such property immediately after the date of the confirmation of the
auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain
the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course
only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will
pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure
proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property in accordance with this provision until, but not
after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which
in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of
property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their
redemption rights until their expiration. (Emphasis supplied.)
Under the new law, an exception is thus made in the case of juridical persons which are allowed to
exercise the right of redemption only "until, but not after, the registration of the certificate of
foreclosure sale" and in no case more than three (3) months after foreclosure, whichever comes first.16
May the foregoing amendment be validly applied in this case when the real estate mortgage contract
was executed in 1985 and the mortgage foreclosed when R.A. No. 8791 was already in effect?
We answer in the affirmative.
When confronted with a constitutional question, it is elementary that every court must approach it
with grave care and considerable caution bearing in mind that every statute is presumed valid and
every reasonable doubt should be resolved in favor of its constitutionality.17 For a law to be nullified,
it must be shown that there is a clear and unequivocal breach of the Constitution. The ground for nullity
must be clear and beyond reasonable doubt.18Indeed, those who petition this Court to declare a law,
or parts thereof, unconstitutional must clearly establish the basis therefor. Otherwise, the petition
must fail.19
Petitioner’s contention that Section 47 of R.A. 8791 violates the constitutional proscription against
impairment of the obligation of contract has no basis.
The purpose of the non-impairment clause of the Constitution20 is to safeguard the integrity of
contracts against unwarranted interference by the State. As a rule, contracts should not be tampered
with by subsequent laws that would change or modify the rights and obligations of the
parties.21 Impairment is anything that diminishes the efficacy of the contract. There is an impairment
if a subsequent law changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the
parties.22
Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but only
modified the time for the exercise of such right by reducing the one-year period originally provided in
Act No. 3135. The new redemption period commences from the date of foreclosure sale, and expires
upon registration of the certificate of sale or three months after foreclosure, whichever is earlier. There
is likewise no retroactive application of the new redemption period because Section 47 exempts from
its operation those properties foreclosed prior to its effectivity and whose owners shall retain their
redemption rights under Act No. 3135.
Petitioner’s claim that Section 47 infringes the equal protection clause as it discriminates
mortgagors/property owners who are juridical persons is equally bereft of merit.
The equal protection clause is directed principally against undue favor and individual or class
privilege.1âwphi1 It is not intended to prohibit legislation which is limited to the object to which it is
directed or by the territory in which it is to operate. It does not require absolute equality, but merely
that all persons be treated alike under like conditions both as to privileges conferred and liabilities
imposed.23 Equal protection permits of reasonable classification.24We have ruled that one class may
be treated differently from another where the groupings are based on reasonable and real
distinctions.25 If classification is germane to the purpose of the law, concerns all members of the class,
and applies equally to present and future conditions, the classification does not violate the equal
protection guarantee.26
We agree with the CA that the legislature clearly intended to shorten the period of redemption for
juridical persons whose properties were foreclosed and sold in accordance with the provisions of Act
No. 3135.27
The difference in the treatment of juridical persons and natural persons was based on the nature of
the properties foreclosed – whether these are used as residence, for which the more liberal one-year
redemption period is retained, or used for industrial or commercial purposes, in which case a shorter
term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable
mortgagee-banks to dispose sooner of these acquired assets. It must be underscored that the General
Banking Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial crisis, sought to
reform the General Banking Act of 1949 by fashioning a legal framework for maintaining a safe and
sound banking system.28 In this context, the amendment introduced by Section 47 embodied one of
such safe and sound practices aimed at ensuring the solvency and liquidity of our banks.1âwphi1 It
cannot therefore be disputed that the said provision amending the redemption period in Act 3135 was
based on a reasonable classification and germane to the purpose of the law.
This legitimate public interest pursued by the legislature further enfeebles petitioner’s impairment of
contract theory.
The right of redemption being statutory, it must be exercised in the manner prescribed by the
statute,29 and within the prescribed time limit, to make it effective. Furthermore, as with other
individual rights to contract and to property, it has to give way to police power exercised for public
welfare.30 The concept of police power is well-established in this jurisdiction. It has been defined as the
"state authority to enact legislation that may interfere with personal liberty or property in order to
promote the general welfare." Its scope, ever-expanding to meet the exigencies of the times, even to
anticipate the future where it could be done, provides enough room for an efficient and flexible
response to conditions and circumstances thus assuming the greatest benefits.31
The freedom to contract is not absolute; all contracts and all rights are subject to the police power of
the State and not only may regulations which affect them be established by the State, but all such
regulations must be subject to change from time to time, as the general well-being of the community
may require, or as the circumstances may change, or as experience may demonstrate the
necessity.32 Settled is the rule that the non-impairment clause of the Constitution must yield to the
loftier purposes targeted by the Government. The right granted by this provision must submit to the
demands and necessities of the State’s power of regulation.33 Such authority to regulate businesses
extends to the banking industry which, as this Court has time and again emphasized, is undeniably
imbued with public interest.34
Having ruled that the assailed Section 47 of R.A. No. 8791 is constitutional, we find no reversible error
committed by the CA in holding that petitioner can no longer exercise the right of redemption over its
foreclosed properties after the certificate of sale in favor of respondent had been registered.
WHEREFORE, the petition for review on certiorari is DENIED for lack of merit. The Decision dated
November 19, 2010 and Resolution dated January 31, 2011 of the Court of Appeals in CA-G.R. CV No.
91120 are hereby AFFIRMED.
With costs against the petitioner.