Credit Pledge 2088-2092

G.R. No. L-32762 January 27, 1983 CRISTINA PENULLAR, petitioner, 
 vs.
 PHILIPPINE NATIONAL BANK, respondent. Teodoro T Junio for petitioner. Antonio M. Ramos for respondent PNB. GUTIERREZ, JR., J.: The principal issue raised in this petition is whether or not the Court of Appeals, even as it sustained the trial court's finding that the titles covering the disputed parcels of land are null and void, could still declare that the mortgages annotated on those titles are valid. The Court of Appeals stated the facts of this case as follows: RESOLVING: On Appeal Civil Case No. D-894 of the Court of First Instance of Pangasinan instituted by Cristina P. Penullar against Florencio Felix et. al., for declaration of absolute nullity of judicial proceedings in which after filing of the complaint on 9 May, 1959, answer on 27 May, 1959 by the Philippine National Bank stipulation of facts on 1 February, 1967 and hearing on 11 August 1967 with only plaintiff presenting evidence purely documentary there was after that promulgated decision disposing. WHEREFORE, in view of all the foregoing the Court rules that: (1) that the proceedings made under Registration Case No. 16347 are null and void; Land

null and void; (5) that since the plaintiff has been found to be the sole and absolute owner of the properties in question, the defendants are hereby ordered to vacate the same and to surrender the possession as well as the ownership thereof in favor of the plaintiff; (6) that the defendants are required to render a true and faithful accounting of the fruits of the said properties from September 26, 1958 until the possession of the plaintiff has been restored, and to indemnify value of said products as may be found in said accounting. The defendants are likewise ordered to pay the costs of this suit. xxx xxx xxx which defendant Philippine National Bank has taken here on appeal on the errors assigned in its brief; IT APPEARING: That the antecedents are rather complicated; it will be the task of this Court to simplify; on 27 February, 1936 claiming that she was the absolute owner but that therein defendants were pretending to have an interest in the property and had intruded sometime in December, 1935, Genoveva Miguel filed Civil Case No. 7199 in the Court of First Instance of Pangasinan against Praxedes Moya et al., predecessors of herein plaintiff Cristina Penullar, for declaration of ownership over three (3) portions of agricultural land situated at Bayambang, Pangasinan; Praxedes Moya and companions presented their answer in due time Exh. A-1; while that Civil Case No. 7199 was pending, Genoveva Miguel presented formal application for registration of her title on 1 February, 1938 in land Case No. 16347; and Praxedes Moya opposed on 10 June, 1938 Exh. B-3; well then on a date which is not very clear in the records but during the pendency of both Civil Case No. 7199 and the land registration Case No. 160.47, Praxedes Moya was able to obtain free patent over the property and unto her was issued original certificate of title No. 3148 and on another parcel also was issued a free patent in the name of one Josefa Sison also one of herein plaintiff's predecessors and unto her was issued Original Certificate of Title No. 2932; in both cases, Civil Case No. 7199 and Expediente 16347 trial Judge issued order on 15 February, 1940 suspending hearing in order to give a chance to Genoveva Miguel to investigate the Original Certificates of Title No, 3148 and 2932 Exh. A-4, issuing a supplementary order on 11 September, 1940 that said cases be held in abeyance,

Until after the Department of Agriculture and Commerce pass upon the complaint that Genoveva Miguel and others have made for the cancellation or withdrawal of the free 'patent certificate issued in the name of Praxedes Moya and others. the parties shall immediately notify the Court soon after the Department of Agriculture and Commerce renders any action on said claim. 'Exh. B- 6; but nothing more happened with respect to the cancellation of the free patents; and so it was that, on 22 May, 1947 Exh. A-7 because since September 11, 1940 up to this date, the plaintiff has failed to take any steps for the prosecution of her action. trial Judge in Civil Case No. 7199 dismissed the case, without prejudice and without pronouncement as to costs, and what Genoveva Miguel instead did after that was to prosecute the registration case and after the same had been finally heard, in the absence of Praxedes Moya, et. al., the Registration Court promulgated its decision on 20 December, 1955 ordering the inscription of the properties now in question in the name of applicant Genoveva Miguel's heirs because she had died in the meantime and as the judgment afterwards became final: Genoveva Miguel or better stated her successors in interest applied for a writ of possession which was granted the Registration Court on 25 September, 1958 and it was executed by the Sheriff on 30 September, 1958 but in the words of the Sheriff, herein plaintiff successor in interest of oppositor Praxedes Moya, vehemently objected to the possession of the applicant,' and a few months after that herein plaintiff Cristina Penullar filed the present Civil Case No, T-894 for annulment of the Registration Proceeding specifically the decision rendered therein and the titles issued pursuant to that in the name of the heirs of Genoveva Miguel, namely Original Certificates No. 14242, 24244, 24240, 14238, 24313 as well as the incumbrance by way of mortgage constituted by the said adjudicatees in favor of the Philippine National Bank, on the Position that the lands having already been registered, although by way of free patent, the

(2) that all the titles issued by the Land Registration Court pursuant to the said Land Registration proceedings, as well as all Certificate of Title flowing from the said original title are null and void; (3) that the land covered by this case are the registered properties of the plaintiff over which she holds an irrevocable and indefeasible title over the same; (4) that the writ of possession issued by the land registration court on 26 of September 1958 in connection with Land Registration Case No. 16347 is

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titles in the names of Praxedes Moya and Josefa Sison, predecessors in interest of Cristina Penullar became an absolute bar against posterior registration and in the trial of the case plaintiff submitted her case on the basis of aforementioned documentary proofs constituting of Exhs. A to 0, against this, Philippine National Bank in its answer p. 23 R.A. submitted as special defense that it was an innocent mortgagee for value having granted loans to the adjudicatees in the registration case namely Maximo Alejo, Filomeno Domingo, Serafina Gascon relying on their titles which appeared to be genuine, issued in due course and regular on their face; and it is to be stated that the fact of this constitution of the mortgages in favor of the Philippine National Bank by the said adjudicatees successors in interest of Genoveva Miguel does not appear to be debated; but trial Judge after hearing the case held for Cristina Penullar successor in the interest of Praxedes Moya and Josefa Sison and annulled the titles issued pursuant to the decision of the Land Registration Court in favor of the successors in interest of Genoveva Miguel; ... The respondent Court of Appeals modified the appealed decision to the effect ... that the mortgages in favor of Philippine National Bank attacked by plaintiff are hereby declared valid.' In all other respects, the decision of the lower court was affirmed. (Annex " D ", p. 18, rollo) Not satisfied with the modified decision, plaintiffappellee Cristina Penullar filed a motion for reconsideration and when the motion was denied by the respondent court, filed the instant petition. The petitioner assigns the following errors: I THE COURT OF APPEALS ERRED IN HOLDING AS VALID THE MORTGAGES NEVER ANNOTATED IN PETITIONER'S TITLES BUT IN THE VOID TITLES OF RESPONDENT'S CO-DEFENDANTS. II THE COURT OF APPEALS ERRED IN ADJUDICATING RESPONDENT'S APPEAL UPON AN ISSUE NOT RAISED IN THE PLEADINGS BEFORE ITSELF NOR BEFORE THE TRIAL COURT. III

THE COURT OF APPEALS ERRED IN RESORTING TO PALPABLY UNTENABLE THEORIES AND POSTULATES TO JUSTIFY ITS DECISION. The main issue centers on the ruling of the Court of Appeals' sustaining the validity of the mortgages in favor of the respondent Philippine National Bank. The petitioner contends: 1. that the Court of Appeals did not have a basis to rule on the matter since the issue of the Philippine National Bank as a mortgagee in good faith was never raised before the trial court and the Court of Appeals, and 2. under the facts obtaining in the case was not justified in ruling that respondent Philippine National Bank's mortgages were valid. The record on Appeal filed by the Philippine National Bank shows that in the Answer of the bank, there was alleged the special defense .. that the Philippine National Bank, a credit institution, in the ordinary course of business, in good faith and for valuable consideration, is an innocent purchaser having granted loans to Maximo Alejo. ... and to Filomeno Domingo and Serafina Gascon ... under the security of Torrens Title issued to the borrower and relying on the fact of the same which appeared to be genuine, regular and in due form." (Record on Appeal, p. 24) Moreover, respondent Philippine National Bank on the very theory that it was a mortgage in good faith filed a Motion to Dismiss the case as against it. (Record on Appeal, pp. 31-34) And this motion was subject to another URGENT MOTION for Resolution filed by respondent Philippine National Bank (Record on Appeal, pp. 39-40).1äwphï1.ñët The same motion prompted the petitioner plaintiff in the trial court, to file an Opposition thereto, (Record on Appeal, PP- 40-41) which in turn led the respondent Philippine National Bank to file a Reply to the Opposition. (Record on Appeal pp, 48- 50). In its appeal to the Court of Appeals, the Philippine National Bank maintained its position that it was a mortgagee in good faith. Thus, in the third Assignment of Error of its brief filed before the appellate court, the Philippine National Bank adequately discussed its being a mortgagee in good faith. The first proposition is without merit. The second proposition covered by the first and third assignments of errors is premised on the following arguments: Since the torrens titles wherein respondent Philippine National Bank's mortgages were annotated were declared void, necessarily the

same mortgages annotated in the said torrens title should also be declared void, on the theory that a mortgage is but an accessory contract. The petitioner maintains that her torrens title should not answer for the same mortgages since the latter were not annotated considering the "fundamental principle of registration that Torrens titles are affected only by the encumbrance registered and annotated in said titles." Furthermore, she argues that to validate the mortgages annotated in the void titles of Philippine National Bank's co-defendants but never annotated in her torrens titles would in effect revalidate the void titles to co-exist with her valid title. The petitioner considers the ruling of the Court of Appeals inconsistent because according to her no valid lien could emanate from a void title. The petitioner's arguments have no merit. The Court of Appeals fully explained the reasons why the mortgages annotated in the void torrens titles should be considered valid. Thus: ... now in resolving this question let it be granted that there is clear logic in the position of appellees that the titles of the heirs of Genoveva Miguel mortgagors to Philippine National Bank having been declared void, on the principle that the rights of Philippine National Bank being dependent upon those void titles, Philippine National Bank should not be permitted to pretend that its mortgages should be considered a valid encumbrance upon the property, for it is like the branch of a dead tree so to speak but the trouble is that cases cannot be decided upon pure logic; the fact of the matter is that the Bank relief upon regular Torrens Titles issued pursuant to a regular judgment of the registration Court: there is no showing, absolutely no showing, that the Bank was made specifically aware of the fact that the very property already covered by the free patents were only afterwards adjudicated to and Torrens Titles issued in the name of the heirs of Genoveva Miguel, who were the parties that afterwards had secured the mortgages from the Bank, not only this, the declaration of nullity of the titles of the heirs of Genoveva Miguel due to the fact that there had already been free patents issued in the name of plaintiff's predecessors Praxedes Moya and Josefa Sison came in only much later and in fact as of the time when these mortgages were accepted by the Bank, there was as yet no decision declaring the titles of the mortgagors null and void; stated otherwise there can be no denying the fact that the Bank was made to rely and had the right to rely upon regular certificates of title first presented to it by the

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mortgagors; ... (Rollo, pp. 17-18) The foregoing findings and conclusions of the respondent Court are sustained by rulings in precedent cases. In Director of Lands v. Abache (73 Phil. 606) the principal issue hinged on whether or not the mortgage lien annotated on the torrens title which was declared null and void should likewise be ordered null and void. We said: Where, however, innocent third persons, relying on the correctness of the certificate of title thus issued, acquire rights over the property, the court cannot disregard such rights and order the total cancellation of the certificate. The effect of such an outright cancellation would be to impair public confidence in the certificates of title, for everyone dealing with property registered under the Torrens System would have to inquire in every instance as to whether the title has been regularly or irregularly issued by the court. And this is contrary to the evident purpose of the law. Section 39 of Act No. 496 provides that every person receiving a certificate of title in pursuance of a dectree 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 encumbrance except those noted on said certificate. We have heretofore emphasized, and do so now, that every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and the law will in no way oblige him to go behind the certificate to determine the condition of the property . Resolving a similar issue in Blanco, et al. v. Esquierdo, et al. (110 Phil. 495) this Court ruled: That the certificate of title issued in the name of Fructuosa Esquierdo (mortgagor) is a nullity, the same having been secured thru fraud, is not here in question. The only question for determination is whether the defendant bank is entitled to the protection accorded to 'innocent purchasers for value', which phrase, according to sec. 38 of the Land Registration Law, includes an innocent mortgagee for value. The question, in our opinion, must be answered in the affirmative. The trial court, in the decision complained of, made no finding that the defendant mortgagee bank was a party to the fraudulent transfer of the land to Fructuosa Esquierdo. Indeed, there is nothing alleged

in the complaint which may implicate said defendant mortgagee in the fraud, or justify a finding that it acted in bad faith. On the other hand, the certificate of title was in the name of the mortgagor Fructuosa Esquierdo when the land was mortgaged by her to the defendant bank. Such being the case, the said defendant bank, as mortgagee, had the right to rely on what appeared in the certificate and, in the absence of anything to excite suspicion, was under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the fact of said certificate. (De Lara, et. al. vs. Ayroso 95 Phil. 185; 50 Off. Gaz., [101 4838; Joaquin vs. Madrid, et al., 106 Phil. 1060). Being thus an innocent mortgagee for value, its right or lien upon the land mortgaged must be respected and protected, even if the mortgagor obtained her title thereto thru fraud. ... In the instant case, the Philippine National Bank relied on the torrens titles of the mortgagors which had been regularly issued. The torrens titles were the result of regular land registration proceedings duly registered with the Register of Deeds. There was nothing in the torrens titles which would excite suspicion that the same were fraudulently processed by the mortgagors. Applying, therefore, the principles enunciated in the afore- cited cases, the respondent Bank was not duty bound to further investigate the validity and/or invalidity of the torrens title. The assertion that the Philippine National Bank could not be an innocent mortgagee in good faith considering that the same parcel of land covered by the invalidated titles was previously mortgaged by: first, Domingo Cayabyab, a predecessor-in-interest of the petitioner and second, by the petitioner herself under Transfer Certificate of Title No. 8822 to the respondent Philippine National Bank is not well-taken. An examination of the technical descriptions of the parcels of land covered by the three subject torrens titles shows that they are different from each other and there is no way for a reader to detect that the void torrens titles covered the same parcels of land in Transfer Certificate of Title No. 8822, previously mortgaged to the respondent Bank. Thus, Transfer Certificate of Title No. 8822 has the following technical description of the land it covers: A parcel of land Plan F-61451, situated in the barrio of Pant-at Municipality of Bayambang, Province of Pangasinan, Islands of Luzon, Bounded on the Northeast by Lot No. 1-B of Plan Psd 8364, Lot No. 1 of Plan Psu-30431-Amd. and Lot No. 2 of plan Psu37494 vs. Lot No. 2 of plan Psu 30431 Amd. on the Southeast, by property of Josefa Sison de Mananzan,

on the Southwest, by properties of Maximiano Felix and Heirs of Martin Palisoc, and on the Northwest by Lot No. 5 of plan Psu-103094, and Lot No. 1-B of plan Psd 8364. Containing an area of ONE HUNDRED FIVE THOUSAND TWO HUNDRED SEVENTY EIGHT (105,278), square meters more or less. Surveyed under authority of Sections 41, 43, Act No. 2874 and in accordance with existing regulations of the Bureau of Lands by Pedro Terrado, Private Land Surveyor, on Dec. 17, 1933. On the other hand, the technical description of the parcel of land awarded to Maximo Alejo, mortgagor in one of the subject mortgages in favor of the respondent Bank, which appears in the writ of possession issued by the cadastral court in the voided land registration proceedings and which necessarily must have been included in the Original Certificate of Title No. 14240 issued in the name of the same Maximo Alejo reads: 4. A parcel of land (Lot No. 3, plan Psu-103094). Bounded on the NE, by property of Gregorio de Leon & Domingo Rodriguez (before) Onofre Sison Abalos (now); on the SE. by lot No. 2; on the SW. by properties of Flaviano Junio and Vicente Castillo; and on the NW. by Lot No. Area 14,807 square meters. Adjudicated in favor of Maximo Alejo. The technical description of the parcel of land awarded to Filomeno Domingo, the mortgagor in the other mortgage in favor of respondent Philippine National Bank, which description necessarily must have been inscribed on Transfer Certificate of Title No. 24313 issued in his name reads: 1. A parcel of land (Lot No. 1, plan Psu103094).Bounded on the N. and NW. by Lot No. 2; on the NE. by property of Gregorio de Leon & Domingo Rodriguez (before) Onofre Sison Abalos (now); on the SE. by Vecinal Road (before) heirs of German Maramba (now); and on the SW. by properties of Faustino Pinto and Filemon Padua. Area 27,463 square meters. Adjudicated in favor of Florencio Felix. 2. A parcel of land (Lot No. 2, Plan Psu-103094). Bounded on the NE: by property of Gregorio de Leon & Domingo Rodriguez before Onofre Sison Abalos (now); on the SE. and S. by Lot No. 1; on the SW. by property of Flaviano Junio and on the NW. by Lot No. 3. Area 26,870 square meters. Adjudicated in favor of Florencio Felix. We agree with the invocation by the Court of Appeals

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of the principle of equity: ... if there be any doubt as to the correctness of this solution this court might as well invoke the principle that where one of two innocent parties must have to suffer due to the act of a third person, he whose negligence had caused the damage should be made to bear the loss; in the present case if 'he heirs of Genoveva Miguel, that is to say herein plaintiff had only been diligent, and had appealed from the decision in the registration case, no certificate of Title would have been issued just like that in the name of the heirs of Genoveva Miguel and no mortgage could have been constituted by them in favor of Bank but as it is, said successors of Praxedes Moya and Josefa Sison failed to do that; instead they let the decision in the registration case gain the status of finality; allowed without prior protest, the certificate of title to be issued; did not even as early as possible, annotate an adverse claim on the "titles; and they filed this case only several months afterwards, it was their negligence that permitted said adjudicatees in the said registration case to apply for and secure mortgages from the Bank. The petitioner argues that neither she nor her predecessors could have appealed the decision in the land registration proceedings because: 1) her predecessors were already dead at the time of the promulgation of the decision, and 2) she was not substituted as a party nor was she aware of said registration proceedings, 3) petitioner's predecessor Praxedes Moya who was aware of the land registration proceedings had the right to rely on the previous suspension of the land registration proceedings; and 4) petitioner's predecessor had the right to rely on the dismissal of Civil Case No. 7199 filed by respondent's co-defendant against; petitioner's predecessors for "declaration of ownership 'over the subject, parcels of land and that nobody notified petitioner or her predecessors of the revival of the void subsequent registration proceedings. The arguments are not well-taken. The records show that Praxedes Moya, predecessor-in-interest of the petitioner, was fully aware of the subject land registration proceedings. From the stipulation of the Facts" alone, the extent of her knowledge can be gleaned Thus: xxx xxx xxx (7) That Notice of Hearing of the Registration Case

No. 16347, G.L.R.O. Record No. 52435, dated July 11, 1955 was issued by the Court, setting the trial for October 6, 1955. (8) Copy of this Notice of Hearing was sent by registered mail, under Registered letter No. 118, which was received by counsel for Praxedes Moya Atty. Jose M. Garcia, on July 22, 1955, as evidenced by Registry Return Card of letter No. 118 attached in the Record of the said registration case on page 148; and, (9) Praxedes Moya herself received or. July 23, 1955 copy of the Notice of Hearing as evidenced by Registry Return Card of registered letter No. 119 attached to the records of Registration Case No. 16347 on page 151. (See minutes of October 6, 1955, page 153 of the Records of Registration Case No. 16347, G.L.R.O. Records No. 524 35. (10) On December 20, 1955, the Court rendered its decision in said Reg. Case 16347, Record 52435 making the following adjudication ... xxx xxx xxx Copy of this Decision were (sic) sent by registered mail to Atty. Jose M. Garcia, counsel for Praxedes Moya who received it on January 27, 1956 as evidenced by Registry Return Card of Letter No. 39 attached to the Record of Registration Case No. 16347, on page 187, (12) Praxedes Moya, herself, was also notified of this decision, furnished to her by registered letter which she received on January 30, 1956 as evidenced by Registry Return Card of Registered Letter No. 138, attached to the record of this registration Case 16347, on page 179. " (Record on Appeal pp, 55-56) xxx xxx xxx As successor-in-interest, the petitioner did not only succeed to the rights and interests of her predecessor-in-interest but she was also bound to recognize the liens and/or encumbrances attached to the subject parcels of land which by law are considered to be valid though not inscribed in the torrens title of that land. The petitioner cannot invoke her relationship with her predecessor when it is to her advantage and yet disclaim the effects of said relationship on exactly the same subject matter when it is to her disadvantage. This is the principle which

the Court of Appeals took into consideration when it ruled that the negligence of petitioner's predecessorin-interest was binding upon the petitioner herself notwithstanding her non- substitution as party to the subject land registration proceedings. WHEREFORE. the decision appealed from is hereby affirmed. Costs against the petitioner. SO ORDERED.

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G.R. No. L-22331

June 6, 1967

following conditions: I hereby reserve for myself, my heirs, successors, administrators, and assigns the right to repurchase the above mentioned properties for the same amount of P3,000.00, without interest, within the stipulated period of three (3) months from the date hereof. If I fail to pay said amount of P3,000.00, within the stipulated period of three months, my right to repurchase the said properties shall be forfeited and the ownership thereto shall automatically pass to Mrs. Maria Bautista Vda. de Reyes, her heirs, successors, administrators, and assigns, without any Court intervention, and they can take possession of the same.1äwphï1.ñët IN WITNESS WHEREOF, we have signed this contract in the City of Manila, this 12th day of January, 1961. s/t RODOLFO LANUZA Vendor s/t AURELIA REYES Vendee When the original period of redemption expired, the parties extended it to July 12, 1961 by an annotation to this effect on the left margin of the instrument. Lanuza's wife, who did not sign the deed, this time signed her name below the annotation. It appears that after the execution of this instrument, Lanuza and his wife mortgaged the same house in favor of Martin de Leon to secure the payment of P2,720 within one year. This mortgage was executed on October 4, 1961 and recorded in the Office of the Register of Deeds of Manila on November 8, 1961 under the provisions of Act No. 3344. As the Lanuzas failed to pay their obligation, De Leon filed in the sheriff's office on October 5, 1962 a petition for the extra-judicial foreclosure of the mortgage. On the other hand, Reyes and Navarro followed suit by filing in the Court of First Instance of Manila a petition for the consolidation of ownership of the house on the ground that the period of redemption expired on July 12, 1961 without the vendees exercising their right of repurchase. The petition for consolidation of ownership was filed on October 19. On October 23, the house was sold to De Leon as the only bidder at the sheriffs sale. De Leon immediately took possession of the house, secured a discharge of the mortgage on the house in favor of a rural bank by paying P2,000 and, on October 29, intervened in court and asked for the dismissal of the petition filed

IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND THE RIGHTS TO A LOT. 
 MARIA BAUTISTA VDA. DE REYES, ET AL., vendees-petitioners-appellees. 
 RODOLFO LANUZA, vendor, 
 vs.
 MARTIN DE LEON, intervenor-appellant. Erasmo R. Cruz and C. R. Pascual for intervenorappellant.
 Augusto J. Salas for vendees-petitionersappellees. REGALA, J.: Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a lot of the Maria Guizon Subdivision in Tondo, Manila, which the spouses leased from the Consolidated Asiatic Co. On January 12, 1961, Lanuza executed a document entitled "Deed of Sale with Right to Repurchase" whereby he conveyed to Maria Bautista Vda. de Reyes and Aurelia R. Navarro the house, together with the leasehold rights to the lot, a television set and a refrigerator in consideration of the sum of P3,000. The deed reads: DEED OF SALE WITH RIGHT TO REPURCHASE KNOW ALL MEN BY THESE PRESENTS: That I, RODOLFO LANUZA, Filipino, of legal age, married to Belen Geronimo, and residing at 783-D Interior 14 Maria Guizon, Gagalangin, Tondo, Manila, hereby declare that I am the true and absolute owner of a new two storey house of strong materials, constructed on a rented lot — Lot No. 12 of the Maria Guizon Subdivision, owned by the Consolidated Asiatic Co. — as evidenced by the attached Receipt No. 292, and the plan of the subdivision, owned by said company. That for and in consideration of the sum of THREE THOUSAND PESOS (P3,000.00) which I have received this day from Mrs. Maria Bautista Vda. de Reyes, Filipino, of legal age, widow; and Aurelia Reyes, married to Jose S. Navarro, Filipinos, of legal ages, and residing at 1112 Antipolo St., Tondo, Manila, I hereby SELL, CEDE, TRANSFER, AND CONVEY unto said Maria Bautista Vda. de Reyes, her heirs, succesors, administrators and assigns said house, including my right to the lot on which it was constructed, and also my television, and frigidaire "Kelvinator" of nine cubic feet in size, under the

by Reyes and Navarro on the ground that the unrecorded pacto de retro sale could not affect his rights as a third party. The parties1 thereafter entered into a stipulation of facts on which this opinion is mainly based and submitted the case for decision. In confirming the ownership of Reyes and Navarro in the house and the leasehold right to the lot, the court said: It is true that the original deed of sale with pacto de retro, dated January 12, 1961, was not signed by Belen Geronimo-Lanuza, wife of the vendor a retro, Rodolfo Lanuza, at the time of its execution. It appears, however, that on the occasion of the extension of the period for repurchase to July 12, 1961, Belen Geronimo-Lanuza signed giving her approval and conformity. This act, in effect, constitutes ratification or confirmation of the contract (Annex "A" Stipulation) by Belen Geronimo-Lanuza, which ratification validated the act of Rodolfo Lanuza s/t MARIA BAUTISTA VDA. DE REYES from the moment of the execution of the said contract. Vendee In short, such ratification had the effect of purging the WITH MY MARITAL CONSENT: contract (Annex "A" Stipulation) of any defect which it s/t JOSE S. NAVARRO might have had from the moment of its execution. (Article 1396, New Civil Code of the Philippines; Tang Ah Chan and Kwong Koon vs. Gonzales, 52 Phil. 180) Again, it is to be noted that while it is true that the original contract of sale with right to repurchase in favor of the petitioners (Annex "A" Stipulation) was not signed by Belen Geronimo-Lanuza, such failure to sign, to the mind of the Court, made the contract merely voidable, if at all, and, therefore, susceptible of ratification. Hence, the subsequent ratification of the said contract by Belen Geronimo-Lanuza validated the said contract even before the property in question was mortgaged in favor of the intervenor. It is also contended by the intervenor that the contract of sale with right to repurchase should be interpreted as a mere equitable mortgage. Consequently, it is argued that the same cannot form the basis for a judicial petition for consolidation of title over the property in litigation. This argument is based on the fact that the vendors a retro continued in possession of the property after the execution of the deed of sale with pacto de retro. The mere fact, however, that the vendors a retro continued in the possession of the property in question cannot justify an outright declaration that the sale should be construed as an equitable mortgage and not a sale with right to repurchase. The terms of the deed of sale with right to repurchase (Annex "A" Stipulation) relied upon by the

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petitioners must be considered as merely an equitable mortgage for the reason that after the expiration of the period of repurchase of three months from January 12, 1961. Article 1602 of the New Civil Code provides: "ART. 1602. The contract shall be presumed to be in equitable mortgage, in any of the following cases; xxx xxx xxx

executed by one who is not the owner of the property mortgaged is without legal existence and the registration cannot validate. (Philippine National Bank vs. Rocha, 55 Phil. 497). The intervenor invokes the provisions of article 1544 of the New Civil Code for the reason that while the real estate mortgage in his favor (Annex "B" Stipulation) has been registered with the Register of Deeds of Manila under the provisions of Act No. 3344 on November 3, 1961, the deed of sale with right to repurchase (Annex "A" Stipulation) however, has not been duly registered. Article 1544 of the New Civil Code, however, refers to the sale of the same property to two or more vendees. This provision of law, therefore, is not applicable to the present case which does not involve sale of the same property to two or more vendees. Furthermore, the mere registration of the property mortgaged in favor of the intervenor under Act No. 3344 does not prejudice the interests of the petitioners who have a better right over the property in question under the old principle of first in time, better in right. (Gallardo vs. Gallardo, C.B., 46 O.G. 5568) De Leon appealed directly to this Court, contending (1) that the sale in question is not only voidable but void ab initio for having been made by Lanuza without the consent of his wife; (2) that the pacto de retro sale is in reality an equitable mortgage and therefore can not be the basis of a petition for consolidation of ownership; and (3) that at any rate the sale, being unrecorded, cannot affect third parties. We are in accord with the trial court's ruling that a conveyance of real property of the conjugal partnership made by the husband without the consent of his wife is merely voidable. This is clear from article 173 of the Civil Code which gives the wife ten years within which to bring an action for annulment. As such it can be ratified as Lanuza's wife in effect did in this case when she gave her conformity to the extension of the period of redemption by signing the annotation on the margin of the deed. We may add that actions for the annulment of voidable contracts can be brought only by those who are bound under it, either principally or subsidiarily (art. 1397), so that if there was anyone who could have questioned the sale on this ground it was Lanuza's wife alone. We also agree with the lower court that between an unrecorded sale of a prior date and a recorded mortgage of a later date the former is preferred to the latter for the reason that if the original owner had parted with his ownership of the thing sold then he no

longer had the ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage under Act No. 3344 would, in such case, be of no moment since it is understood to be without prejudice to the better right of third parties.2 Nor would it avail the mortgagee any to assert that he is in actual possession of the property for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the thing sold to the vendee.3 But there is one aspect of this case which leads us to a different conclusion. It is a point which neither the parties nor the trial court appear to have sufficiently considered. We refer to the nature of the so-called "Deed of Sale with Right to Repurchase" and the claim that it is in reality an equitable mortgage. While De Leon raised the question below and again in this Court in his second assignment of error, he has not demonstrated his point; neither has he pursued the logical implication of his argument beyond stating that a petition for consolidation of ownership is an inappropriate remedy to enforce a mortgage. De Leon based his claim that the pacto de retro sale is actually an equitable mortgage on the fact that, first, the supposed vendors (the Lanuzas) remained in possession of the thing sold and, second, when the three-month period of redemption expired the parties extended it. These are circumstances which indeed indicate an equitable mortgage.4 But their relevance emerges only when they are seen in the perspective of other circumstances which indubitably show that what was intended was a mortgage and not a sale.These circumstances are: 1. The gross inadequacy of the price. In the discussion in the briefs of the parties as well as in the decision of the trial court, the fact has not been mentioned that for the price of P3,000, the supposed vendors "sold" not only their house, which they described as new and as being made of strong materials and which alone had an assessed value of P4,000, but also their leasehold right television set and refrigerator, "Kelvinator of nine cubic feet in size." indeed, the petition for consolidation of ownership is limited to the house and the leasehold right, while the stipulation of facts of the parties merely referred to the object of the sale as "the property in question." The failure to highlight this point, that is, the gross inadequacy of the price paid, accounts for the error in determining the true agreement of the parties to the deed. 2. The non-transmission of ownership to the vendees.

"(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed. xxx xxx xxx

In the present case, it appears, however, that no other instrument was executed between the parties extending the period of redemption. What was done was simply to annotate on the deed of sale with right to repurchase (Annex "A" Stipulation) that "the period to repurchase, extended as requested until July 12, 1961." Needless to say, the purchasers a retro, in the exercise of their freedom to make contracts, have the power to extend the period of repurchase. Such extension is valid and effective as it is not contrary to any provision of law. (Umale vs. Fernandez, 28 Phil. 89, 93) The deed of sale with right to repurchase (Annex "A" Stipulation) is embodied in a public document. Consequently, the same is sufficient for the purpose of transferring the rights of the vendors a retro over the property in question in favor of the petitioners. It is to be noted that the deed of sale with right to repurchase (Annex "A" Stipulation) was executed on January 12, 1961, which was very much ahead in point of time to the execution of the real estate mortgage on October 4, 1961, in favor of intervenor (Annex "B" Stipulation). It is obvious, therefore, that when the mortgagors, Rodolfo Lanuza and Belen Geronimo Lanuza, executed the real estate mortgage in favor of the intervenor, they were no longer the absolute owners of the property since the same had already been sold a retro to the petitioners. The spouses Lanuza, therefore, could no longer constitute a valid mortgage over the property inasmuch as they did not have any free disposition of the property mortgaged. (Article 2085, New Civil Code.) For a valid mortgage to exist, ownership of the property mortgaged is an essential requisite. A mortgage

6

The Lanuzas, the supposed vendors did not really transfer their ownership of the properties in question to Reyes and Navarro. What was agreed was that ownership of the things supposedly sold would vest in the vendees only if the vendors failed to pay P3,000. In fact the emphasis is on the vendors payment of the amount rather than on the redemption of the things supposedly sold. Thus, the deed recites that — If I (Lanuza) fail to pay said amount of P3,000.00 within the stipulated period of three months, my right to repurchase the said properties shall be forfeited and the ownership thereto automatically pass to Mrs. Maria Bautista Vda. de Reyes . . . without any Court intervention and they can take possession of the same. This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee acquires ownership of the thing sold immediately upon execution of the sale, subject only to the vendor's right of redemption.5 Indeed, what the parties established by this stipulation is an odious pactum commissorium which enables the mortgages to acquire ownership of the mortgaged properties without need of foreclosure proceedings. Needless to say, such a stipulation is a nullity, being contrary to the provisions of article 2088 of the Civil Code.6 Its insertion in the contract of the parties is an avowal of an intention to mortgage rather than to sell.7 3. The delay in the filing of the petition for consolidation. Still another point obviously overlooked in the consideration of this case is the fact that the period of redemption expired on July 12, 1961 and yet this action was not brought until October 19, 1962 and only after De Leon had asked on October 5, 1962 for the extra-judicial for closure of his mortgage. All the while, the Lanuzas remained in possession of the properties they were supposed to have sold and they remained in possession even long after they had lost their right of redemption. Under these circumstances we cannot but conclude that the deed in question is in reality a mortgage. This conclusion is of far-reaching consequence because it means not only that this action for consolidation of ownership is improper, as De Leon claims, but, what is more that between the unrecorded deed of Reyes and Navarro which we hold to be an equitable mortgage, and the registered mortgage of De Leon, the latter must be preferred. Preference of mortgage credits is determined by the priority of registration of the mortgages,8 following the maxim "Prior tempore potior jure" (He who is first in time is preferred in

right.)9 Under article 2125 of the Civil Code, the equitable mortgage, while valid between Reyes and Navarro, on the one hand, and the Lanuzas, on the other, as the immediate parties thereto, cannot prevail over the registered mortgage of De Leon. Wherefore, the decision appealed from is reversed, hence, the petition for consolidation is dismissed. Costs against Reyes and Navarro.

7

G.R. Nos. L-43459 and 43460 1937

August 11,

EL HOGAR FILIPINO, Mutual Building and Loan Association, petitioner-appellant, 
 vs.
 THE PHILIPPINE NATIONAL BANK, oppositor-appellee. DeWitt, Perkins, Brady and Ponce Enrile for appellant.
 Roman J. Lacson for appellee. AVANCEÑA, C.J.: On November 5, 1949, Serafin Novella, Mercedes Novella, Cecilia Magalona and Robustiano Magalona constituted a first mortgage on lots Nos. 194, 158 and 14 of the cadastre of Victorias, Occidental Negros, and on lots Nos. 700, 817 and 706 of the cadastre of Saravia, Occidental Negros, to secure the payment of the sum of P28,000, with interest thereon at 9 per cent per annum, representing their indebtedness to El Hogar Filipino, Mutual Building and Loan Association. This mortgage was duly registered and noted in the corresponding certificates of title. The deed of mortgage contains the following clause: TENTH. The borrowers hereby give and confer upon the eventual manager of the Association sufficient and irrevocable power so that, in case the debt hereby acknowledge should become due by reason of the nonfulfillment by the borrower of any of the obligations stated in the second, fourth, fifth, eleventh, twelfth, thirteen, sixteenth, seventeenth, and twentyfirst clauses of this instrument, upon resolution of the board of directors declaring that the Association has chosen to make use of its right to consider the borrower's debt due, and upon publication of notices in a newspaper of general circulation in this city once a week for three (3) consecutive weeks, he may proceed with the extrajudicial sale at public auction of the mortgaged property, before the notary or auctioneer designated by the board of directors, the eventual manager of the Association being likewise vested with irrevocable power, as agent of the borrower, to execute the corresponding deed of sale in favor of the highest bidder at the auction. Provided, however, That said instrument of sale shall not be executed until after the expiration of thirty (30) days from the dated of the auction sale. And provided, further, That if within said period of thirty (30) days from the date of the auction sale, the borrower should pay to the Association the full amount of his indebtedness on that date, plus the accrued interest thereon and the expenses occasioned by the auction sale, minus the withdrawal value of his shares, the

auction sale shall be of no effect and the representatives of the Association shall execute the corresponding instrument of cancellation of the mortgage constituted hereby, the expenses for the execution of said instrument of cancellation being for the account of the borrower. Subsequently, on June 6, 1930, Serafin Novella, constituted a second mortgage on his 3/4 share of said lots in favor of the Philippine National Bank. El Hogar Filipino consented to the constitution of the second mortgage in favor of the Philippine National Bank on condition that it be considered subordinate to the first mortgage constituted in favor of the former. The Novellas and Magalonas having violated the contract, El Hogar Filipino declared due, as to them, and proceeded with the auction sale of the mortgaged lots strictly in accordance with the conditions set forth in the above-quoted tenth clause of the mortgage deed. El Hogar Filipino having been the highest bidder at said sale, the lots sold were adjudicated to it for the amount of its credit of P39,063.71. Before the auction sale of the lots in question was carried out, the Philippine National Bank was notified thereof. After the sale had been made, it was likewise notified for the purposes of its right of repurchase. The Philippine National Bank, however, never made use of its right of repurchased to this date. Thirty days after the auction sale had been made, the corresponding deed of sale was issued in favor of El Hogar Filipino. When said document was presented to the office of the register of deeds for the cancellation of the titles to said lots and the issuance of new certificates in favor of El Hogar Filipino, the Philippine National Bank opposed, alleging that, under the law, it had one year within which to redeem the lots. Notwithstanding said opposition, the documents was registered with a notation of the mortgage in favor of the Philippine National Bank, which notation was agreed to by El Hogar Filipino provided it was made to appear that it was merely taken from the original certificate of the title. El Hogar Filipino brought these two actions in the Court of First Instance of Occidental Negros to have the court declare the mortgage lien in favor of the Philippine National Bank extinguished and order the register of deeds to cancel the annotation of said mortgage in favor of the Philippine National Bank on the transfer certificates of title issued in favor of El Hogar Filipino.

The court, after due trial, rendered judgment denying the petition of El Hogar Filipino and from said judgment an appeal was taken to this court. By virtue of the mortgage constituted in favor of the El Hogar Filipino, and the credit thereof having become demandable, said mortgaged lots in order to apply the proceeds to the payment of its credit. Such is the legal effect of the mortgage. The Philippine National Bank, by reason of the second mortgage constituted in its favor which was accepted by it as subordinate to the first mortgage in favor of El Hogar Filipino, cannot oppose such effect. The above-quoted tenth clause of the contract being valid (El Hogar Filipino vs. Paredes, 45 Phil., 1780, the validity of the sale made strictly in accordance therewith cannot be questioned. The sale in debtors and said lots should thereafter be considered extinguished in so far as they secured the payment of the credit of the Philippine National Bank. Therefore, the security in favor of said bank, as second creditor, was in fact extinguished thereby. Aside from the right of repurchase, the Philippine National Bank's only right under the mortgage constituted in its favor would be to apply to the payment of its credit the excess of the proceeds of the sale after the payment of that of El Hogar Filipino, such being the effect of the subordination of its mortgage to that of the latter. However, inasmuch as the credit of El Hogar Filipino has absorbed the entire proceeds of the sale, the mortgage in favor of the bank was in fact extinguished with it because it cannot be enforced by said bank beyond the total value of the mortgaged lots. Consequently, the lots passed to the repurchaser free from the mortgage in favor of the bank. The bank's claim that the second mortgage in its favor stands to the prejudice of the purchaser is untenable, particularly because, as the repurchaser in this case is the first mortgages, would practically be to convert the second mortgage, constituted in favor of the Philippine National Bank, into a first mortgage, and the first mortgage, constituted in favor of El Hogar Filipino, into a second mortgage. The fact that El Hogar tolerated the annotation of the bank's second mortgage on the transfer certificates of title in its name is of no avail, it being clear that El Hogar's consent to this effect was not an admission of the existence of the bank's second mortgage but merely a compromise with the bank's claim that it was still timely for the latter to redeem the lots sold, as shown by the fact that El Hogar consented thereto provided it was made to appear that the annotation was merely taken from the debtors' certificates of title. In this instance, Serafin Novella filed a petition to intervene on April 6, 1937, after the case had already

8

been submitted. As said petition was not filed on time, it should be denied (Felismino vs. Gloria, 47 Phil., 967; De Borja vs. Jugo, p. 464, ante). For the foregoing considerations, the appealed judgment is reversed, and the second mortgage constituted on the lots in question in favor of the Philippine National Bank is ordered cancelled, without special pronouncement as to costs. So ordered.

9

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

11, 1975; and April 4, 1977; 3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights; 4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of the Promissory Notes; 5. Without foreclosure proceedings, whether judicial or extrajudicial, defendant DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question; 6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question, defendant DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond in question; In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBP thereafter accepted the offer to repurchase in a letter addressed to plaintiff dated February 1, 1982; After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband; Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and AGRIPINA P. CAPERAL, respondents. DECISION DAVIDE, JR., J.:

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

These two consolidated cases stemmed from a complaint[1] filed against the Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBP’s appropriation of CUBA’s rights, title, and interests over a 44-hectare fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of DBP’s sale of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the fishpond; and (5) the recovery of damages, attorney’s fees, and expenses of litigation. After the joinder of issues following the filing by the parties of their respective pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pre-trial order:[2] 1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13, 1974 from the Government; Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the Promissory Notes dated September 6, 1974; August

7.

8.

2.

9.

10

the act of DBP in appropriating to itself CUBA’s leasehold rights over the fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised its contractual right under the Assignments of Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP. The trial court resolved the issue in favor of CUBA by declaring that DBP’s taking possession and ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which provides as follows: ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. It disagreed with DBP’s stand that the Assignments of Leasehold Rights were not contracts of mortgage because (1) they were given as security for loans, (2) although the “fishpond land” in question is still a public land, CUBA’s leasehold rights and interest thereon are alienable rights which can be the proper subject of a mortgage; and (3) the intention of the contracting parties to treat the Assignment of Leasehold Rights as a mortgage was obvious and unmistakable; hence, upon CUBA’s default, DBP’s only right was to foreclose the Assignment in accordance with law. The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a clear case of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the Civil Code. It then concluded that since DBP never acquired lawful ownership of CUBA’s leasehold rights, all acts of ownership and possession by the said bank were void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective. As to damages, the trial court found “ample evidence on record” that in 1984 the representatives of DBP ejected CUBA and her caretakers not only from the fishpond area but also from the adjoining big house; and that when CUBA’s son and caretaker went there on 15 September 1985, they found the said house unoccupied and destroyed and CUBA’s personal belongings, machineries, equipment, tools,

and other articles used in fishpond operation which were kept in the house were missing. The missing items were valued at about P550,000. It further found that when CUBA and her men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of which died because the DBP representatives prevented CUBA’s men from feeding the fish. At the conservative price of P3.00 per fish, the gross value would have been P690,000, and after deducting 25% of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It then set the aggregate of the actual damages sustained by CUBA at P1,067,500. The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBA’s leasehold rights. Such representation induced the said Bureau to terminate CUBA’s leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA “suffered moral shock, degradation, social humiliation, and serious anxieties for which she became sick and had to be hospitalized” the trial court found her entitled to moral and exemplary damages. The trial court also held that CUBA was entitled to P100,000 attorney’s fees in view of the considerable expenses she incurred for lawyers’ fees and in view of the finding that she was entitled to exemplary damages. In its decision of 31 January 1990, [4] the trial court disposed as follows: WHEREFORE, judgment is hereby rendered in favor of plaintiff: 1. DECLARING null and void and without any legal effect the act of defendant Development Bank of the Philippines in appropriating for its own interest, without any judicial or extra-judicial foreclosure, plaintiff’s leasehold rights and interest over the fishpond land in question under her Fishpond Lease Agreement No. 2083 (new); 2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission of the Development

Bank of the Philippines relative to said sale (Exhs. 16 and 26) as void and ineffective; 3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083A dated December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by defendant Agripina Caperal in favor of the defendant Development Bank of the Philippines (Exh. 24) as void ab initio; 4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal, jointly and severally, to restore to plaintiff the latter’s leasehold rights and interests and right of possession over the fishpond land in question, without prejudice to the right of defendant Development Bank of the Philippines to foreclose the securities given by plaintiff; 5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following amounts: a) The sum of ONE MILLION SIXTYSEVEN THOUSAND FIVE HUNDRED PESOS (P1,067,500.00), as and for actual damages; b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages; c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages; d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorney’s fees;

11

6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to defendant Development Bank of the Philippines under their Deed of Conditional Sale. CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought an increase in the amount of damages, while the latter questioned the findings of fact and law of the lower court. In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the deed of assignment was null and void and that defendant Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA - cession presupposes plurality of debts and creditors; (3) the deeds of assignment represented the voluntary act of CUBA in assigning her property rights in payment of her debts, which amounted to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped from questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits for lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It, however, deleted the amount of exemplary damages and reduced the award of moral damages from P100,000 to P50,000 and attorney’s fees, from P100,000 to P50,000. The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cuba’s leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the assignment of leasehold rights executed by Caperal in favor of DBP. It then

ordered DBP to turn over possession of the property to Caperal as lawful holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as attorney’s fees. Since their motions for reconsideration were denied,[6] DBP and CUBA filed separate petitions for review. In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorney’s fees in favor of CUBA. Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred (1) in not holding that the questioned deed of assignment was a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the deed of assignment effected a novation of the promissory notes; (c) in holding that CUBA was estopped from questioning the validity of the deed of assignment when she agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in reducing the amounts of moral damages and attorney’s fees, in deleting the award of exemplary damages, and in not increasing the amount of damages. We agree with CUBA that the assignment of leasehold rights was a mortgage contract. It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which was covered by a promissory note. In all of these notes, there was a provision that: “In the event of foreclosure of the mortgage securing this notes, I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any.” [7] Simultaneous with the execution of the notes was the execution of “Assignments of Leasehold Rights” [8] where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as “borrower”; the assigned rights, as mortgaged properties; and the instrument itself, as mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that “failure to comply with the terms and condition of any of the loans shall cause all other loans to become due and demandable and all mortgages shall be foreclosed.” And, condition no. 33 provided that if “foreclosure is actually accomplished, the usual 10% attorney’s fees and 10% liquidated damages of the total obligation shall be imposed.” There is, therefore, no shred of

doubt that a mortgage was intended. Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for the payment of the loans; thus: 3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights. In People’s Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment to guarantee an obligation is in effect a mortgage. We find no merit in DBP’s contention that the assignment novated the promissory notes in that the obligation to pay a sum of money the loans (under the promissory notes) was substituted by the assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said assignment merely complemented or supplemented the notes; both could stand together. The former was only an accessory to the latter. Contrary to DBP’s submission, the obligation to pay a sum of money remained, and the assignment merely served as security for the loans covered by the promissory notes. Significantly, both the deeds of assignment and the promissory notes were executed on the same dates the loans were granted. Also, the last paragraph of the assignment stated: “The assignor further reiterates and states all terms, covenants, and conditions stipulated in the promissory note or notes covering the proceeds of this loan, making said promissory note or notes, to all intent and purposes, an integral part hereof.” Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more creditors and involves the assignment of all the debtor’s property. Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads: “Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales.” It bears stressing that the assignment, being in its essence a mortgage, was but a security and not a satisfaction of indebtedness.[10] We do not, however, buy CUBA’s argument that condition no. 12 of the deed of assignment constituted pactum commissorium. Said condition

12

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

property for the payment of the principal obligation. DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it during the pre-trial, it had “[w]ithout foreclosure proceedings, whether judicial or extrajudicial, … appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question.” Its contention that it limited itself to mere administration by posting caretakers is further belied by the deed of conditional sale it executed in favor of CUBA. The deed stated: WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein vendees [Cuba spouses] the former acquired all the rights and interest of the latter over the abovedescribed property; … The title to the real estate property [sic] and all improvements thereon shall remain in the name of the Vendor until after the purchase price, advances and interest shall have been fully paid. (Emphasis supplied). It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBA’s leasehold rights merely on the strength of the deed of assignment. DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBA’s default would operate to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers ownership on the assignee.[12] At any rate, DBP’s act of appropriating CUBA’s leasehold rights was violative of Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing of, the thing given as security for the payment of a debt. The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from questioning DBP’s act of appropriation. Estoppel is unavailing in this case. As held by this Court in some cases,[13] estoppel cannot give validity to an act that is prohibited by law or against public policy. Hence, the appropriation of the

leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy, cannot be deemed validated by estoppel. Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it “had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] to pay their loan amortizations.”[14] This only goes to show that DBP was aware of the necessity of foreclosure proceedings. In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled CUBA’s original lease permit, approved the deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the subsequent acts emanating from DBP’s appropriation of the leasehold rights, should therefore be set aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil Code. Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as amended.[15] With more reason that the sale of property given as security for the payment of a debt be set aside if there was no prior foreclosure proceeding. Hence, DBP should render an accounting of the income derived from the operation of the fishpond in question and apply the said income in accordance with condition no. 12 of the deed of assignment which provided: “Any amount received from rents, administration, … may be applied to the payment of repairs, improvements, taxes, assessment, and other incidental expenses and obligations and the balance, if any, to the payment of interest and then on the capital of the indebtedness….” We shall now take up the issue of damages. Article 2199 provides: Except as provided by law or by stipulation, one is

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entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory damages. Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty.[16] A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the actual amount thereof.[17] It must point out specific facts which could afford a basis for measuring whatever compensatory or actual damages are borne.[18] In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000 which represented the value of the alleged lost articles of CUBA and P517,500 which represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the adjoining house. This award was affirmed by the Court of Appeals. We find that the alleged loss of personal belongings and equipment was not proved by clear evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of those items before DBP took over the fishpond in question. As pointed out by DBP, there was not “inventory of the alleged lost items before the loss which is normal in a project which sometimes, if not most often, is left to the care of other persons.” Neither was a single receipt or record of acquisition presented. Curiously, in her complaint dated 17 May 1985, CUBA included “losses of property” as among the damages resulting from DBP’s take-over of the fishpond. Yet, it was only in September 1985 when her son and a caretaker went to the fishpond and the adjoining house that she came to know of the alleged loss of several articles. Such claim for “losses of property,” having been made before knowledge of the alleged actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for actual damages. With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which died when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss was not duly proved; besides, the

claim therefor was delayed unreasonably. From 1979 until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24 October 1979,[19] she declared: 1. That from February to May 1978, I was then seriously ill in Manila and within the same period I neglected the management and supervision of the cultivation and harvest of the produce of the aforesaid fishpond thereby resulting to the irreparable loss in the produce of the same in the amount of about P500,000.00 to my great damage and prejudice due to fraudulent acts of some of my fishpond workers. Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond, did CUBA intimate that upon DBP’s takeover there was a total of 230,000 pieces of bangus, but all of which died because of DBP’s representatives prevented her men from feeding the fish. The award of actual damages should, therefore, be struck down for lack of sufficient basis. In view, however, of DBP’s act of appropriating CUBA’s leasehold rights which was contrary to law and public policy, as well as its false representation to the then Ministry of Agriculture and Natural Resources that it had “foreclosed the mortgage,” an award of moral damages in the amount of P50,000 is in order conformably with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective damages in the amount of P25,000 should likewise be awarded by way of example or correction for the public good.[20] There being an award of exemplary damages, attorney’s fees are also recoverable.[21] WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted pactum commissorium and the award of actual damages; and by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the attorney’s fees, from P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered to render an accounting of the income derived from the operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the determination of each party’s financial obligation to one another. SO ORDERED.

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G.R. No. L-49940 September 25, 1986 GEMMA R. HECHANOVA, accompanied by her husband, NICANOR HECHANOVA, JR., and PRESCILLA R. MASA, accompanied by her husband, FRANCISCO MASA, petitioners, 
 vs.
 HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II, Court of First Instance of Iloilo, THE PROVINCIAL SHERIFF OF ILOILO, and PIO SERVANDO, respondents.

the mortgage amount bearing an interest of 10% per annum. I further certify that in case I fail to redeem the said properties within the period stated above, my cousin Pio Servando, shall become the sole owner thereof. (SGD.) JOSE YUSAY SERVANDO WITNESSES: (Sgd) Ernesto G. Jeruta

On August 25, 1978, a judgment by default was rendered against the defendants, annulling the deed of sale in question and ordering the Register of Deeds of Iloilo to cancel the titles issued to Priscilla Masa and Gemma Hechanova, and to revive the title issued in the name of Jose Y. Servando and to deliver the same to the plaintiff. The defendants took timely steps to appeal the decision to the Court of Appeals by filing a notice of appeal, an appeal bond, and a record on appeal. However, the trial court disapproved the record on appeal due to the failure of defendants to comply with its order to eliminate therefrom the answer filed on August 2, 1978 and accordingly, dismissed the appeal, and on February 2, 1978, issued an order granting the writ of execution prayed for by plaintiff. We find the petition meritorious, and the same is hereby given due course. It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no standing to question the validity of the deed of sale executed by the deceased defendant Jose Servando in favor of his co-defendants Hechanova and Masa. No valid mortgage has been constituted plaintiff's favor, the alleged deed of mortgage being a mere private document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Article 2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the sale. WHEREFORE, the decision of the respondent court dated August 25, 1973 and its Order of February 2, 1979 are set aside, and the complaint filed by plaintiff dated February 4, 1978 is hereby dismissed. SO ORDERED.

YAP, J.: (Sgd) Francisco B. Villanueva Petitioners seek the annulment of various orders issued by the respondent Presiding Judge of Branch II, Court of First Instance of Iloilo, in Civil Case No. 12312 entitled "Pio Servando versus Jose Y. Servando et al." A temporary restraining order was issued by this Court on May 9, 1979, staying until further orders the execution of the decision rendered by the respondent Judge in said case. The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by defendant Jose Y. Servando in favor of his co-defendants, the petitioners herein, covering three parcels of land situated in Iloilo City. Claiming that the said parcels of land were mortgaged to him in 1970 by the vendor, who is his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando impugned the validity of the sale as being fraudulent, and prayed that it be declared null and void and the transfer certificates of title issued to the vendees be cancelled, or alternatively, if the sale is not annulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests, and to order defendants to pay damages. Attached to the complaint was a copy of the private document evidencing the alleged mortgage (Annex A), which is quoted hereunder: August 20, 1970 This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax Declaration No. 28905, 44123 and 31591 at Lot No. 1, 1863Portion of 1863 & 1860 situated at Sto. Nino St., Arevalo, Compania St. & Compania St., Interior Molo, respectively, have this date mortgaged the said property to my cousin Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00), redeemable for a period not exceeding ten (10) years, The defendants moved to dismiss the complaint on the grounds that it did not state a cause of action, the alleged mortgage being invalid and unenforceable since it was a mere private document and was not recorded in the Registry of Deeds; and that the plaintiff was not the real party in interest and, as a mere mortgagee, had no standing to question the validity of the sale. The motion was denied by the respondent Judge, in its order dated June 20, 1978, "on the ground that this action is actually one for collection." On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a Manifestation and Motion, informing the trial court accordingly, and moving for the dismissal of the complaint pursuant to Section 21 of Rule 3 of the Rules of Court, pointing out that the action was for. recovery of money based on an actionable document to which only the deceased defendant was a party. The motion to dismiss was denied on July 25, 1978, "it appearing from the face of the complaint that the instant action is not purely a money claim, it being only incidental, the main action being one for annulment and damages." On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the very next day, August 2, the respondent Judge granted the motion and set the hearing for presentation of plaintiff's evidence ex-parte on August 24, 1978. On August 2, 1978, or the same day that the default order was issued, defendants Hechanova and Masa filed their Answers, denying the allegations of the complaint and repeating, by way of special and affirmative defenses, the grounds stated in their motions to dismiss.

15

G.R. No. 74073 September 13, 1991 HONESTO ONG, RENATO LLOBRERA, AVELINO DE GRACIA, JR., ALFONSO ONG, and SANTIAGO OCAMPO, petitioners, 
 vs.
 HON. INTERMEDIATE APPELLATE COURT, HON. RICARDO D. DIAZ, as Judge of the RTC of Manila, Branch XXVII and CONSOLIDATED BANK AND TRUST CORPORATION (SOLID BANK), respondents. Joaquin P. Yuseco, Jr. for petitioners. C.M. De los Reyes & Associates for SOLID BANK PARAS, J.: This is a petition for review on certiorari seeking to reverse and set aside: (a) the decision * of the Intermediate Appellate Court dated January 31, 1986 in AC-G.R. SP No. 05490 entitled "Honesto Ong, et al. v. Hon. Ricardo D. Diaz, et al." which dismissed the petition for lack of merit and (b) the resolution dated March 26, 1986 denying the motion for reconsideration. The undisputed facts of the case are as follows: On July 27, 1977, Madrigal Shipping Co., Inc. applied for and was granted a loan by the Consolidated Bank and Trust Corporation (Solidbank for short) in the amount of P2,094,000.00 payable on or before July 27, 1978 at ten (10%) percent interest per annum as evidenced by Promissory Note No. 57884 (Rollo, p. 61). To secure the fulfillment of the obligations of Madrigal Shipping Co., Inc. to the Solidbank, and credit accommodations which the former may from time to time obtain from the latter both parties executed a document denominated as "Pledge Agreement" dated December 4, 1978 (Rollo, pp. 77-78). Under the said Pledge Agreement, Madrigal Shipping, Co., Inc. gave additional securities or collaterals in the form of a pledge in favor of the bank, its barge and tugboat particularly described, as follows: "Tugboat CARBPM" of 27/42 gross tonnage 13.87 net tonnage, one (1) deck, no mast, 13.77 mt. long, 4.32 mt. broad, 1.73 mt. steep, with Certificate of Ownership No. 1283 and Certificate of Registration No. 6886.

MSC Barge No. 601, of 372.28 gross tonnage, 361.96 net tonnage, 120 mt. long, 32 mt. broad, 10 ft. deep, with Certificate of Ownership No. 6213, Certificate No. 127-68. (Ibid.) Madrigal Shipping Co., Inc. failed to pay its obligation to the Solidbank. The creditor bank had to sell the pledged properties. Nevertheless, when the pledgee bank was to sell the pledged properties, it found out that the tugboat and the barge had surreptitiously been taken from the Tanque Bodega, Pasig River, Manila, where the vessels were moored and towed to Pier 2, North Harbor, Manila, without the knowledge and consent of the Solidbank (Rollo, p. 62). Meanwhile, on August 1, 1979, petitioner Honesto Ong bought one (1) MSC Barge No. 601 with 300 net tonnage, the same barge which was subject of the pledge from Santiago S. Ocampo, a successful bidder in a public auction by virtue of a writ of execution issued by the National Labor Relations Commission (NLRC) in a case entitled "Union de Marinos v. Madrigal Shipping Co., Inc.". (Rollo, Annex "A", p. 23). On August 6, 1979, private respondent (Solidbank) filed a complaint against Honesto Ong, et al. for Replevin with Damages before the defunct Court of First Instance (now Regional Trial Court) and was docketed as Civil Case No. 125651 (Rollo, pp. 42-46). On August 7, 1979, the respondent court (CFI) issued an order for the seizure of the above described personal property upon posting of a bond in the sum of P1,000,000.00 (Rollo, p. 23; pp. 75-76). On August 8, 1979, petitioner Honesto Ong filed a Motion to Lift Order of Seizure, claiming great and irreparable damage would be suffered by him if the Court would not recall the above stated order. In the same motion, petitioner Honesto Ong maintained that he purchased in good faith MSC Barge No. 601 and even offered to post a counterbond in an amount to be determined by respondent Court of First Instance (Rollo, p. 24). On August 13, 1979, private respondent Solidbank, filed an opposition to lift order of seizure and accused the petitioner Honesto Ong of being a purchaser in bad faith. In its opposition, the private respondent outlined numerous circumstances pointing to an alleged conspiracy where the petitioners resorted to foul schemes to place the subject barge beyond the reach of the plaintiff Solidbank (Rollo, p. 9).

On August 31, 1979, the petitioners, Honesto Ong and Alfonso Ong filed their answer, and set forth their specific denials and affirmative defenses to the complaint filed by Solidbank (Rollo, pp. 156-164). On September 7, 1979, a reply and answer to the counterclaim was filed by the private respondent Solidbank, where additional issues and matters were averred as against the petitioners (Rollo, p. 24). On September 25, 1979, the respondent court (CFI) issued an order lifting the order of seizure and ordered the sheriff to return the MSC Barge No. 601 to the petitioner-defendant Honesto Ong (Rollo, p. 166). On September 28, 1979, a motion for reconsideration was filed by the private respondent Bank (Rollo, p. 115). On December 16, 1980, after an opposition to the motion for reconsideration and a reply to the opposition had been filed by the parties, the Court of First Instance denied the motion for reconsideration but ordered the petitioners Alfonso Ong and Honesto Ong to post a counterbond of P400,000.00 executed to the herein plaintiff-private respondent. The pertinent part of the order and its dispositive portion reads: The alleged Pledge Agreement between plaintiff and Madrigal Shipping Company covering the vessel (barge) in question was not registered in the registry of vessels. Considering that plaintiff does not charge private defendants with knowledge of such pledge (see par. 8, complaint), said defendants, being third persons, cannot be said to be bound by said pledge. Plaintiff therefore, vis-a-vis private defendants and third persons, cannot be considered, at this stage of the action, to be entitled to possession of the vessel for purposes of maintaining the efficacy of the writ of replevin earlier issued and pursuant to the law applicable and pertinent to the matter, the defendants, Alfonso L. Ong and Honesto Ong, are ordered to put up a counterbond of P400,000.00 which is double the value of the subject vessel (barge), executed to the herein plaintiff if such delivery be adjudged in favor of the plaintiff. WHEREFORE, the motion for reconsideration is hereby DENIED for lack of merit. SO ORDERED. (Rollo, p. 50) (Emphasis supplied).

16

On January 1, 1981, Solidbank filed a motion to release the properties subject matter of replevin for failure of the petitioners to post the required counterbond (Rollo, p. 10). On March 3, 1981, a motion for clarification and opposition to the motion to release properties was filed by the petitioners (Rollo, p. 25). On February 21, 1983, the respondent Court (CFI) issued an order stating that its order dated December 16, 1981 is clear and needs no clarification, and that the order requiring the petitioners to post a counterbond is reiterated. The dispositive portion reads: WHEREFORE, the defendants, Alfonso Ong and Honesto Ong, are hereby ordered to put up a counterbond of P400,000.00 executed in favor of the plaintiff within ten (10) days from receipt of this order. Otherwise, the plaintiffs motion to release properties subject matter of replevin will be granted. (Rollo, p. 26). On April 21, 1983, a motion for reconsideration to the above stated order was filed by the petitioners Ong (Ibid.). On October 27, 1983, the respondent court (CFI) issued an order directing petitioners Alfonso Ong and Honesto Ong to deliver and release the barge in question. In the same order, the motion for reconsideration filed by the petitioners was denied for lack of merit. Plaintiff's motion, in short, dated January 22, 1981 was granted. The dispositive portion of the order reads: WHEREFORE, defendants Alfonso Ong and Honesto Ong are hereby ordered to deliver and/or release the barge in question (MSC Barge No. 601) to herein plaintiff from receipt (hereof) of this order. SO ORDERED. (Rollo, pp. 51-53). On June 11, 1984, the new counsel filed a second motion for reconsideration in behalf of the petitioners to the above stated order (Rollo, pp. 167-170). And on June 21, 1984, a supplement to the second motion for reconsideration was filed again by the counsel of the petitioners (Rollo, pp. 172-175). Acting on the second motion for reconsideration and

supplement filed by the defendants Ongs, as well as, the opposition interposed by the plaintiff Solidbank the lower court denied the second motion for reconsideration. (Rollo, p. 65) The defendants Alfonso Ong and Honesto Ong filed with the Intermediate Appellate Court a petition for certiorari docketed as AC-G.R. No. 05490 (Rollo, Ibid.). On January 31, 1986, the Intermediate Appellate Court rendered a decision, dismissing the petition for lack of merit, the dispositive portion reading: WHEREFORE, the petition is hereby DISMISSED for lack of merit. The restraining order previously issued is dissolved, lifted and set aside. No costs. SO ORDERED. (Rollo, p. 34). Petitioner Ong's motion for reconsideration of said decision was denied. (Rollo, p. 48) Hence, this petition. This Court, in its resolution dated April 6, 1987 gave due course to the petition and required both parties to file their respective memoranda (rollo, petition, pp. 720- Resolution, p. 100). The main issues in this case are: (1) whether or not the contract of pledge entered into by and between Solidbank and Madrigal Shipping Co., Inc. is binding on the petitioners Ong (2) whether or not there is a necessity for the Ongs to post a counterbond in the amount of P400,000.00. I. Undoubtedly, petitioners rely heavily on the fact that the contract of pledge by and between Solidbank and Madrigal Shipping Co., Inc. was not recorded under Sections 804 and 809 of the Tariff and Customs Code and argue that it is not binding on third persons like the petitioners. It is, however, stated under Article 2096 of the Civil Code that for a pledge to take effect against third persons, it should be in a public instrument which must contain the description of the thing pledged and the date of the pledge.

In the case of Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937), Art. 2096 has been interpreted in the sense that for the contract to affect third persons, apart from being in a public instrument, possession of the thing pledged must in addition be delivered to the pledgee. All these requirements have been complied with, in the case at bar. The pledge agreement is a public instrument, the same having been notarized and under the notarial seal of Vicente A. Casim, as Doc. No. 1487; Page No. 179; Book V and Series of 1978. Subject of the pledge (MSC Barge No. 601) was delivered to the Solidbank which had it moored at Tanque Bodega, Pasig River, Manila, where it was guarded by a security guard. (Rollo, pp. 69-70). Undeniably, Madrigal Shipping co., Inc., owner of MSC Barge No. 601, pledged said vessel and tugboat to secure the shipping company's obligation to the creditor bank (Solidbank) in the amount of P2,094,000.00, and no payment was made by Madrigal Shipping Co., Inc., as pledgor. Therefore the Solidbank has the light of retention of the barge in question pledged to it until it is paid. The Civil Code expressly provides; Art. 2090. The contract of pledge gives right to the creditor to retain the thing in his possession or in that of a third person to whom it has been delivered, until the debt is paid. Applying these concepts in the case at bar, the pledgee is obviously a lawful and rightful possessor of the personal property pledged. II. As to the second issue of whether or not there is necessity for the Ongs to post a counterbond, the provisions of the Rules are clear. This Court has explained that a defendant in a replevin suit, (petitioners Ong in this case) may demand the return of possession of the property replevined by filing a redelivery bond executed to the plaintiff in double the value of the property as stated in the plaintiff s affidavit, within the periods specified in Sections 5 and 6 of Rule 60 of the Rules of Court. Under Section D, petitioner may "at any time before the delivery of the property to the plaintiff' require the return of the property; in Section 6, he may do so, "within five (5) days after the taking of the property by the officer." Both these periods are mandatory in character. Thus, a lower court which approves a counterbond filed

17

beyond the statutory periods, acts in excess of jurisdiction (Yang v. Valdez, 177 SCRA 143 [1989]). As correctly explained by the Intermediate Appellate Court (.now Court of Appeals): ... The intent of the law requiring the posting of the bond by the applicant is clear and manifest, which is to cover and insulate the defendant's interest from undue damage. ... To forestall the possession by the plaintiff of the property our procedural law provides that the defendant must post a counterbond and must furnish the plaintiff with the copy of the undertaking. (Chan vs. Villanueva, L-3420. April 30, 1982; Sections 5 & 6, Rule 60, Revised Rules of Court) Again, if only for the purpose of emphasis, this is required to protect the plaintiff, should his action be adjudged meritorious. We need not mention, that this procedure was purposely formulated to allow the defendant to continue possessing the property. Not to require him to post any bond would likewise, be counter to the objectives and intent sought by the framers of the law. In short, whoever holds the property must post the bond to stand as security to the non-holder pending the final determination of the case. (Rollo, pp. 33-34) Verily, respondent Appellate Court aptly observed that the questioned orders reveal that the Court a quo exercised prudence in the highest degree. Solidbank was required and has already posted a bond in favor of the Ongs should the suit for replevin be declared improper. Conversely, petitioner Ong must post a bond if he seeks the continued possession of the property, in favor of Solidbank should the suit for replevin prosper. Under the circumstances, the court a quo's orders which were affirmed by the Court of Appeals cannot be faulted. PREMISES CONSIDERED, the petition is DISMISSED for lack of merit, and the assailed decision dated January 31, 1986 of the Intermediate Appellate Court is AFFIRMED. SO ORDERED.

18