[G.R. No. 141931. December 4, 2000]

ANICETO RECEBIDO, petitioner, vs. PEOPLE OF THE PHILIPPINES, respondent.

R E S O L U T I O N

KAPUNAN, J.:

This is a petition for review on certiorari assailing the Decision of the Court of Appeals in C.A.-G.R. CR No. 21347 entitled People of the Philippines versus Aniceto Recebido, dated September 9, 1999 which found petitioner guilty beyond reasonable doubt of Falsification of Public Document; and its Resolution dated February 15, 2000 denying petitioners motion for reconsideration.

The antecedent facts are the following, to wit:

On September 9, 1990, private complainant Caridad Dorol went to the house of her cousin, petitioner Aniceto Recebido, at San Isidro, Bacon, Sorsogon to redeem her property, an agricultural land with an area of 3,520 square meters located at San Isidro, Bacon, Sorsogon, which Caridad Dorol mortgaged to petitioner sometime in April of 1985. Petitioner and Caridad Dorol did not execute a document on the mortgage but Caridad Dorol instead gave petitioner a copy of the Deed of Sale dated June 16, 1973 (Exhibit A) executed in her favor by her father, Juan Dorol.

In said confrontation, petitioner refused to allow Caridad Dorol to redeem her property on his claim that she had sold her property to him in 1979. Caridad Dorol maintained and insisted that the transaction between them involving her property was a mortgage.

Caridad Dorol verified from the Office of the Assessor in Sorsogon that there exists on its file a Deed of Sale dated August 13, 1979 (Exhibit J), allegedly executed by Caridad Dorol in favor of petitioner and that the property was registered in the latters name. After comparison of the specimen signatures of Caridad Dorol in other documents (Exhibits K to K-10) with that of the signature of Caridad Dorol on the questioned Deed of Sale, NBI Document Examiner Antonio Magbojas, found that the latter signature was falsified (Exhibits L-1 to L-2).

Thereafter, Caridad Dorol filed her complaint against petitioner Aniceto Recebido with the National Bureau of Investigation (NBI), Legaspi City and its Questioned Documents Division conducted an examination in the original copy of the Deed of Sale in question allegedly signed by Caridad, particularly her signature affixed thereon.

Mr. Magbojas report was approved by the Chief of the Questioned Documents Division, Arcadio Ramos, and the Deputy Director of Technical Services, Manuel Roura, both of the NBI.[1]

Thus, the Office of the Provincial Prosecutor of Sorsogon filed the information indicting petitioner for Falsification of Public Document with the Regional Trial Court, 5th Judicial Region, Branch 51, Sorsogon, Sorsogon, reading as follows:

That on or about the 13th day of August, 1979, in the Municipality of Sorsogon, Province of Sorsogon, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused, being a private individual, did then and there, willfully, unlawfully and feloniously, with intent to defraud, falsify and/or imitate the signature of one Caridad Dorol and/or cause it to appear that said Caridad Dorol has signed her name on a Deed of Absolute Sale of Real Property in favor of the herein accused and Notarized as Doc. No. 680; page No. 54; Boon No. XIV and Series of 1979 of the Registry of Notary Public Dominador S. Reyes, when in truth and in fact accused well knew, that Caridad Dorol did not execute said document, to the damage and prejudice of the latter.

Contrary to law.[2]

Upon arraignment, petitioner pleaded not guilty.

As narrated by the Court of Appeals, the petitioner contends that the land in question was mortgaged to him by Juan Dorol, the father of Caridad, on February 25, 1977 and was subsequently sold to him on August 13, 1983 although it was made to appear that the deed of sale was executed on August 13, 1979. It was also on the said date that Recebido gave Caridad the amount of P1,000.00 in addition to the P2,600.00 mortgage price given to Juan Dorol which culminated into the execution of the Deed of Sale signed by Caridad.[3]

After trial on the merits, the trial court rendered the decision on December 2, 1996, convicting petitioner of the crime charged and sentencing him as follows:

ACCORDINGLY, accused ANECITO RECEBIDO is sentenced to an indeterminate penalty of one (1) year to three (3) years and six (6) months of prision correccional as maximum and to pay a fine of Three Thousand (P3,000.00) Pesos, with subsidiary imprisonment.

Accused is ordered to pay P5,000.00 damages and to vacate the land in question owned by the offended party.

SO ORDERED.[4]

On appeal, the Court of Appeals affirmed with modification the decision of the trial court, the dispositive portion of which reads:

WHEREFORE, with the modification that the award for damages is DELETED, the assailed judgment is AFFIRMED in all other respects.

SO ORDERED.[5]

The petitioner raises his case before this Court seeking the reversal of the assailed decision and resolution of the Court of Appeals. Based on his petition, the following issues are before this Court:

1. Whether or not the crime charged had already prescribed at the time the information was filed?

2. Whether or not the Court of Appeals committed grave abuse of discretion in sustaining the conviction of the petitioner?

3. Whether or not the Court of Appeals committed grievous error in affirming the decision of the trial court for the petitioner to vacate the land in question owned by the offended party?

We rule in the negative on the three issues.

On the first issue: While the defense of prescription of the crime was raised only during the motion for reconsideration of the decision of the Court of Appeals, there was no waiver of the defense. Under the Rules of Court, the failure of the accused to assert the ground of extinction of the offense, inter alia, in a motion to quash shall not be deemed a waiver of such ground. [6] The reason is that by prescription, the State or the People loses the right to prosecute the crime or to demand the service of the penalty imposed.[7] Accordingly, prescription, although not invoked in the trial, may, as in this case, be invoked on appeal.[8] Hence, the failure to raise this defense in the motion to quash the information does not give rise to the waiver of the petitioner-accused to raise the same anytime thereafter including during appeal.

Nonetheless, we hold that the crime charged has not prescribed. The petitioner is correct in stating that whether or not the offense charged has already prescribed when the information was filed would depend on the penalty imposable therefor, which in this case is prision correccional in its medium and maximum periods and a fine of not more than 5,000.00 pesos.[9] Under the Revised Penal Code,[10] said penalty is a correctional penalty in the same way that the fine imposed is categorized as correctional. Both the penalty and fine being correctional, the offense shall prescribe in ten years. [11] The issue that the petitioner has missed, however, is the reckoning point of the prescriptive period. The petitioner is of the impression that the ten-year prescriptive period necessarily started at the time the crime was committed. This is inaccurate. Under Article 91 of the Revised Penal Code, the period of prescription shall commence to run from the day on which the crime is discovered by the offended party, the authorities, or their agents, x x x. In People v. Reyes,[12] this Court has declared that registration in public registry is a notice to the whole world. The record is constructive notice of its contents as well as all interests, legal and equitable, included therein. All persons are charged with knowledge of what it contains.

The prosecution has established that private complainant Dorol did not sell the subject land to the petitioner-accused at anytime and that sometime in 1983 the private complainant mortgaged the agricultural land to petitioner Recebido. It was only on September 9, 1990, when she went to petitioner to redeem the land that she came to know of the falsification committed by the petitioner. On the other hand, petitioner contends that the land in question was mortgaged to him by Juan Dorol, the father of private complainant, and was subsequently sold to him on August 13, 1983. This Court notes that the private offended party had no actual knowledge of the falsification prior to September 9, 1990. Meanwhile, assuming arguendo that the version of the petitioner is believable, the alleged sale could not have been registered before 1983, the year the alleged deed of sale was executed by the private complainant. Considering the foregoing, it is logical and in consonance with human experience to infer that the crime committed was not discovered, nor could have been discovered, by the offended party before 1983. Neither could constructive notice by registration of the forged deed of sale, which is favorable to the petitioner since the running of the prescriptive period of the crime shall have to be reckoned earlier, have been done before 1983 as it is impossible for the petitioner to have registered the deed of sale prior thereto. Even granting arguendo that the deed of sale was executed by the private complainant, delivered to the petitioner-accused in August 13, 1983 and registered on the same day, the ten-year prescriptive period of the crime had not yet elapsed at the time the information was filed in 1991. The inevitable conclusion, therefore, is that the crime had not prescribed at the time of the filing of the information.

On the second issue: We hold that the Court of Appeals did not commit any grave abuse of discretion when it affirmed petitioners conviction by the trial court. The petitioner admits that the deed of sale that was in his possession is a forged document as found by the trial and appellate court.[13] Petitioner, nonetheless, argues that notwithstanding this admission, the fact remains that there is no proof that the petitioner authored such falsification or that the forgery was done under his direction. This argument is without merit. Under the circumstance, there was no need of any direct proof that the petitioner was the author of the forgery. As keenly observed by the Solicitor General, the questioned document was submitted by petitioner himself when the same was requested by the NBI for examination. Clearly in possession of the falsified deed of sale was petitioner and not Caridad Dorol who merely verified the questioned sale with the Provincial Assessors Office of Sorsogon.[14]In other words, the petitioner was in possession of the forged deed of sale which purports to sell the subject land from the private complainant to him. Given this factual backdrop, the petitioner is presumed to be the author of the forged deed of sale, despite the absence of any direct evidence of his authorship of the forgery. Since the petitioner is the only person who stood to benefit by the falsification of the document found in his possession, it is presumed that he is the material author of the falsification.[15] As it stands, therefore, we are unable to discern any grave abuse of discretion on the part of the Court of Appeals.

On the third issue: Petitioner submits that the trial court is without jurisdiction to order petitioner to vacate the land in question considering that the crime for which he is charged is falsification.[16] The petitioner insists that the civil aspect involved in the criminal case at bar refer to the civil damages recoverable ex delito or arising from the causative act or omission.[17] In addition, petitioner argues that he is entitled to possession as mortgagee since the private complainant has not properly redeemed the property in question.

These are specious arguments. The petitioner based his claim of possession alternatively by virtue of two alternative titles: one, based on the forged deed of sale and, two, as mortgagee of the land. As already discussed, the deed of sale was forged and, hence, could not be a valid basis of possession. Neither could his status as mortgagee be the basis of possession since it is the mortgagor in a contract of mortgage who is entitled to the possession of the property. We have taken note of the practice in the provinces that in giving a realty for a collateral, possession usually goes with it.[18] Besides, even assuming that petitioner had a right to possess the subject land, his possession became unlawful when the private complainant offered to redeem the property and petitioner unjustly refused. Petitioner cannot profit from the effects of his crime. The trial court, therefore, did not commit any error in ordering petitioner to vacate the subject property.

In view of the foregoing, this Court finds that the Court of Appeals did not commit any reversible error in its Decision dated September 9, 1999 and its Resolution dated February 15, 2000.

ACCORDINGLY, the instant petition is DENIED for lack of merit.

SO ORDERED.

[G.R. No. 141970. September 10, 2001]

METROPOLITAN BANK, & TRUST COMPANY, petitioner, vs. Hon. FLORO T. ALEJO, in His Capacity as Presiding Judge of Branch 172 of the Regional Trial Court of Valenzuela; and SY TAN SE, represented by his Attorney-in-Fact, SIAN SUAT NGO, respondents.

D E C I S I O N

PANGANIBAN, J.:

In a suit to nullify an existing Torrens Certificate of Title (TCT) in which a real estate mortgage is annotated, the mortgagee is an indispensable party. In such suit, a decision canceling the TCT and the mortgage annotation is subject to a petition for annulment of judgment, because the non-joinder of the mortgagee deprived the court of jurisdiction to pass upon the controversy.

The Case

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court, assailing the March 25, 1999 Resolution of the Court of Appeals (CA) in CA-GR SP No. 50638, which states in full:

This resolves the petition for annulment of judgment based on external (sic) fraud filed by petitioner Metropolitan Bank and Trust Company seeking to annul the Decision dated August 12, 1998 rendered by respondent judge, Honorable Floro T. Alejo, Presiding Judge of the Regional Trial Court, Branch 172, Valenzuela, Metro Manila, in Civil Case No. 4930-V-96 entitled Sy Tan Se, represented by his attorney-in-fact Sian Suat Ngo v. Raul Acampado, et al.

This Court has observed that petitioner knew of the questioned Decision sometime [i]n October 1998 (Petition, Rollo, p. 3).This being the case, petitioner should have first sought recourse by way of petition for relief from judgment under Rule 38 of the 1997 Rules of Civil Procedure. Accordingly, the petition for annulment of judgment is DENIED DUE COURSE and DISMISSED outright for being insufficient in form and substance (Section 2, Rule 47, 1997 Rules of Civil Procedure).

Also challenged is the January 27, 2000 CA Resolution [2] denying petitioners Motion for Reconsideration.

The Facts

On November 21, 1995[3] and January 30, 1996,[4] Spouses Raul and Cristina Acampado obtained loans from petitioner in the amounts of P5,000,000 and P2,000,000, respectively. As security for the payment of these credit accommodations, the Acampados executed in favor of petitioner a Real Estate Mortgage[5] and an Amendment of Real Estate Mortgage[6]over a parcel of land registered in their names. The land was covered by TCT No. V-41319 in the Registry of Deeds of Valenzuela City, where the contracts were also registered on November 20, 1995 and January 23, 1996, respectively.[7]

On June 3, 1996, a Complaint for Declaration of Nullity of TCT No. V-41319 was filed by Respondent Sy Tan Se against Spouses Acampado. In the Regional Trial Court (RTC) of Valenzuela, Branch 172, it was docketed as Civil Case No. 4930-V-96,[8] the progenitor of the present controversy.

Despite being the registered mortgagee of the real property covered by the title sought to be annulled, petitioner was not made a party to Civil Case No. 4930-V-96,[9] nor was she notified of its existence.

Because the spouses defaulted in the payment of their loan, extrajudicial foreclosure proceedings over the mortgaged property were initiated on April 19, 1997.

On June 17, 1997, the sheriff of Valenzuela conducted an auction sale of the property, during which petitioner submitted the highest and winning bid. [10] On July 15, 1997, a Certificate of Sale was issued in its favor. [11] This sale was entered in the Registry of Deeds of Valenzuela on July 28, 1997.

When the redemption period lapsed exactly a year after, on July 28, 1998, petitioner executed an Affidavit of Consolidation of Ownership to enable the Registry of Deeds of Valenzuela to issue a new TCT in its name.

Upon presentation to the Register of Deeds of the Affidavit of Consolidation of Ownership, petitioner was informed of the existence of the August 12, 1998 RTC Decision in Civil Case No. 4930-V-96, annulling TCT No. V-41319. The dispositive portion of the Decision[12] stated:

WHEREFORE, judgment is hereby rendered declaring as null and void Transfer Certificate of Title No.V-41319 in the name of defendant Raul Acampado for having proceeded from an illegitimate source. With costs against the defendant.

SO ORDERED.

On January 27, 1999, petitioner filed with the Court of Appeals a Petition for Annulment of the RTC Decision.

Ruling of the Court of Appeals

For being insufficient in form and substance, the Petition for Annulment was outrightly dismissed by the CA. It ruled that petitioner ought to have filed, instead, a petition for relief from judgment or an action for quieting of title.

Hence, this Petition.[13]

Issues

In its Memorandum, petitioner presents the following issues:

I

x x x [W]hether or not a petition for annulment of judgment under Rule 47 of the 1997 Rules of Civil Procedure is the proper remedy available to petitioner under the circumstances.

II

x x x [W]hether or not the judgment of the trial court in Civil Case No. 4930-V-96 should be annulled.[14]

The Courts Ruling

The Petition is meritorious.

First Issue:   Proper   Remedy

Respondents aver that a petition for annulment is not proper, because there were three different remedies available but they were not resorted to by petitioner.

We are not persuaded. First, a petition for relief, the remedy pointed to by the Court of Appeals, was not available to petitioner. Section 1, Rule 38 of the Rules of Court, states:

Petition for relief from judgment, order, or other proceedings.-When a judgment or final order is entered, or any other proceeding is thereafter taken against a party in any court through fraud, accident, mistake, or excusable negligence, he may file a petition in such court and in the same case praying that the judgment, order or proceeding be set aside. (Italics supplied)

It must be emphasized that petitioner was never a party to Civil Case No. 4930-V-96. In Lagula et al. v. Casimiro et al.,[15] the Court held that -- relative to a motion for relief on the ground of fraud, accident, mistake, or excusable negligence -- Rule 38 of the Rules of Court only applies when the one deprived of his right is a party to the case. Since petitioner was never a party to the case

or even summoned to appear therein, then the remedy of relief from judgment under Rule 38 of the Rules of Court was not proper. This is plainly provided in the italicized words of the present provision just quoted.

Second, in denying petitioners Motion for Reconsideration of the Decision dismissing the Petition for Annulment of Judgment, the Court of Appeals reasoned that another remedy, an action for quieting of title, was also available to petitioner.

We do not agree. It should be stressed that this case was instituted to ask for relief from the peremptory declaration of nullity of TCT No. V-41319, which had been issued without first giving petitioner an opportunity to be heard. Petitioner focused on the judgment in Civil Case No. 4930-V-96 which adversely affected it, and which it therefore sought to annul.Filing an action for quieting of title will not remedy what it perceived as a disregard of due process; it is therefore not an appropriate remedy.

Equally important, an action for quieting of title is filed only when there is a cloud on title to real property or any interest therein. As defined, a cloud on title is a semblance of title which appears in some legal form but which is in fact unfounded.[16] In this case, the subject judgment cannot be considered as a cloud on petitioners title or interest over the real property covered by TCT No. V-41319, which does not even have a semblance of being a title.

It would not be proper to consider the subject judgment as a cloud that would warrant the filing of an action for quieting of title, because to do so would require the court hearing the action to modify or interfere with the judgment or order of another co-equal court. Well-entrenched in our jurisdiction is the doctrine that a court has no power to do so, as that action may lead to confusion and seriously hinder the administration of justice.[17] Clearly, an action for quieting of title is not an appropriate remedy in this case.

Third, private respondent cites a last remedy: the intervention by petitioner in Civil Case No. 4930-V-96. The availability of this remedy hinges on petitioners knowledge of the pendency of that case, which would have otherwise been alerted to the need to intervene therein. Though presumed by private respondent, any such knowledge prior to October 1998 is, however, emphatically denied by petitioner.

The Petition for Annulment before the Court of Appeals precisely alleged that private respondent purposely concealed the case by excluding petitioner as a defendant in Civil Case No. 4930-V-96, even if the latter was an indispensable party.Without due process of law, the former intended to deprive petitioner of the latters duly registered property right. Indeed, the execution of the Decision in Civil Case No. 4930-V-96 necessarily entailed its enforcement against petitioner, even though it was not a party to that case. Hence, the latter concludes that annulment of judgment was the only effective remedy open to it.

The allegation of extrinsic fraud, if fully substantiated by a preponderance of evidence, may be the basis for annulling a judgment.[18] The resort to annulment becomes proper because of such allegation, coupled with the unavailability of the other remedies pointed to by respondents.

Second Issue:   Lack of Jurisdiction

It is undisputed that the property covered by TCT No. V-41319 was mortgaged to petitioner, and that the mortgage was annotated on TCT No. V-41319 before the institution of Civil Case No. 4930-V-96. It is also undisputed that all subsequent proceedings pertaining to the foreclosure of the mortgage were entered in the Registry of Deeds. The nullification and cancellation of TCT No. V-41319 carried with it the nullification and cancellation of the mortgage annotation.

Although a mortgage affects the land itself and not merely the TCT covering it, the cancellation of the TCT and the mortgage annotation exposed petitioner to real prejudice, because its rights over the mortgaged property would no longer be known and respected by third parties. Necessarily, therefore, the nullification of TCT No. V-41319 adversely affected its property rights, considering that a real mortgage is a real right and a real property by itself.[19]

Evidently, petitioner is encompassed within the definition of an indispensable party; thus, it should have been impleaded as a defendant in Civil Case No. 4930-V-96.

An indispensable party is a party who has such an interest in the controversy or subject matter that a final adjudication cannot be made, in his absence, without injuring or affecting that interest[;] a party who has not only an interest in the subject matter of the controversy, but also has an interest of such nature that a final decree cannot be made without affecting his interest or leaving the controversy in such a condition that its final determination may be wholly

inconsistent with equity and good conscience. It has also been considered that an indispensable party is a person in whose absence there cannot be a determination between the parties already before the court which is effective, complete, or equitable. Further, an indispensable party is one who must be included in an action before it may properly go forward.

A person is not an indispensable party, however, if his interest in the controversy or subject matter is separable from the interest of the other parties, so that it will not necessarily be directly or injuriously affected by a decree which does complete justice between them.[20]

The joinder of indispensable parties to an action is mandated by Section 7, Rule 3 of the Revised Rules of Civil Procedures, which we quote:

SEC 7. Compulsory joinder of indispensable parties. Parties in interest without whom no final determination can be had of an action shall be joined either as plaintiffs or defendants.

Aside from the above provision, jurisprudence requires such joinder, as the following excerpts indicate:

Indispensable parties must always be joined either as plaintiffs or defendants, for the court cannot proceed without them. x x x. Indispensable parties are those with such an interest in the controversy that a final decree would necessarily affect their rights, so that the courts cannot proceed without their presence.[21]

"x x x. Without the precence of indispensable parties to a suit or proceeding, a judgment of a Court cannot attain real finality."[22]

Whenever it appears to the court in the course of a proceeding that an indispensable party has not been joined, it is the duty of the court to stop the trial and to order the inclusion of such party. (The Revised Rules of Court, Annotated & Commented by Senator Vicente J. Francisco, Vol. I, p. 271, 1973 ed., See also Cortez vs. Avila, 101 Phil. 705.) Such an order is unavoidable, for the general rule with reference to the making of parties in a civil action requires the joinder of all necessary parties wherever possible, and the joinder of all indispensable parties under any and all conditions, the presence of those latter parties being a sine qua non of the exercise of judicial power. (Borlasa vs. Polistico, 47 Phil. 345, at p. 347.) It is precisely when an indispensable party is not before the court (that) the action should be dismissed. (People vs. Rodriguez, 106 Phil. 325. at p. 327.) The absence of an indispensable party renders all subsequent actuations of the court null and void, for want of authority to act, not only as to the absent parties but even as to those present.[23] (emphasis supplied)

The evident aim and intent of the Rules regarding the joinder of indispensable and necessary parties is a complete determination of all possible issues, not only between the parties themselves but also as regards to other persons who may be affected by the judgment. A valid judgment cannot even be rendered where there is want of indispensable parties.[24]

From the above, it is clear that the presence of indispensable parties is necessary to vest the court with jurisdiction, which is the authority to hear and determine a cause, the right to act in a case. [25] We stress that the absence of indispensable parties renders all subsequent actuations of the court null and void, because of that courts want of authority to act, not only as to the absent parties but even as to those present.

It is argued that petitioner cannot possibly be an indispensable party, since the mortgage may not even be valid because of the possible absence of compliance with the requirement[26] that the mortgagor be the absolute owner of the thing mortgaged. It should be emphasized, however, that at the time the mortgage was constituted, there was an existing TCT (No. V-41319), which named the mortgagors, the Acampado spouses, as the registered owners of the property. In Seno v. Mangubat[27] this Court held as follows:

The well-known rule in this jurisdiction is that a person dealing with a registered land has a right to rely upon the face of the Torrens Certificate of Title and to dispense with the need of inquiring further, except when the party concerned has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry.

x x x x x x x x x

Thus, where innocent third persons relying on the correctness of the certificate of title issued, acquire rights over the property, the court cannot disregard such rights and order the total cancellation of the certificate for that would impair public

confidence in the certificate of title; otherwise everyone dealing with property registered under the Torrens system would have to inquire in every instance as to whether the title ha[s] been regularly or irregularly issued by the court. Indeed this is contrary to the evident purpose of the law.

The peremptory disregard of the annotations registered and entered in TCT No. V-41319 constituted a deprivation of private property without due process of law and was therefore unquestionably unjust and iniquitous. This, we cannot countenance.

Clearly, it was the trial courts duty to order petitioners inclusion as a party to Civil Case No. 4930-V-96. This was not done. Neither the court nor private respondents bothered to implead petitioner as a party to the case. In the absence of petitioner, an indispensable party, the trial court had no authority to act on the case. Its judgment therein was null and void due to lack of jurisdiction over an indispensable party.

In Leonor v. Court of Appeals[28] and Arcelona v. Court of Appeals,[29] we held thus:

A void judgment for want of jurisdiction is no judgment at all. It cannot be the source of any right nor the creator of any obligation. All acts performed pursuant to it and all claims emanating from it have no legal effect. Hence, it can never become final and any writ of execution based on it is void:x x x it may be said to be a lawless thing which can be treated as an outlaw and slain at sight, or ignored wherever and whenever it exhibits its head.

WHEREFORE, the Petition is GRANTED and the assailed Resolutions of the Court of Appeals are REVERSED. The Decision of the Regional Trial Court in Civil Case No. 4930-V-41319 is hereby NULLIFIED and SET ASIDE. No costs.

SO ORDERED.

G.R. No. L-17500             May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF MANILA, plaintiffs-appellants, vs.DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and CONNELL BROS. CO. (PHIL.), defendants-appellants.

Angel S. Gamboa for defendants-appellants.Laurel Law Offices for plaintiffs-appellants.

DIZON, J.:

On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do business in the Philippines — hereinafter referred to as ATLANTIC — sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company — hereinafter referred to as DALCO — for the total sum of $500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's Bank & Trust Company — hereinafter referred to as the BANK — amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, executed by both DALCO and the Dahican America Lumber Corporation, a foreign corporation and a stockholder of DALCO, — hereinafter referred to as DAMCO, all payable to the BANK or its order.

As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor of the BANK — the latter acting for itself and as trustee for the Export-Import Bank of Washington D.C. — a deed of mortgage covering five parcels of land situated in the province of Camarines Norte together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds contained the following provision extending the mortgage lien to properties to be subsequently acquired — referred to hereafter as "after acquired properties" — by the mortgagor:

All property of every nature and description taken in exchange or replacement, and all buildings, machinery, fixtures, tools equipment

and other property which the Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the premises, shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor shall from time to time during the existence of this mortgage furnish the Mortgagee with an accurate inventory of such substituted and subsequently acquired property.

Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations.

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory note.

After July 13, 1950 — the date of execution of the mortgages mentioned above — DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO as due to Connell Bros. Company (Philippines) — a domestic corporation who was acting as the general purchasing agent of DALCO — thereinafter called CONNELL — the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34.

On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO and DAMCO, on the one hand and between DALCO and CONNELL, on the other.

On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and DAMCO. On the same date they filed an ex-parte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary injunction to restrain DALCO from removing its properties. The court granted both remedies and appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its order of February 21, 1953, discharged the Receiver.

On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and alleging several affirmative defenses and a counterclaim.

On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the owner and possessor of some of the equipments, spare parts and supplies which DALCO had acquired subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs claimed were covered by the lien. In its order of March 18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was reinstated.

On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and asserting affirmative defenses and a counterclaim.

Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the action to the Court of First Instance of Manila where it was docketed as Civil Case No. 20987.

On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement one-half (P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the "after acquired properties".

After due trial, the Court, on July 15, 1960, rendered judgment as follows:

IN VIEW WHEREFORE, the Court:

1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with 7% interest per annum from July 13, 1950, Plus another sum of P100,000.00 with 5% interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's fees;

2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4% interest per annum from July 3, 1950, plus 10% on both principal as attorney's fees;

3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal interest from the date of the filing of the respective answers of those parties, 10% of the principals as attorney's fees;

4. Orders that of the sum realized from the sale of the properties of P175,000.00, after deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the court no longer specifying the share of each because of that announced intention under the stipulation of facts to "pool their resources"; as to the other one-half, the same should be adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in the proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision; but with the understanding that whatever plaintiffs and Dahican American and Connell Bros. should receive from the P175,000.00 deposited in the Court shall be applied to the judgments particularly rendered in favor of each;

5. No other pronouncement as to costs; but the costs of the receivership as to the debated properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber Co., pro-rata.

On the following day, the Court issued the following supplementary decision:

IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add the following paragraph 6:

6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court orders the sale at public auction of the lands object of the mortgages to satisfy the said mortgages and costs of foreclosure.

From the above-quoted decision, all the parties appealed.

Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were subject to the deeds of mortgage mentioned heretofore; that said properties were acquired from suppliers other than DAMCO and CONNELL; that even granting that DAMCO and CONNELL were the real suppliers, the rescission of the sales to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering the foregoing, the proceeds obtained from the sale of the "after acquired properties" as well as those obtained from the sale of the "undebated properties" in the total sum of P175,000.00 should have been awarded exclusively to plaintiffs by reason of the mortgage lien they had thereon; that damages should have been awarded to plaintiffs against defendants, all of them being guilty of an attempt to defraud the former when they sought to rescind the sales already mentioned for the purpose of defeating their mortgage lien, and finally, that defendants should have been made to bear all the expenses of the receivership, costs and attorney's fees.

On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that plaintiffs had no cause of action against them because the promissory note sued upon was not yet due when the action to foreclose the mortgages was commenced; secondly, in not holding that the mortgages aforesaid were null and void as regards the "after acquired properties" of DALCO because they were not registered in accordance with the Chattel Mortgage Law, the court erring, as a consequence, in holding that said properties were subject to the mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the fourth paragraph of each of said mortgages did not automatically make subject to such mortgages the "after acquired properties", the only meaning thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not ruling that said stipulation was void as against DAMCO

and CONNELL and in not awarding the proceeds obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in appointing a Receiver and in holding that the damages suffered by DAMCO and CONNELL by reason of the depreciation or loss in value of the "after acquired properties" placed under receivership was damnum absque injuria and, consequently, in not awarding, to said parties the corresponding damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership, instead of sentencing plaintiffs to pay attorney's fees.

Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as appellants submit a total of seventeen. However, the multifarious issues thus before Us may be resolved, directly or indirectly, by deciding the following issues:

Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage subject of foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid and binding on the properties aforesaid inspite of the fact that they were not registered in accordance with the provisions of the Chattel Mortgage Law?; thirdly, assuming again that the mortgages are valid and binding upon the "after acquired properties", what is the effect thereon, if any, of the rescission of sales entered into, on the one hand, between DAMCO and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was the action to foreclose the mortgages premature?

A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises — that is, its lumber concession — "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties, We see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used — thus becoming subject to the inevitable wear and tear — but with the understanding — express or implied — that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. Indeed, if such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar provision is included in the contract.

B. But defendants contend that, granting without admitting, that the deeds of mortgage in question cover the "after acquired properties" of DALCO, the same are void and ineffectual because they were not registered in accordance with the Chattel Mortgage Law. In support of this and of the proposition that, even if said mortgages were valid, they should not prejudice them, the defendants argue (1) that the deeds do not describe the mortgaged chattels specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof constitutes "mere executory agreements to give a lien" over the "after acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after acquired properties" should not prejudice creditors and other third persons such as DAMCO and CONNELL.

The stipulation under consideration strongly belies defendants contention. As adverted to hereinbefore, it states that all property of every nature, building, machinery etc. taken in exchange or replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein". No clearer language could have been chosen.

Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, We say that such law does not apply to this case.

As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be no doubt that the provisions of said code must govern their interpretation and the question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the former or the latter as guide in deciding the point under consideration.

Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works.

On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".

We find the above ruling in agreement with our decisions on the subject:

(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil Code (old) gives the character of real property to machinery, liquid containers, instruments or replacements intended by the owner of any building or land for use in connection with any industry or trade being carried on therein and which are expressly adapted to meet the requirements of such trade or industry.

(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof .

It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein — which were registered as such — did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that the "after acquired properties" did not become immobilized because DALCO did not own the whole area of its lumber concession all over which said properties were scattered.

The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery therein involved as personal property by executing chattel mortgages thereon in favor of third parties, while in the present case the parties had treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall automatically become subject to the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact, stated that "the characterization of the property as chattels by the appellant is indicative of intention and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis supplied). In the present case, the characterization of the "after acquired properties" as real property was made not only by one but by both interested parties. There is, therefore, more reason to hold that such consensus impresses upon the properties the character determined by the parties who must now be held in estoppel to question it.

Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225 U.S. 58) where it was held that while under the general law of Puerto Rico, machinery placed on property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it is not disputed that DALCO purchased the "after acquired properties" to be placed on, and be used in the development of its lumber concession, and agreed further that the same shall become immediately subject to the lien constituted by the questioned mortgages. There is also abundant evidence in the record that DAMCO and CONNELL had full notice of such stipulation and had never thought of disputed validity until the present case was filed. Consequently all of them must be deemed barred from denying that the properties in question had become immobilized.

What We have said heretofore sufficiently disposes all the arguments adduced by defendants in support their contention that the mortgages under foreclosure are void, and, that, even if valid, are ineffectual as against DAMCO and CONNELL.

Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid sellers"; that as such they had not only a superior lien on the "after acquired properties" but also the right to rescind the sales thereof to DALCO.

This contention — it is obvious — would have validity only if it were true that DAMCO and CONNELL were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did not know their exact identity and description prior to the filing of the case bar because DALCO, in violation of its obligation under the mortgages, had failed and refused theretofore to submit a complete list thereof. In the course of the proceedings, however, when defendants moved to dissolve the order of receivership and the writ of preliminary injunction issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquire properties," and engaged the services of auditors to examine the books of DALCO so as to bring out the details thereof. The report of the auditors and its annexes (Exhibits V, V-1 — V4) show that neither DAMCO nor CONNELL had supplied any of the goods of which they respective claimed to be the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in addition to those o f the real suppliers in order to collect and justify such service charge.

Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired required properties" would seem to be preposterous. The most that can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in this connection, it is clear that, as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted from the beginning that the "after acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure.

The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise, is of no consequence and does not make the rescission valid and legally effective. It must be stated clearly, however, in justice to Belden, that, as a member of the Board of Directors of DALCO, he opposed the resolution of December 15, 1952 passed by said Board and the subsequent rescission of the sales.

Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was premature because the promissory note sued upon did not fall due until April 1 of the same year, concluding from this that, when the action was commenced, the plaintiffs had no cause of action. Upon this question the lower court says the following in the appealed judgment;

The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed on 12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should follow that the debtor thereby lost the benefit to the period.

x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate, P1,200,000 excluding interest while the aggregate price of the "after-acquired" chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all the properties were sold afterwards for only P175,000.00, page 47, Vol. IV, and the Court understanding that when the law permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by his giving a guaranty for the debt, that must mean a new and

efficient guaranty, must concede that the causes of action for collection of the notes were not premature.

Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding that, when the action was commenced, DALCO was insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is sufficiently supported by the evidence particularly the resolution marked as Exhibit K, which shows that on December 16, 1952 — in the words of the Chairman of the Board — DALCO was "without funds, neither does it expect to have any funds in the foreseeable future." (p. 64, record on appeal).

The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after acquired properties" should have been awarded exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed among said parties, whether or not the distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and, lastly, whether or not the expenses incidental to the Receivership should be borne by all the parties on a pro-rata basis or exclusively by one or some of them are of a secondary nature as they are already impliedly resolved by what has been said heretofore.

As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the mortgages under foreclosure.

On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and 1314 of the New Civil Code) provides that creditors are protected in cases of contracts intended to defraud them; and that any third person who induces another to violate his contract shall be liable for damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21 — which may be given retroactive effect (Arts. 225253) — or under Arts. 1902 and 2176 of the Old Civil Code.

The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.

However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely, the difference between the alleged total obligation secured by the mortgages amounting to around P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and the proceeds obtained from the sale of "after acquired properties", and of those that were not claimed neither by DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject to the mortgages under foreclosure has not been effected, and considering further the lack of evidence showing that the true value of all the properties already sold was not realized because their sale was under stress, We feel that We do not have before Us the true elements or factors that should determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however, our considered opinion that, upon the facts established, all the expenses of the Receivership, which was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in the appealed judgment.

In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled to recover from the defendants, the record of this case shall be remanded below for the corresponding proceedings.

Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs.

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.

 

YAP, J.:

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, 1863-Portion 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 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

(Sgd) Francisco B. Villanueva

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.

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.

G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner, vs.COURT OF APPEALS and NORA B. MOULIC, respondents.

Escober, Alon & Associates for petitioner.

Martin D. Pantaleon for private respondents.

 

BELLOSILLO, J.:

The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals.

Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE).

MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her.

On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her

knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks.

On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.

STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the reglementary period it would be of no consequence as the checks should never have been presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course. 1

In this regard, Sec. 52 of the Negotiable Instruments Law provides —

Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it was previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these checks were merely issued to payee as security and not for value.

Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks. 4

MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course.

That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the

instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.

Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:

Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8

In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. 9

The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile.

The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE Investment House, Inc. This is error.

The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16

It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage. 17

The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in default.

WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.

[G.R. No. 138053. May 31, 2000]

CORNELIO M. ISAGUIRRE, petitioner, vs. FELICITAS DE LARA, respondent.

D E C I S I O N

GONZAGA-REYES, J.:

In this petition for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998 decision[1] of the Court of Appeals[2] and its Resolution promulgated on March 5, 1999.

The antecedent facts of the present case are as follows:

Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales Application over a parcel of land identified as portion of Lot 502, Guianga Cadastre, filed with the Bureau of Lands on January 17, 1942 and with an area of 2,342 square meters. Upon his death, Alejandro de Lara was succeeded by his wife - respondent Felicitas de Lara, as claimant. On November 19, 1954, the Undersecretary of Agriculture and Natural Resources amended the sales application to cover only 1,600 square meters. Then, on November 3, 1961, by virtue of a decision rendered by the Secretary of Agriculture and Natural Resources dated November 19, 1954, a subdivision survey was made and the area was further reduced to 1,000 square meters. On this lot stands a two-story residential-commercial apartment declared for taxation purposes under TD 43927 in the name of respondents sons - Apolonio and Rodolfo, both surnamed de Lara.

Sometime in 1953, respondent obtained several loans from the Philippine National Bank. When she encountered financial difficulties, respondent approached petitioner Cornelio M. Isaguirre, who was married to her niece, for assistance. On February 10, 1960, a document denominated as "Deed of Sale and Special Cession of Rights and Interests" was executed by respondent and petitioner, whereby the former sold a 250 square meter portion of Lot No. 502, together with the two-story commercial and residential structure standing thereon, in favor of petitioner, for and in consideration of the sum of P5,000.

Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against petitioner for recovery of ownership and possession of the two-story building.[3] However, the case was dismissed for lack of jurisdiction.

On August 21, 1969, petitioner filed a sales application over the subject property on the basis of the deed of sale. His application was approved on January 17, 1984, resulting in the issuance of Original Certificate of Title No. P-11566 on February 13, 1984, in the name of petitioner. Meanwhile, the sales application of respondent over the entire 1,000 square meters of subject property (including the 250 square meter portion claimed by petitioner) was also given due course, resulting in the issuance of Original Certificate of Title No. P-13038 on June 19, 1989, in the name of respondent.[4]

Due to the overlapping of titles, petitioner filed an action for quieting of title and damages with the Regional Trial Court of Davao City against respondent on May 17, 1990. The case was docketed as Civil Case No. 20124-90. After trial on the merits, the trial court rendered judgment on October 19, 1992, in favor of petitioner, declaring him to be the lawful owner of the disputed property. However, the Court of Appeals reversed the trial courts decision, holding that the transaction entered into by the parties, as evidenced by their contract, was an equitable mortgage, not a sale.[5] The appellate courts decision was based on the inadequacy of the consideration agreed upon by the parties, on its finding that the payment of a large portion of the "purchase price" was made after the execution of the deed of sale in several installments of minimal amounts; and finally, on the fact that petitioner did not take steps to confirm his rights or to obtain title over the property for several years after the execution of the deed of sale. As a consequence of its decision, the appellate court also declared Original Certificate of Title No.P-11566 issued in favor of petitioner to be null and void. On July 8, 1996, in a case docketed as G. R. No. 120832, this Court affirmed the decision of the Court of Appeals and on September 11, 1996, we denied petitioners motion for reconsideration.

On May 5, 1997, respondent filed a motion for execution with the trial court, praying for the immediate delivery of possession of the subject property, which motion was granted on August 18, 1997. On February 3, 1998, respondent moved for a writ of possession, invoking our ruling in G. R. No. 120832. Petitioner opposed the motion, asserting that he had the right of retention over the property until payment of the loan and the value of the improvements he had introduced on the property. On March 12, 1998, the trial court granted respondents motion for writ of possession. Petitioners motion for reconsideration was denied by the trial court on May 21, 1998. Consequently, a writ of possession dated June 16, 1998, together with the Sheriffs Notice to Vacate dated July 7, 1998, were served upon petitioner.

Petitioner filed with the Court of Appeals a special civil action for certiorari and prohibition with prayer for a temporary restraining order or preliminary injunction to annul and set aside the March 12, 1998 and May 21, 1998 orders of the trial court, including the writ of possession dated June 16, 1998 and the sheriffs notice to vacate dated July 7, 1998.[6]

The appellate court summarized the issues involved in the case as follows: (1) whether or not the mortgagee in an equitable mortgage has the right to retain possession of the property pending actual payment to him of the amount of indebtedness by the mortgagor; and (b) whether or not petitioner can be considered a builder in good faith with respect to the improvements he made on the property before the transaction was declared to be an equitable mortgage.

The Court of Appeals held that petitioner was not entitled to retain possession of the subject property. It said that -

the mortgagee merely has to annotate his claim at the back of the certificate of title in order to protect his rights against third persons and thereby secure the debt. There is therefore no necessity for him to actually possess the property. Neither should a mortgagee in an equitable mortgage fear that the contract relied upon is not registered and hence, may not operate as a mortgage to justify its foreclosure. In Feliza Zubiri v. Lucio Quijano, 74 Phil 47, it was ruled "that when a contract x x x is held as an equitable mortgage, the same shall be given effect as

if it had complied with the formal requisites of mortgage. x x x by its very nature the lien thereby created ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage, as long as the land remains in the hands of the petitioner (mortgagor) and the rights of innocent parties are not affected."

Proceeding from the foregoing, petitioners imagined fears that his lien would be lost by surrendering possession are unfounded.

In the same vein, there is nothing to stop the mortgagor de Lara from acquiring possession of the property pending actual payment of the indebtedness to petitioner. This does not in anyway endanger the petitioners right to security since, as pointed out by private respondents, the petitioner can always have the equitable mortgage annotated in the Certificate of Title of private respondent and pursue the legal remedies for the collection of the alleged debt secured by the mortgage. In this case, the remedy would be to foreclose the mortgage upon failure to pay the debt within the required period.

It is unfortunate however, that the Court of Appeals, in declaring the transaction to be an equitable mortgage failed to specify in its Decision the period of time within which the private respondent could settle her account, since such period serves as the reckoning point by which foreclosure could ensue. As it is, petitioner is now in a dilemma as to how he could enforce his rights as a mortgagee. ...

Hence, this Court, once and for all resolves the matter by requiring the trial court to determine the amount of total indebtedness and the period within which payment shall be made.

Petitioners claims that he was a builder in good faith and entitled to reimbursement for the improvements he introduced upon the property were rejected by the Court of Appeals. It held that petitioner knew, or at least had an inkling, that there was a defect or flaw in his mode of acquisition. Nevertheless, the appellate court declared petitioner to have the following rights:

He is entitled to reimbursement for the necessary expenses which he may have incurred over the property, in accordance with Art. 526 and Art. 452 of the Civil Code. Moreover, considering that the transaction was merely an equitable mortgage, then he is entitled to payment of the amount of indebtedness plus interest, and in the event of non-payment to foreclose the mortgage. Meanwhile, pending receipt of the total amount of debt, private respondent is entitled to possession over the disputed property.

The case was finally disposed of by the appellate court in the following manner:

WHERFORE, the Petition is hereby DISMISSED, and this case is ordered remanded to the Regional Trial Court of Davao City for further proceedings, as follows:

1) The trial court shall determine

a) The period within which the mortgagor must pay his total amount of indebtedness.

b) The total amount of indebtedness owing the petitioner-mortgagee plus interest computed from the time when the judgment declaring the contract to be an equitable mortgage became final.

c) The necessary expenses incurred by petitioner over the property.[7]

On March 5, 1999, petitioners motion for reconsideration was denied by the appellate court.[8] Hence, the present appeal wherein petitioner makes the following assignment of errors:

A.......THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE RTC ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ISSUING A WRIT OF POSSESSION IN FAVOR OF RESPONDENT.

A.1......The RTC patently exceeded the scope of its authority and acted with grave abuse of discretion in ordering the immediate delivery of possession of the Property to respondent as said order exceeded the parameters of the final and executory decision and constituted a variance thereof.

B.......THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS NOT ENTITLED TO THE POSSESSION OF THE PROPERTY PRIOR TO THE PAYMENT OF RESPONDENTS MORTGAGE LOAN.

C.......THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER WAS NOT A BUILDER IN GOOD FAITH.

D.......THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS ENTITLED TO INTEREST COMPUTED ONLY FROM THE TIME WHEN THE JUDGMENT DECLARING THE CONTRACT TO BE AN EQUITABLE MORTGAGE BECAME FINAL.[9]

Basically, petitioner claims that he is entitled to retain possession of the subject property until payment of the loan and the value of the necessary and useful improvements he made upon such property.[10] According to petitioner, neither the Court of Appeals decision in G.R. CV No. 42065 nor this Courts decision in G.R. No. 120832 ordered immediate delivery of possession of the subject property to respondent.

The dispositive portion of the March 31, 1995 decision of the Court of Appeals in G.R. CV No. 42065, which was affirmed by this Court, provides that

IN VIEW OF ALL THE FOREGOING, the judgment appealed from is REVERSED and SET ASIDEand a new one entered: (1) dismissing the complaint; (2) declaring the "Document of Sale and Special Cession of Rights and Interests" (Exhibit B) dated February 10, 1960, to be an equitable mortgage not a sale; (3) upholding the validity of OCT No. P-13038 in the name of Felicitas de Lara; and (3) declaring null and void OCT No. P-11566 in the name of plaintiff Cornelio Isaguirre. All other counterclaims for damages are likewise dismissed. Costs against the appellee.[11]

Petitioner argues that the abovementioned decision merely settled the following matters: (1) that the transaction between petitioner and respondent was not a sale but an equitable mortgage; (2) that OCT No. P-13038 in the name of respondent is valid; and (3) that OCT No. P-11566 in the name of petitioner is null and void. Since the aforementioned decision did not direct the immediate ouster of petitioner from the subject property and the delivery thereof to respondent, the issuance of the writ of possession by the trial court on June 16, 1998 constituted an unwarranted modification or addition to the final and executory decision of this Court in G.R. No. 120832.[12]

We do not agree with petitioners contentions. On the contrary, the March 31, 1995 decision of the appellate court, which was affirmed by this Court on July 8, 1996, served as more than adequate basis for the issuance of the writ of possession in favor of respondent since these decisions affirmed respondents title over the subject property. As the sole owner, respondent has the right to enjoy her property, without any other limitations than those established by law.[13] Corollary to such right, respondent also has the right to exclude from the possession of her property any other person to whom she has not transmitted such property.[14]

It is true that, in some instances, the actual possessor has some valid rights over the property enforceable even against the owner thereof, such as in the case of a tenant or lessee.[15] Petitioner anchors his own claim to possession upon his declared status as a mortgagee. In his Memorandum, he argues that

4.8 It was respondent who asserted that her transfer of the Property to petitioner was by way of an equitable mortgage and not by sale. After her assertion was sustained by the Courts, respondent cannot now ignore or disregard the legal effects of such judicial declaration regarding the nature of the transaction.

xxx......xxx......xxx

4.13 Having delivered possession of the Property to petitioner as part of the constitution of the equitable mortgage thereon, respondent is not entitled to the return of the Property unless and until the mortgage loan is discharged by full payment thereof. Petitioners right as mortgagee to retain possession of the Property so long as the mortgage loan remains unpaid is further supported by the rule that a mortgage may not be extinguished even though then mortgagor-debtor may have made partial payments on the mortgage loan:

"Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or the creditor.

"Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

"Neither can the creditors heir who has received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid."

(Emphasis supplied.)

xxx......xxx......xxx

4.14 ......To require petitioner to deliver possession of the Property to respondent prior to the full payment of the latters mortgage loan would be equivalent to the cancellation of the mortgage. Such effective cancellation would render petitioners rights ineffectual and nugatory and would constitute unwarranted judicial interference.

xxx......xxx......xxx

4.16 The fact of the present case show that respondent delivered possession of the Property to petitioner upon the execution of the Deed of Absolute Sale and Special Cession of Rights and Interest dated 10 February 1960. Hence, transfer of possession of the Property to petitioner was an essential part of whatever agreement the parties entered into, which, in this case, the Supreme Court affirmed to be an equitable mortgage.

xxx......xxx......xxx

4.19 Petitioner does not have the mistaken notion that the mortgagee must be in actual possession of the mortgaged property in order to secure the debt. However, in this particular case, the delivery of possession of the Property was an integral part of the contract between petitioner and respondent. After all, it was supposed to be

a contract of sale. If delivery was not part of the agreement entered into by the parties in 1960, why did respondent surrender possession thereof to petitioner in the first place?

4.20 Now that the Courts have ruled that the transaction was not a sale but a mortgage, petitioners entitlement to the possession of the Property should be deemed as one of the provisions of the mortgage, considering that at the time the contract was entered into, possession of the Property was likewise delivered to petitioner. Thus, until respondent has fully paid her mortgage loan, petitioner should be allowed to retain possession of the subject property.[16]

Petitioners position lacks sufficient legal and factual moorings.

A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation.[17] It is constituted by recording the document in which it appears with the proper Registry of Property, although, even if it is not recorded, the mortgage is nevertheless binding between the parties.[18] Thus, the only right granted by law in favor of the mortgagee is to demand the execution and the recording of the document in which the mortgage is formalized.[19] As a general rule, the mortgagor retains possession of the mortgaged property since a mortgage is merely a lien and title to the property does not pass to the mortgagee.[20] However, even though a mortgagee does not have possession of the property, there is no impairment of his security since the mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.[21] If the debtor is unable to pay his debt, the mortgage creditor may institute an action to foreclose the mortgage, whether judicially or extrajudicially, whereby the mortgaged property will then be sold at a public auction and the proceeds therefrom given to the creditor to the extent necessary to discharge the mortgage loan. Apparently, petitioners contention that "[t]o require [him] to deliver possession of the Property to respondent prior to the full payment of the latters mortgage loan would be equivalent to the cancellation of the mortgage" is without basis. Regardless of its possessor, the mortgaged property may still be sold, with the prescribed formalities, in the event of the debtors default in the payment of his loan obligation.

Moreover, this Court cannot find any justification in the records to uphold petitioners contention that respondent delivered possession of the subject property upon the execution of the "Deed of Sale and Special Cession of Rights and Interests" on February 10, 1960 and that the transfer of possession to petitioner must therefore be considered an essential part of the agreement between the parties. This self-serving assertion of petitioner was directly contradicted by respondent in her pleadings.[22] Furthermore, nowhere in the Court of Appeals decisions promulgated on March 31, 1995 (G.R. CV No. 42065) and on October 5, 1998 (G.R. SP No. 48310), or in our own decision promulgated on July 8, 1996 (G.R. No. 120832) was it ever established that the mortgaged properties were delivered by respondent to petitioner.

In Alvano v. Batoon,[23] this Court held that "[a] simple mortgage does not give the mortgagee a right to the possession of the property unless the mortgage should contain some special provision to that effect." Regrettably for petitioner, he has not presented any evidence, other than his own gratuitous statements, to prove that the real intention of the parties was to allow him to enjoy possession of the mortgaged property until full payment of the loan.

Therefore, we hold that the trial court correctly issued the writ of possession in favor of respondent. Such writ was but a necessary consequence of this Courts ruling in G.R. No. 120832 affirming the validity of the original certificate of title (OCT No. P-13038) in the name of respondent Felicitas de Lara, while at the same time nullifying the original certificate of title (OCT No. P-11566) in the name of petitioner Cornelio Isaguirre. Possession is an essential attribute of ownership; thus, it would be redundant for respondent to go back to court simply to establish her right to possess subject property. Contrary to petitioners claims, the issuance of the writ of possession by the trial court did not constitute an unwarranted modification of our decision in G.R. No. 120832, but rather, was a necessary complement thereto.[24] It bears stressing that a judgment is not confined to what appears upon the face of the decision, but also those necessarily included therein or necessary thereto.[25]

With regard to the improvements made on the mortgaged property, we confirm the Court of Appeals characterization of petitioner as a possessor in bad faith. Based on the factual findings of the appellate court, it is evident that petitioner knew from the very beginning that there was really no sale and that he held respondents property as mere security for the payment of the loan obligation. Therefore, petitioner may claim reimbursement only for necessary expenses;

however, he is not entitled to reimbursement for any useful expenses[26] which he may have incurred.[27]

Finally, as correctly pointed out by the Court of Appeals, this case should be remanded to the Regional Trial Court of Davao City for a determination of the total amount of the loan, the necessary expenses incurred by petitioner, and the period within which respondent must pay such amount.[28] However, no interest is due on the loan since there has been no express stipulation in writing.[29]

WHEREFORE, the assailed Decision of the Court of Appeals dated October 5, 1998 and its Resolution dated March 5, 1999 are hereby AFFIRMED. Respondent is entitled to delivery of possession of the subject property. This case is hereby REMANDED to the trial court for determination of the amount of the loan, the necessary expenses incurred by petitioner and the period within which the respondent must pay the same.

SO ORDERED.

G.R. No. 97401 December 6, 1995

LUIS CASTRO, JR., MARISSA CASTRO, RAMON CASTRO, MARY ANN CASTRO, CATHERINE CASTRO and ANTONIO CASTRO, petitioners, vs.HON. COURT OF APPEALS and UNION BANK OF THE PHILIPPINES, respondents.

 

VITUG, J.:

The instant petition for review on certiorari of the decision, 1 dated 11 October 1990, of the Court of Appeals is focused on the issue of whether or not a residential house, which was constructed by a lessee on a portion of the leased property theretofore encumbered under a real estate mortgage by the lessor, can be rightly covered by a writ of possession following the foreclosure sale of the mortgaged land.

The facts are not in any serious dispute.

On 15 August 1974, Cabanatuan City Colleges obtained a loan from the Bancom Development Corporation. In order to secure the indebtedness, the college mortgaged to Bancom two parcels of land covered by TCT No. T-45816 and No. T-45817 located in Cabanatuan City. The parcels were both within the school site. While the mortgage was subsisting, the college board of directors agreed to lease to petitioners a 1,000-square-meter portion of the encumbered property on which the latter, eventually, built a residential house. Bancom, the mortgagee, was duly advised of the matter.

The school defaulted in the due payment of the loan. In time, Bancom extrajudicially foreclosed on the mortgage, and the mortgaged property was sold at public auction on 22 August 1979 with Bancom coming out to be the only bidder. A certificate of sale was accordingly executed by the provincial sheriff in favor of Bancom. Subsequently, the latter assigned its credit to herein private respondent Union Bank of the Philippines.

On 10 October 1984, following the expiration of the redemption period without the college having exercised its right of redemption, private respondent consolidated title to the property.

On 08 May 1985, private respondent filed with the Regional Trial Court of Nueva Ecija, Branch XXVIII in Cabanatuan City, an ex-parte motion for the issuance of a writ of possession not only over the land and school buildings but also the residential house constructed by petitioners. 2 On 10 May 1985, the lower court granted the motion and directed the issuance of the corresponding writ.

The ex-officio provincial sheriff, in implementing the writ, thereby also sought the vacation of the premises by petitioners. When the latter refused, private respondent filed an ex-parte motion for a special order directing the physical ouster of the occupants.

On 23 May 1986, petitioners formally entered their appearance in the proceedings to oppose the ex-parte motion. Petitioners averred that, being the

owners of the residential house which they themselves had built on the foreclosed property with the prior knowledge of the mortgagee, they could not be ousted simply on the basis of a petition for a writ of possession under Act No. 3135.

On 27 May 1986, the lower court, 3 nevertheless, issued an order granting private respondent's motion, and it directed Atty. Luis T. Castro, in representation of petitioners, to deliver "all the keys to all the rooms and premises" found on the property foreclosed and authorized, in the event petitioners would refuse to surrender the keys, private respondent "to enter the premises in question and do what is best for the preservation of the properties belonging to the Cabanatuan City Colleges." 4

Petitioners sought reconsideration of the order but the lower court denied the motion on 13 June 1986. 5 It ruled that the residential building was included in the writ of possession pursuant to Article 2127 of the Civil Code. Private respondent still sought clarification of the Order, praying that the court issue another order specifically mentioning the residential house to be among the property which the sheriff should deliver to it. 6 Although the court found no need to clarify its previous ruling, "in the interest of justice and to obviate any possible misunderstanding between the parties, however, it issued its order of 18 June 1986 stating:

WHEREFORE, the Ex-Officio Provincial Sheriff, Atty. Numeriano Y. Galang should implement the order of May 27, 1986 to include therein the residential house being the subject of dispute between the parties hereto there being no compelling reasons to exclude it.

SO ORDERED. 7

Petitioners elevated the case to the Court of Appeals, assailing the orders of the court a quo of 27 May 1986, 13 June 1986 and 18 June 1986. On 11 October 1990, the appellate court rendered decision affirming the questioned orders. 8

There is merit in the instant petition for review on certiorari.

Shorn of unrelated matters, 9 the basic question raised in the petition relates to the proper application of Article 2127 of the Civil Code. The law reads:

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or passes into the hands of a third person.

This article extends the effects of the real estate mortgage to accessions and accessories found on the hypothecated property when the secured obligation becomes due. The law is predicated on an assumption that the ownership of such accessions and accessories also belongs to the mortgagor as the owner of the principal. 10 The provision 11 has thus been seen by the Court, in a long line of cases beginning in 1909 withBischoff vs. Pomar, 12 to mean that all improvements subsequently introduced or owned by the mortgagor on the encumbered property are deemed to form part of the mortgage. That the improvements are to be considered so incorporated only if so owned by the mortgagor is a rule that can hardly be debated since a contract of security, whether, real or personal, needs as an indispensable element thereof the ownership by the pledgor or mortgagor of the property pledged or mortgaged. 13 The rationale should be clear enough — in the event of default on the secured obligation, the foreclosure sale of the property would naturally be the next step that can expectedly follow. A sale would result in the transmission of title to the buyer which is feasible only if the seller can be in a position to convey ownership of the thing sold (Article 1458, Civil Code). It is to say, in the instant case, that a foreclosure would be ineffective unless the mortgagor has title to the property to be foreclosed. 14

It may not be amiss to state, in passing, that in respect of the lease on the foreclosed property, the buyer at the foreclosure sale merely succeeds to the

rights and obligations of the pledgor-mortgagor subject, however, to the provisions of Article 1676 of the Civil Code on its possible termination. 15

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE, and a new one is entered declaring the residential house owned by petitioners to have been improperly included in the writ of possession issued by the court a quo. No costs.

SO ORDERED.

[G.R. No. 101747. September 24, 1997]

PERFECTA QUINTANILLA, petitioner, vs. COURT OF APPEALS** and RIZAL COMMERCIAL BANKING CORPORATION, respondents.

D E C I S I O N

FRANCISCO, J.:

The antecedents, as found by the trial court and affirmed by the Court of Appeals (CA), are as follows:

Defendant, x x x (respondent RCBC) is a commercial banking institution, organized under existing laws, doing business through its duly accredited offices in the City of Cebu.

On 12 July 1983, plaintiff (petitioner) executed a Real Estate Mortgage on a parcel of land, situated in the City of Cebu, under TCT No. 39409, in favor of defendant, RCBC, to secure a credit line in the amount of P45,000.00. Plaintiff availed, from this collateralized credit line, the amount of P25,000.00 only, secured and evidenced by promissory note no. 84/615 in the said sum of P25,000.00, with interest at the rate of 38% per annum, on 23 October 1984.

Plaintiff, Perfecta Quintanilla, who is engaged in business, under the name and style, Cebu Cane Products, exports rattan products abroad. In connection therewith, she established with defendant, RCBC, advance credit line, for her export bills against Letters of Credit from her customers abroad.

Also, on an even date, 23 October 1984, plaintiff secured from defendant, RCBC, a loan of P100,000.00, against her advance export credit line, secured by promissory note no. 84/614, on a maturing period, one month from thence.

Again on November 8, 1984, plaintiff secured another advance credit of P100,000.00 against her advance export credit line, which she again secured by another promissory note no. 84/632, of even date.

On 20 November 1984, plaintiff shipped stocks of her Cane Products to her buyer in Belgium, upon a Letter of Credit, under Export Bill No. 84/199, in the amount of US $10,638.15. Defendant, RCBC, received the proceeds of this export shipment, in the amount of P208,630.00, from Bank Brussels Lambert-New York.

The full amount of the proceeds, was therefore credited to plaintiffs Current Account No. 218 with defendant bank. Defendant RCBC, then debited plaintiffs current account, in the amount of P125,000.00 as payment for the latters loan of P100,000.00 to promissory note no. 84/614 and P25,000.00 to promissory note no. 84/615. The latter amount was what plaintiff secured by the Real Estate Mortgage, Exhibit A.

On November 27, 1984, plaintiff made another shipment from her Cebu Cane Products, under Export Bill No. 84-205 for US $10,083.00. Consequently, RCBC sent the export documents to the issuing bank for collection of this, latter export shipment.

However, on November 28, 1984, the issuing bank, Brussels Lambert-Belgium, refused payment on Export Bill No. 84-199, and demanded reimbursement from defendant, RCBC, the amount of US $20,721.70, invoking its right for immediate reimbursement, under Art. 16 of the International Chamber of Commerce (ICC)

Publication 400 through telex, to which plaintiff was so notified by defendant, RCBC. The latter, subsequently advised plaintiff to communicate and arrange matters with her buyers and customers in Belgium. After persistent demand for reimbursement, from Bank Brussels Lambert-Belgium, defendant, RCBC, returned and reimbursed the total sum of US $20,721.70 to Bank Brussels Lambert-Belgium.

RCBC, then proceeded to revert the credit and debit entries on plaintiffs current account, which it supposedly paid to promissory note nos. 84/614 and 84/615 and demanded payments from the plaintiff, the whole amount, including the amount of P25,000.00, it collaterized by the real estate mortgage, Exh. A.[1]

For failing to comply with the demands, RCBC sought to foreclose the real estate mortgage, not only for the amount of P25,000.00 but also for the amount of P500,994.39 which represents petitioners subsequent credit accommodations. RCBC alleged that the latter amount was likewise secured under the mortgage contract.

Rejecting RCBCs claim, petitioner filed an action for specific performance, damages and attorneys fees with prayer for a writ of preliminary injunction, alleging that the obligation for which the mortgage was executed was only for the maximum amount of P45,000.00 and that petitioner had already paid her other unsecured loans.RCBC filed an answer denying petitioners claim and set up a counterclaim for the payment of all her other outstanding loans totalling P500,694.39.

After trial, the RTC rendered judgment, the dispositive portion of which reads:

WHEREFORE, the writ of preliminary injunction, issued by this Court is hereby lifted. The defendant, RCBC, and defendants may proceed to foreclose the real estate mortgage for the satisfaction of plaintiffs obligation of P25,000.00 plus stipulated interests thereon in accordance with the terms thereof, but not to satisfy the other obligation of the plaintiff in excess thereof, which the said mortgage did not secure, therefor. No pronouncement as to costs.

SO ORDERED.[2]

RCBC appealed to the CA imputing error to the trial court in not granting its counterclaim and in ruling that the foreclosure of the mortgage was limited to the P25,000.00 availed of by petitioner. The CA affirmed the RTC ruling in so far as the foreclosure was limited to the amount of P25,000.00 but modified the same by granting the counterclaim. The dispositive portion of the CA decision provides:

Premises considered, We affirm the appealed decision with the modification consisting of ordering the appellee to pay the appellant, on the latters counter-claims, the sum of P500,694.39 due as of May 22, 1987 plus interest on the principal sum of P298,097.47 at the rate of 18% per annum from May 23, 1987 and penalty charges of 12% per annum from the same date, until fully paid, and the sum of P8,000.00 as reasonable attorneys fees plus the costs.

SO ORDERED.[3]

Aggrieved, petitioner moved for a partial reconsideration, arguing for the first time that respondent RCBCs counterclaim is permissive in nature for which the trial court has not acquired jurisdiction due to the non-payment of the docket fees. Petitioners motion was denied by the CA, though it amended its earlier decision by ordering respondent RCBC to pay docket fees on the counterclaim. [4] Hence this petition.

The pivotal issue is whether respondent RCBCs counterclaim is compulsory or permissive in nature, the resolution of which hinges on the interpretation of the following provision in the real estate mortgage which reads:

That for and in consideration of certain loans overdrafts and other credit accommodations obtained from the mortgagee by the same and those that hereafter be obtained, the principal of all of which is hereby fixed at forty-five Thousand Pesos (P45,000.00), Philippine Currency, as well as those that the mortgagee may extend to the mortgagor including interest and expenses of any other obligation owing to the mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the mortgagee, the mortgagor does hereby transfer and convey by way of mortgage unto the mortgagee x x x (emphasis supplied).[5]

We disagree with the CAs ruling that RCBCs counterclaim is permissive. In Ajax Marketing & Development Corporation vs. Court of Appeals,[6] a substantially similar provision appears, to wit:

That for and in consideration of credit accommodations obtained from the MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR and/or AJAX MKTG. & DEV. CORP./AJAX MARKETING COMPANY/YLANG-YLANG MERCHANDISING COMPANY detailed as follows:

Nature Date Granted Due Amount or Line

Date

Loans and/or P600,000.00

Advances in 150,000.00

current account 250,000.00

and to secure the payment of the same and those that may hereafter be obtained including the renewals or extension thereof.

x x x x x x x x x

the principal of all of which is hereby fixed at (P600,000.00/P150,000.00/P250,000.00)... as well as those that the MORTGAGEE may have previously extended or may later extend to the MORTGAGOR, including interest and expenses or any other obligation owing to the MORTGAGEE, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the MORTGAGEE, the MORTGAGOR hereby transfer and convey by way of mortgage unto the MORTGAGEE, x x x.

This Court in the Ajax case, in upholding the validity of the extra-judicial foreclosure of mortgage which included the loans obtained in excess of the amount fixed in the mortgage contract as expressed in said proviso, ruled that:

An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of the contracting parties is manifest that the mortgage property shall also answer for future loans or advancements, then the same is not improper as it is valid and binding between the parties.[7] (Italics supplied).

The amount stated in the mortgage contract between petitioner and RCBC does not limit the amount for which it may stand as security considering that under the terms of that contract, the intent to secure future indebtedness is apparent. It would have been different if the mortgage contract in the case at bar simply provides that it was intended only to secure the payment of the same and those that may hereafter be obtained the principal of all of which is hereby fixed at P45,000.00...[8] Yet the parties to the mortgage contract further stipulated: as well as those that the Mortgagee may extend to the Mortgagor.[9] The latter phrase clearly means that the mortgage is not limited to just the fixed amount but also covers other credit accommodations in excess thereof. Thus, the general rule that mortgage must be limited to the amount mentioned in the mortgage cannot be applied herein. Rather by specific provision and agreement of the parties, the mortgage contract was designed to secure even future advancements.[10]

Having determined that the mortgage contract extends even to petitioners other advances in excess of the P25,000.00, RCBCs counterclaim for such other advances cannot but be considered as compulsory in nature. Such counterclaim necessarily arises out of the transaction or occurrence that is the subject matter of petitioners claim which is to enjoin the foreclosure of the latters other credit accommodations in excess of P25,000.00. It thus satisfies the compelling test of compulsoriness which requires a logical relationship between the claim and counterclaim, that is, where conducting separate trials of the respective claims of the parties would entail a substantial duplication of effort and time by the parties and the court.[11] Both claims are merely offshoots of the same basic controversy.[12] Moreover, RCBCs counterclaim does not require for its adjudication the presence of third parties upon whom the court cannot acquire jurisdiction and the court has jurisdiction to entertain the claim.[13]

RCBCs counterclaim being compulsory in nature, there is no need to pay docket fees therefor.Nevertheless, RCBC is still bound to pay the docket fees as ordered by the CA in its August 19, 1991 Resolution, having failed to appeal therefrom. The entrenched procedural rule in this jurisdiction is that a party who has not himself appealed cannot obtain from the appellate court any affirmative relief other than those granted in the decision of the lower court.[14]

Finally, even granting that RCBCs counterclaim is permissive where the trial court has no/cannot exercise jurisdiction over said claim unless/until the

corresponding docket fees therefor has been paid, petitioner is however barred by estoppel from challenging the trial courts jurisdiction. We quote with approval the CAs observation in this matter.

x x x. The record clearly shows that never once, during the proceedings below, was the question of docket fees and of jurisdiction raised by the appellee. Not only did appellee not bother to answer counterclaim but she did [not] even hint at it in her memorandum, notwithstanding that the Bank adduced the required evidence to prove the counterclaim which was included in the Banks former (sic) offer of evidence (EXG. C, Record, pp; 114-117). Neither was the issue raised in appellees brief, again notwithstanding the fact that the counterclaim is the subject of the first and second errors of the brief of the Bank, against which appellee did not raise a single argument. The issue surfaced for the first time in the motion for partial reconsideration filed by the appellee.

The objection should have been raised more seasonably, before the trial court or at the very least in appellees brief. In the circumstances appellee is barred by laches from raising the question of jurisdiction at this very late stage (Vide Maersk vs. Court of Appeals, 187 SCRA 646).[15]

In addition, it has been consistently held by this Court that while jurisdiction may be assailed at any stage, a partys active participation in the proceedings before a court without jurisdiction will estop such party from assailing such lack of it. It is an undesirable practice of a party participating in the proceedings and submitting his case for decision and then accepting the judgment, only if favorable, and attacking it for lack of jurisdiction, when adverse.[16]

WHEREFORE, save for the modification anent the nature of RCBCs counterclaim and its related incidents, the decision of the Court of Appeals promulgated October 31, 1990 as amended by its Resolution promulgated August 19, 1991 is hereby AFFIRMED in all other respects.

SO ORDERED.

G.R. No. 118552             February 5, 1996

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs.COURT OF APPEALS and THE SPOUSES ALEJANDRO and AMPARO CASAFRANCA, respondents.

D E C I S I O N

DAVIDE, JR., J.:

This petition for review on certiorari seeks: (1) a modification of the decision of 29 April 1994 of the Court of Appeals in CA-G.R. CV No. 383321 affirming in toto the 20 April 1992 ruling of the Regional Trial Court (RTC) of Cebu, Branch 16, in Civil Case No. CEB-6779;2 and (2) a review of the appellate court's resolution of 4 January 19953 denying the petitioner's Motion for Partial Reconsideration4 of the aforementioned decision.

The sole issue in this case is whether, in the foreclosure of a real estate mortgage, the penalties stipulated in two promissory notes secured by the mortgage may be charged against the mortgagors as part of the sums secured, although the mortgage contract does not mention the said penalties.

The Court of Appeals adopted the trial court's findings of facts, to wit:

The following antecedental facts are supported by the pleadings and evidence on record: Plaintiff spouses Alejandro and Amparo Casafranca, used to be the owners of Lot 802-B-2-B-2-F-1 of the subdivision plan Psd-698545, located in Cebu City and covered by TCT No. 32769 (Exh A). On 3 December 1976 they sold the lot to Carlos Po who paid part of the agreed price. The latter, after securing a title in his name (TCT No. 66446), mortgaged the lot to the Philippine Bank of Communications (PBCom for short) to secure a loan of P330,000 (Exh B). It appears that in a civil action that ensued between them, plaintiff spouses obtained a favorable judgment against Carlos Po (Exh C). Later, in an auction sale to satisfy Carlos Po's judgment obligation, plaintiff spouses acquired the aforesaid lot and a Certificate of Sale was executed in their favor (Exh D).

Meanwhile, under date of 9 September 1980 PBCom applied for extrajudicial foreclosure of the mortgage executed by Carlos Po (Exh E), and in the succeeding auction sale held on 4 November 1980, it

acquired the lot at its winning bid of P1,006,540.56. The corresponding Certificate of Sale was then executed in its favor (Exh F). It appears further that sometime in 1981 plaintiff Amparo Casafranca who had stepped into the shoes of mortgagor Carlos Po by virtue of the auction sale in her favor (Exh D) offered to redeem the property from PBCom by tendering to its manager, Isidore Falek, a check in the amount of P500,000 which, in her estimate, would be sufficient to settle the account of Carlos Po. PBCom did not accept the check as it insisted that any such redemption should be at the price it acquired the lot in the auction sale. In reaction, plaintiffs filed against PBCom Civil Case No. R-21700 in the RTC of Cebu for nullification of the foreclosure and auction sale (Exh M). In a judgment which became final and executory on 17 September 1986 (Exh H) the Court set aside the extrajudicial foreclosure and auction sale and declared that the obligation secured by the mortgage executed by Carlos Po was only P330,000 plus stipulated interest and charges (Exh G). Subsequently, in a letter dated 4 December 1986 PBCom advised plaintiff spouses to pay the sum of P884,281.38 purportedly representing Carlos Po's principal account of P330,000, interest and charges thereon, attorney's fee[s] and realty taxes which it paid for the lot (Exh I). Plaintiffs, however, did not agree with said Statement of Account and since the account remained unpaid, PBCom again applied for extrajudicial foreclosure of mortgage (Exh J), which culminated in an auction sale of the lot on 2 April 1987, during which it was sold to Natalie Limchio for P1,184,000 (Exh L).

On 6 April 1988 plaintiffs commenced the present action to nullify the auction sale in favor of Natalie Limchio. It is alleged in the complaint that the second foreclosure was void as it was based on a bloated account. Plaintiffs further alleged that PBCom refused to turn over the correct amount of residue after paying off the mortgage and costs of the sale. Upon plaintiffs' application, the Court issued on 7 April 1988 a TRO enjoining defendant sheriffs from transferring the title of the lot in favor of defendant Natalie Limchio and the latter, from taking possession of the lot. This was followed by a preliminary injunctive writ which was issued after hearing and upon plaintiffs' filing of a bond. However, before the pre-trial conference could be held, plaintiffs signified their intention to pursue only their alternative demand for the residue or balance of the proceeds of the auction sale less the correct outstanding account which was secured by the mortgage. For this purpose they filed an amended complaint only against PBCom (pp. 296-305, rollo) which was admitted, in which they pray for recovery of the sum of P625,724.90 as residue after paying off the outstanding account [to] the tune of P558,275.00, realty taxes paid by PBCom and costs of the foreclosure proceeding. Hence, what is left for the Court to ascertain is the true or correct account of Carlos Po as of the auction sale on 2 April 1987 after which, the determination of the residue would follow. . . .5

As to the amounts due the parties, the trial court computed them as follows:

The mortgage contract (Exh B) explicitly provides for interest of "Twelve per cent (12%) per annum or at such other higher rate or rates as may be fixed by the MORTGAGEE from time to time, and shall be payable at the end of every month or otherwise, as the MORTGAGEE may elect and, if not so paid, shall be added to, and become part of, the principal and shall earn interest at the same rate as the principal." It is then evident that the parties agreed to capitalize the interest due and unpaid, which as added principal, shall earn new interest. Herein lies the discrepancy in the computation respectively submitted by plaintiffs (pp. 190-191; 204-209, rollo) and PBCom (pp. 181-183, rollo), for while the former assessed only conventional or simple interest, the latter computed compound interest conformable to the mortgage contract. In this connection, the Court finds PBCom's computation of interest to be in accordance with the contractual stipulations of the parties. It may be stressed that the increase in the rate of interest from 12% to 14% as of 1 December 1979 is authorized in the mortgage contract itself as sanctioned by CB Circular No. 705 dated 1 December 1979. PBCom is further entitled to reimbursement for realty taxes it paid for the lot. But of course, penalties and charges are not due for want of stipulation in the mortgage contract.

To recapitulate, the principal loan obtained by Carlos Po (now succeeded by plaintiffs) on 15 December 1976 was P330,000. Interest thereon for the first year at 12% per annum was retained or deducted from the proceeds of the loan. For the next two (2) years or from 25 December 1977 to 30 November 1979, compound interests earned at the same rate reached P77,660. And then from 1 December 1979 to 2 April 1987 (date of auction sale) the rate of interest was raised to 14% per annum, as authorized in the mortgage

contract. At such rate, compound interests for said period would be in the sum of P343,805. Adding both interest earnings to the principal obligation, the total account would then be P751,465. Additionally, the mortgage contract provides for attorney's fee[s] equivalent to 10% of the amounts due. Hence, the sum of P75,146.50 in the concept of attorney's fee[s] would raise the account to P826,611.50. Finally, the amount of P83,028.18 representing realty taxes paid by PBCom for the lot, inclusive of interest, which must be reimbursed, will bring the grand total of the account to P909,639.68.

On the other hand, the publication and other expenses incurred in the foreclosure and auction sale [to] the tune of P707 should be deducted from the amount of P1,184,000 which Natalie Limchio paid for the lot, leaving net proceeds of P1,183,293. Subtracting therefrom the total account due to PBCom, the residue would be P273,653.32, which must be delivered to plaintiffs.6

In the light of the above, the trial court thus ruled:

WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiffs Alejandro and Amparo Casafranca for the sum of P273,653.32 representing the residue or balance of the proceeds of the auction sale conducted on 2 April 1987 after deducting therefrom publication expenses and paying off the total account due to defendant Philippine Bank of Communications, and ordering the latter to pay unto plaintiffs the aforesaid amount.

SO ORDERED.7

Both parties appealed from the above judgment to the Court of Appeals. The petitioner questioned the lower court's failure to include in its computation the penalty stipulated in the aforementioned promissory notes. On the other hand, the private respondents advanced that: (1) the interest on the sum due to the petitioner should have stopped running on 31 July 1981; (2) the lower court should have allowed twelve percent (12%) interest per annum on the amount awarded to the private respondents from 3 April 1987 until the obligation was fully paid; and (3) the lower court should have awarded the private respondents moral and exemplary damages, attorney's fees, and litigation expenses.

The Court of Appeals affirmed the decision of the trial court in toto and subsequently denied the parties' separate motions for reconsideration.

The petitioner and the private respondents then instituted with this Court separate petitions for certiorari under Rule 45 of the Rules of Court. While that of the petitioner was docketed as G.R. No. 118552 (this case), that of the private respondents was docketed as G.R. No. 118809 and assigned to the Second Division. However, the two actions were not consolidated.

The private respondents in this case filed their Comment8 to the petition as required in the resolution of 8 February 1995.9

On 13 March 1995, the Second Division issued a resolution which dismissed G.R. No. 118809, thus:

[F]or failure to persuasively demonstrate any reversible error in the challenged judgment of the Fourth Division of the Court of Appeals promulgated on April 29, 1994 - affirming in toto that of the Regional Trial Court of Cebu rendered by Judge (now Court of Appeals Justice) Godardo A. Jacinto on April 20, 1992 (Civil Case No. CEB-6779) - it appearing on the contrary, that both judgments correctly appreciated the evidence and applied the relevant legal provisions in ruling, essentially, that there had been no valid tender of payment by petitioners of the amount of the mortgage liability burdening the property in question, and that the computation of the amount rightly due said petitioners had been correctly made in accordance with the law applicable to the case (Act No. 3135, as amended). Moreover, the record discloses no important and special reason for the exercise by this Court of its discretionary power of review in this case.10

On 9 May 1995, this Court received the private respondents' Manifestation11 drawing our attention to this resolution.

On 23 August 1995, we gave due course to the petition12 and required the parties to submit their respective memoranda, which they subsequently did. The private respondents contended that "[a]ctually there are no more issues left for this Honorable Court to decide because all the issues in controversy in this case has

[sic] already been decided with finality by the Second Division of the Supreme Court in G.R. No. 118809."13 To which, the petitioner replied14 that the G.R. No. 118809 resolution dispensed with only those issues raised therein by the private respondents and did not touch on the questions raised in this case.

The petition is not impressed with merit.

The two promissory notes in question, signed by Carlos Po, 15 are similarly worded and their pertinent provisions read:

For value received, I/we jointly and severally, promise to pay the Philippine Bank of Communications, at its office in the City of Cebu, Philippines the sum of THREE HUNDRED THOUSAND PESOS (P300,000.00), Philippine Currency, together with interest thereon at the rate of TWELVE % per annum until paid, which interest rate the Bank may at any time without notice, raise within the limits allowed by law, and I/we also agree to pay, jointly and solidarily 12% per annum penalty charge, by way of liquidated damages should this note be unpaid or is not renewed on due date.

xxx       xxx       xxx

Should it become necessary to collect this note through an attorney-at-law, I/we hereby expressly agree to pay, jointly and severally, ten per cent (10%) of the total amount due on this note as attorney's fees which in no case shall be less than P100.00 exclusive of all costs and fees allowed by law stipulated in the contract of real estate mortgage if any there be.

while the mortgage contract provides in part:16

This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred by the MORTGAGOR(S) and Po's All Electrical Supply either as principal debtor(s) or as surety(ies) or in any other capacity, including discounts of Chinese and other drafts, bills of exchange, promissory notes, even without any further endorsements by the Mortgagor(s), said property or properties to stand security for the payment of the said obligations to the fullest extent and for all that it is (or they are) worth, to the extent of THREE HUNDRED THIRTY THOUSAND PESOS (P330,000.00) Philippine Currency.

xxx       xxx       xxx

This mortgage shall be subject to the following conditions, to wit:

FIRST: The interest on the obligations secured by this mortgage shall be computed at the rate of Twelve per cent (12%) per annum or at such other or higher rate or rates as may be fixed by the MORTGAGEE from time to time, and shall be payable at the end of every month or otherwise, as the MORTGAGEE may elect and if not so paid, shall be added to, and become part of, the principal and shall earn interest at the same rate as the principal.

xxx       xxx       xxx

EIGHT: The MORTGAGOR(S) shall, during the existence of this mortgage, promptly pay when due all taxes or assessments of every kind that may be levied upon the property or properties hereby mortgaged and deliver the corresponding tax receipts to the MORTGAGEE, . . . In case of failure on the part of the MORTGAGOR(S) to comply with the provisions of this condition, the MORTGAGEE may and is hereby authorized to pay such taxes or assessments and to have the buildings insured; and any sum or sums so spent by the MORTGAGEE shall be fully secured hereby and be subject to the terms hereof. . . .

xxx       xxx       xxx

ELEVENTH: The expenses incurred in the drafting, acknowledgement and the registration of this mortgage and of its

cancellation, shall be for the account of, and shall be paid by, the MORTGAGOR(S).

TWELFTH: Should the MORTGAGEE find it necessary to resort to the courts in order to collect any amount which may be due, the interest thereon or the expenses incurred on account of the matters enumerated in the previous paragraphs, or should the MORTGAGEE in any manner and for any reason be involved in litigation on account of the property or properties mortgaged, or should foreclosure proceedings be instituted in accordance with the fourth condition hereof or should the MORTGAGOR(S) encumber the property or properties hereby mortgaged with a second mortgage without the written consent of the MORTGAGEE, the MORTGAGEE shall be allowed a sum equivalent to Ten Per Centum (10%) of all the amounts due, but in no case less than THIRTY THREE THOUSAND PESOS as attorney's fees, said amount to be considered part of the principal sum hereby secured, this mortgage answering for its payment accordingly.

We immediately discern that the mortgage contract does not at all mention the penalties stipulated in the promissory notes. However, the petitioner insists that the penalties are covered by the following provision of the mortgage contract:

This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred. . . .

The petitioner's insistence is based on the supposed rule:

[T]hat the determination of the mortgage debt would not be limited on the mortgage contract itself if from the face thereof, it is apparent that other obligations are also intended to be secured.

To bolster its argument, the petitioner relies on the cases represented by Mojica vs. Court of Appeals 17 which held:

It has long been settled by a long line of decisions that mortgages to secure future advancements are valid and legal contracts; that the amounts named as consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.18

The Court is unconvinced for the cases relied upon by the petitioner are inapplicable. The doctrine first laid down in Lim Julian vs. Lutero19 pertains only to mortgages securing future advancements. The petitioner would not have been misled into thinking otherwise had it properly quoted Mojica in its petition. The following explanation is helpful to distinguish future advancements from the loan in the case at bench:

It is not uncommon that persons enter into a contract whereby they draw sums of money from their creditors, usually banks, from time to time, and as security therefor execute a mortgage on their property. Such contracts are sometimes executed for an account smaller or larger than that actually borrowed. Thus, it may appear in the contract that the loan secured by the mortgage is only for P10,000 when by reason of advancements made by the creditor to the debtor the amount ultimately drawn and borrowed is P20,000. Under these circumstances it is inequitable to consider that the mortgage can be foreclosed only for the amount of P10,000. Indeed, no bank or creditor would be willing to make such advancements which are in excess of the amount stipulated if the payment thereof is not secured. . . .20

The obligation in this case was not a series of indeterminate sums incurred over a period of time, but two specific amounts procured in a single instance. Thus, the inapplicability of Lim Julian. Instead, what applies here is the general rule that "an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage."21

Aside from the foregoing, other factors militate against the petitioner's stance.

The mortgage provision relied upon by the petitioner is known in American jurisprudence as a "dragnet" clause, which is specifically phrased to subsume all

debts of past or future origin. Such clauses are "carefully scrutinized and strictly construed."22

The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was the affixing of his signature or "adhesion" thereto. Being a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the agreement.23

A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention of penalty charges.24 Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This explains the finding by the trial court, as affirmed by the Court of Appeals, that "penalties and charges are not due for want of stipulation in the mortgage contract."25

Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage.26 In this case, the mortgage contract provides that it secures notes and other evidences of indebtedness. Under the rule of ejusdem generis, 27 where a description of things of a particular class or kind is "accompanied by words of a generic character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated. . . ." 28 A penalty charge does not belong to the species of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty.

There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it.29

A mortgage and a note secured by it are deemed parts of one transaction and are construed together,30 thus, an ambiguity is created when the notes provide for the payment of a penalty but the mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty was intended to be covered by the mortgage. The mortgage contract consisted of three pages with no less than seventeen conditions in fine print; it included provisions for interest and attorney's fees similar to those in the promissory notes; and it even provided for the payment of taxes and insurance charges. Plainly, the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can then only be interpreted to mean that the petitioner had no design of including the penalty in the amount secured.

It should also be noted that the private respondents consistently excluded penalty charges in their computation of the amount due to the petitioner,31 while the petitioner seemed indecisive in including the said charges.

In its Manifestation32 of 14 May 1988 before the trial court, the petitioner computed the penalty charge as follows:

Penalty charge on the principal amount of P330,000,00 from Dec. 25, 1977 to April 2, 1987 at the rate of 8% perannum

The promissory notes provided for a 12% per annum penalty, 33 not eight percent (8%). The petitioner explained this discrepancy in its Memorandum 34 submitted to the trial court, claiming:

On the contrary, the bank's computation of the actual amount of the mortgage debt should be upheld. In fact, the bank was lenient on the spouses in computing the amount of the debt. For instance, the rate of charges stipulated is 12% per annum . . . Yet the bank computed the charges at a much lesser rate . . . thereby lessening the actual amount of the mortgage debt.35

The petitioner, however, included in its Offer of Exhibits:36

14. EXHIBIT "14" - Promissory Note No. 3838dated 25 October 1977.

"14-A" - Stipulation on penalty/bank charges.

PURPOSE:

. . . 3) It is stipulated that PBCom could impose penalty charges of 12% per annum; and 4) PBCom was liberal on plaintiffs as it did not impose the full extent of the stipulated charges.

Far then from being a display of lenience or liberality, the above circumstances evince the petitioner's uncertainty as to whether penalty charges were actually due it. In fact, in a statement of account 37 signed by the petitioner's Senior Vice-President, Isidore Falek, there was no mention of a penalty charge, although there was an entry stating:

Interest:

xxx       xxx       xxx

8% Bank charges P248,233.33

Furthermore, the promissory notes are clear that the penalty shall be at 12% per annum, neither more nor less. Thus, when the petitioner claims that under the same notes it could impose, as in fact it did, the lower penalty of 8% - contrary to what was covenanted - the petitioner only reveals that it is wont to stipulate what it does not mean. The private respondent then should not be faulted for the petitioner's imperfection, and the latter must bear the consequences of its failings.

It is interesting to note that the petition in this case did not include a computation of the sum due as penalty which is the very matter in dispute. The petitioner merely pegged its claim at "12% per annum on the principal amount of P330,000.00 computed from 1977,"38 which was likewise a departure from the 8% interest rate which it insisted upon during trial.

After interpreting the mortgage contract strictly against the petitioner, considering the intention of the parties as evidenced by their various pleadings and assertions, the inescapable conclusion is that the mortgage contract did not authorize the petitioner to include in the secured amount the penalty stipulated in the promissory notes. The mortgage contract did not contain a trace of the said penalty and, proceeding by the rule that "an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage," such penalty can not be recovered on the foreclosure of the mortgage.

WHEREFORE, finding no reversible error on the part of respondent Court of Appeals, its challenged decision of 29 April 1994 in CA-G.R. CV No. 38332 is hereby AFFIRMED in toto.

Costs against the petitioner.

SO ORDERED.

G.R. No. 77502 January 15, 1988

EMILIA B. SANTIAGO, plaintiff-appellant, vs.PIONEER SAVINGS AND LOAN BANK, ET. AL., defendants-appellees.

 

MELENCIO-HERRERA, J.:

An appeal certified by the Court of Appeals to this Tribunal for determination since only a question of law is involved.

The facts are not controverted.

Plaintiff-appellant, Emilia P. Santiago, is the registered owner of a parcel of land situated at Polo, Valenzuela, Metro Manila, with an area of approximately 39,007 square meters, covered by T.C.T. No. B-41669 (briefly, the Title) of the Register of Deeds of Caloocan City (hereinafter, simply the Disputed Property).

On 7 April 1983, plaintiff-appellant executed a Special Power of Attorney in favor of Construction Resources Corporation of the Philippines (CRCP, for short) authorizing and empowering CRCP:

1. To borrow money and make, execute, sign and deliver mortgages of real estate now owned by me and standing in my name and to make, sign, execute and deliver any and all promissory notes necessary in the premises.

2. For the purpose of these presents, or for the purpose of securing the payment of any loan, indebtedness or obligation which my attorney-in-fact may obtain or contract with the bank, its renewal, extension of payment of the whole or any part thereof, said attorney-in-fact is hereby authorized and empowered to transfer and convey by way of mortgage in favor of the bank, ... (the Disputed Property).

On 8 April 1983, CRCP executed a Real Estate Mortgage over the Disputed Property in favor of FINASIA Investment and Finance Corporation to secure a loan of P1 million. The mortgage contract specifically provided that in the event of default in payment, the mortgagee may immediately foreclose the mortgage judicially or extrajudicially. The promissory note evidencing the indebtedness was dated 4 March 1983.

The Special Power of Attorney executed by plaintiff-appellant in CRCP's favor, the Real Estate Mortgage by CRCP in favor of FINASIA, together with the Board Resolution dated 28 March 1983 authorizing the CRCP President to sign for and on its behalf, were duly annotated on the Title on 12 April 1983.

On 29 July 1983, FINASIA executed in favor of defendant-appellee, Pioneer Savings & Loan Bank, Inc. (Defendant Bank, for brevity), an "Outright Sale of Receivables without Recourse" including the receivable of P610,752.59 from CRCP.

On 21 May 1984, FINASIA executed a "Supplemental Deed of Assignment" in favor of Defendant Bank confirming and ratifying the assignment in the latter's favor of the receivable of P610,752.59 from CRCP and of the mortgage constituted by CRCP over the disputed property.

On 12 July 1984, the aforesaid Supplemental Deed of Assignment was inscribed on the Title.

CRCP failed to settle its obligation and Defendant Bank opted for extrajudicial foreclosure of the mortgage. The notice of auction sale was scheduled on 16 May 1985.

On 13 May 1985, on learning of the intended sale, plaintiff-appellant filed before the Regional Trial Court of Valenzuela, Metro Manila, Branch CLXXII, an action for declaration of nullity of the real estate mortgage with an application for a Writ of Preliminary Injunction (Civil Case No. 2231-V-55).

On 14 May 1985, the Trial Court 1 issued a Temporary Restraining Order enjoining the sale at public auction of the Disputed Property.

Basically, plaintiff-appellant claimed in her Complaint that she was not aware of any real estate mortgage she had executed in favor of Defendant Bank; that she had not authorized anyone to execute any document for the extrajudicial foreclosure of the real estate mortgage constituted on the Disputed Property and that since the notice of Sheriffs sale did not include her as a party to the foreclosure proceedings, it is not binding on her nor on her property.

Defendant Bank opposed the application for Preliminary Injunction and asserted its right to extrajudicially foreclose the mortgage on the Disputed Property based on recorded public documents.

During the hearing on the petition for Preliminary Injunction, plaintiff-appellant, through counsel, admitted the due execution of plaintiff-appellant's Special Power of Attorney in favor of CRCP, the Real Estate Mortgage by CRCP to FINASIA, the Outright Sale of Receivables by FINASIA to Defendant Bank, as well the Supplemental Deed of Assignment by FINASIA to Defendant Bank.

On 30 May 1985, the Trial Court granted the Petition for Preliminary Injunction enjoining the public auction sale of the mortgaged property upon plaintiff-appellant's posting of a bond in the amount of P100,000.00.

On 7 June 1985, Defendant Bank filed a Motion to Dismiss the main case on the ground that the complaint did not state a cause of action followed on 24 June 1985 with a Motion for Reconsideration of the Order granting the Writ of Preliminary Injunction, both of which Motions plaintiff-appellant opposed.

On 30 August 1985, the Trial Court reconsidered its Order of 30 May 1985, dissolved the Writ of Preliminary Injunction, and ordered the dismissal of the case for lack of cause of action.

Plaintiff-appellant appealed to the Court of Appeals, which, as stated at the outset, certified the case to us on a pure question of law.

In the meantime, with the dissolution of the Preliminary Injunction, it appears that defendant Bank completed its extrajudicial foreclosure and the Disputed Property was sold at public auction on January 1986, after a re-publication of the notice of sale, since the first scheduled sale was enjoined by the Trial Court.

Plaintiff-appellant maintains that:

I. The Lower Court erred in dismissing the complaint and lifting the Preliminary Injunction by relying solely on the admission of the counsel of the plaintiff-appellant of certain documentary exhibits presented by the counsel of the defendant-appellee.

II. The Lower Court erred in relying on the case of Wenceslao Vinzons Tan vs. Director of Forestrywhich it qualifies as "on all fours with the case at bar."

III. The Lower Court erred in ignoring the pertinent doctrines in the Supreme Court cases cited by the plaintiff-appellant in her Opposition to Motion to Dismiss.

IV. The Lower Court erred in holding that notice of the scheduled sale of the land sent to the agent (CRCP) is also Notice to the principal (Plaintiff Appellant), the land owner.

and prays that she be given "a real day in Court" so that she may testify and give her side of the case.

Upon the factual and legal context, the errors assigned are without merit.

It is true that the determination of the sufficiency of a cause of action must be limited to the facts alleged in the Complaint and no other should be considered. 2 In this case, however, a hearing was held and documentary evidence was presented, not on the Motion to Dismiss but on the question of granting or denying plaintiff-appellant's application for a Writ of Preliminary Injunction, Counsel for plaintiff-appellant admitted an the evidence presented. That being so, the Trial Court committed no reversible error in considering said evidence in the resolution of the Motion to Dismiss.

Furthermore, "even if the complaint stated a valid cause of action, a motion to dismiss for insufficiency of cause of action will be granted if documentary evidence admitted by stipulation disclosing facts sufficient to defeat the claim enabled the court to go beyond disclosure in the complaint" (LOCALS No. 1470, No. 1469, and No. 1512 of the International Longshoremen's Association vs. Southern Pacific Co., 6 Fed. Rules Service, p. 107; U.S. Circuit Court of Appeals, Fifth Circuit, Dec. 7, 1952; 131 F. 2d 605). Thus, although the evidence of the parties were presented on the question of granting or denying petitioner-appellant's application for a writ of preliminary injunction, the trial court correctly applied said evidence in the resolution of the motion to dismiss. ... 3

While, as contended by plaintiff-appellant, some aspects of this case differ from those in Tan, the doctrinal ruling therein, as quoted above, is squarely applicable to the case at bar. The cases which plaintiff-appellant cites express the general

rule when there is no "documentary evidence admitted by stipulation disclosing facts sufficient to defeat the claim." Where, however, such evidence is before the Court and has been stipulated upon, a Court can go "beyond the disclosure in the complaint." 4

Moreover, the rule is explicit that "rules of procedure are not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure substantial justice." 5

The evidence on record sufficiently defeats plaintiff-appellant's claim for relief from extrajudicial foreclosure. Her Special Power of Attorney in favor of CRCP specifically included the authority to mortgage the Disputed Property. The Real Estate Mortgage in favor of FINASIA explicitly authorized foreclosure in the event of default. Indeed, foreclosure is but a necessary consequence of non-payment of a mortgage indebtedness. Plaintiff-appellant, therefore, cannot rightfully claim that FINASIA, as the assignee of the mortgagee, cannot extrajudicially foreclose the mortgaged property. A mortgage directly and immediately subjects the property upon which it is imposed to the fulfillment of the obligation for whose security it was constituted. 6

The assignment of receivables made by the original mortgagee, FINASIA, to Defendant Bank was valid, since a mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. 7 Said formalities were complied with in this case. The assignment was made in a public instrument and proper recording in the Registry of Property was made. 8 While notice may not have been given to plaintiff-appellant personally, the publication of the Notice of Sheriff's Sale, as required by law, is notice to the whole world.

The full-dress hearing that plaintiff-appellant prays for wherein she intends to prove that she tried to contact the President of CRCP to urge him to pay the mortgage loan, that she had failed to do so despite several attempts; that she did not know that FINASIA had sold its receivables including that of CRCP to Defendant Bank; and that she was not informed by CRCP of the scheduled foreclosure sale will not tilt the scales of justice in her favor in the face of incontrovertible documentary evidence before the Court.

Plaintiff-appellant's recourse is against CRCP, specially considering her allegation that the latter had failed to observe their agreement.

WHEREFORE, the Order appealed from is hereby AFFIRMED, with costs against plaintiff-appellant.

SO ORDERED.

[G.R. No. 130722. December 9, 1999]

SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R CORPORATION, VICENTE COLOYAN in his capacity as Acting Registrar of the Register of Deeds of Quezon City thru Deputy Sheriff ROBERTO R. GARCIA, respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the consent of the mortgagee and that, otherwise, the sale made without the mortgagees consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?

The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The loans were secured by a mortgage[1] constituted by the spouses upon their two parcels of land and the improvements thereon located in Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters, respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.

On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they had previously mortgaged to L & R Corporation for the sum of P430,000.00. [2] The sale was annotated at the back of the respective certificates of title of the properties.[3]

Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to L & R Corporation as the only bidder for the amount of P221,624.58.[4] When L & R Corporation presented its corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15, 1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980, it wrote a letter[5] to the Register of Deeds of Quezon City requesting for the cancellation of the annotation regarding the sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the spouses Litonjua stating that the mortgagees prior written consent was necessary in case of subsequent encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was made without its prior written consent, the same should not have been registered and/or annotated.

On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered payment of the full redemption price to L & R Corporation in the form of China Bank Managers Check No. HOF-M O12623 in the amount of P238,468.04.[6] See Exhibits G & 2, Letter of PWHAS to L & R Corporation, id.6 L & R Corporation, however, refused to accept the payment, hence, PWHAS was compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the redemption price to the Deputy Sheriff through China Bank Managers Check No. HOF-O14750 in the amount of P240,798.94. [7] The check was deposited with the Branch Clerk of Court who issued Receipt No. 7522484[8] for the full redemption price of the mortgaged properties. Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981.[9]

In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the full redemption price and advised it that it can claim the payment upon surrender of its owners duplicate certificates of title.[10]

On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in their favor to the Register of Deeds of Quezon City. The Certificate also informed L & R Corporation of the fact of redemption and directed the latter to surrender the owners duplicate certificates of title within five days.[11]

On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties, when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity to redeem the same.[12]

On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of Redemption as an adverse claim on the titles of the subject properties on account of the refusal of L & R Corporation to surrender the owners duplicate copies of the titles to the subject properties. With the refusal of the Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a Petition[13] on July 17, 1981 against L & R Corporation for the surrender of the owners duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.

On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of Ownership.[14] Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer Certificates of Title No. 280054[15] and 28055[16] in favor of L & R Corporation, free of any lien or encumbrance.

With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of land that being the new owner, the rental payments should be made to them, and that new lease contracts will be executed with interested tenants before the end of August, 1981.[17] Upon learning of this incident from their tenants, the spouses Litonjua filed an adverse claim[18] and a notice of lis pendens[19] with the Register of Deeds. In the process, they learned that the prior sale of the properties in favor of PWHAS was not annotated on the titles issued to L & R.

A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by the spouses Litonjua and PWHAS against herein respondents before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case No. Q-33362. [20] On February 10, 1987, the lower court rendered its Decision[21] dismissing the Complaint upon its finding that

the sale between the spouses Litonjua and PWHAS was null and void and unenforceable against L & R Corporation and that the redemption made was also null and void.

On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June 22, 1994, [22]on the ground that the sale made to PWHAS as well as the redemption effected by the spouses Litonjua were valid.However, the same was subsequently reconsidered and set aside in an Amended Decision dated September 11, 1997.[23]

Hence, the instant Petition on the following issues:

(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;

(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the knowledge and consent of L & R Corporation, is valid and enforceable;

(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the spouses Litonjua; and

(4) whether or not there was a valid redemption.

Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows

"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the real property/properties subject of this mortgage without the prior written consent of the MORTGAGEE;

9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage, the MORTGAGEE shall be duly notified thereof by the MORTGAGORS, and should the MORTGAGEE be interested to purchase the same, the latter shall be given priority over all the other prospective buyers;[24]

There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to PWHAS without the prior written consent of L & R Corporation and without giving the latter notice of such sale nor priority over PWHAS.

Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity

of subsequent sale to PWHAS

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil Code which provides that (A) stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo,[25] a stipulation prohibiting the mortgagor from entering into second or subsequent mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation,[26] the case of Philippine Industrial Co., supra, was erroneously cited to have held that the prohibition in a mortgage contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the mortgagee is valid. No similar prohibition forbidding the owner of mortgaged property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling inPhilippine Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or alienation runs counter not only to Philippine Industrial Co., itself, but also to Article 2130 of the New Civil Code.

Meanwhile in De la Paz v. Macondray & Co., Inc., [27] it was held that while an agreement of such nature does not nullify the subsequent sale made by the mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the necessity of either notifying the purchaser or including him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost his equitable right of redemption.

In Bonnevie v. Court of Appeals,[28] where a similar provision appeared in the subject contract of mortgage, the petitioners therein, to whom the mortgaged property were sold without the written consent of the mortgagee, were held as without the right to redeem the said property. No consent having been secured from the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not validly substituted as debtors. It was further held that since their rights were never recorded, the mortgagee was charged with the obligation to recognize the right of redemption only of the original mortgagors-

vendors. Without discussing the validity of the stipulation in question, the same was, in effect, upheld.

Again, in Cruz v. Court of Appeals,[29] while a similar provision was recognized and applied, no discussion as to its validity was made since the same was not raised as an issue.

On the other hand, in Tambunting v. Rehabilitation Finance Corporation,[30] the validity of a similar provision was specifically raised and discussed and found as invalid. It was there ratiocinated that --

To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting, does contain a provision that the property mortgaged shall not be x x x the subject of any new or subsequent contracts of agreements, saving and excepting those having connection with the first mortgage with the RFC, without first securing the written permission and consent of the MORTGAGEE. But the provision can only be construed as directed against subsequent mortgages or encumbrances, not to an alienation of the immovable itself.   For while covenants prohibiting the owner from constituting a later mortgage over property registered under the Torrens Act have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations forbidding the owner from alienating the immovable mortgaged are expressly declared void by law (Art. 2130, Civil Code). It is clear that the stipulation against subsequent agreements above mentioned had not been breached by the assignment by the Escuetas (to the Hernandezes) of their right of redemption in connection with the mortgage constituted in favor of the R.F.C. The assignment was not a subsequent mortgage or encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the encumbered real property in truth, an alienation of the immovable which could not lawfully be forbidden. Moreover, since the subject of the assignment to the Hernandezes had connection with the first assignment with the R.F.C., it did not fall within, but was explicitly excepted from, the prohibitory stipulation in question. Finally, it should not be forgotten that since the Tambuntings, in their own deed of conditional sale with the R.F.C., had accepted without demur the provision that said contract could be revoked within one (1) year from September 16, 1955 at the option of the RFC, as vendor, should the former owner (Escueta) exercise his right to redeem the property; and that the redemption of the property within said period by the former owner or his successor-in-interest would render their instrument of conditional sale automatically null and void and without effect, they cannot now assume a position inconsistent with said provision. (underscoring, Ours)

Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose a principal attribute of ownership is not thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot oppose.

In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v. Court of Appeals, supra, and Medida v. Court of Appeals.[32] According to the Court of Appeals, said cases, are not only more recent that that of Tambunting, supra, but are also more applicable to the issue at bar.

We are not convinced.

As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no discussion as to its validity was made since the same was not raised as an issue. Thus, it cannot be said that the specific pronouncement in the Tambunting case that such a stipulation can only be construed as against subsequent mortgages or encumbrances but not to an alienation of the immovable itself, which is prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in the case of Medida v. Court of Appeals, are different from those in the present case for what was in issue in the said case was a second mortgage over a foreclosed property during the period of redemption.Thus, the ruling in Medida quoted in the Amended Decision that what is delimited is not the mortgagors jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted, actually refers to the fact that the only rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the possession use and enjoyment of the same during the period of redemption. It has no connection or reference to the right of a mortgagor to sell his mortgaged property without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of the stipulation in controversy.

Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is still the controlling law.Indeed, we are fully in accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute

prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil Code.

Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties.Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.

Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such sale and was in effect, their successor-in-interest.As such, it had the right to redeem the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that

x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment.Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption.

The redemption of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest. As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.

Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of the foreclosure sale, well within the one year period of redemption.

Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see nothing wrong in this provision. The right of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-mortgage includes the consideration for the right of first refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be given the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua had

every right to sell their mortgaged property to PWHAS without securing the prior written consent of L & R Corporation, it had the obligation under paragraph 9, which is a perfectly valid provision, to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of L & R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and conditions offered to L & R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporations contractual right of first refusal?On this score, we agree with the Amended Decision of the Court of Appeals that the sale made to PWHAS is rescissible.The case of Guzman, Bocaling & Co v. Bonnevie[33] is instructive on this point

The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for one of the contracting parties and even third persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity. (underscoring, Ours)

It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject properties since the Deed of Real Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by registration, which equates to notice to the whole world.

We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the subject properties at the same purchase price of P430,000.00, and was agreeable to pay the difference between such purchase price and the redemption price of P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did not duly exercised its right of first refusal at the opportune time cannot be taken against it, precisely because it was not notified by the spouses Litonjua of their intention to sell the subject property and thereby, to give it priority over other buyers.

All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporations prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by L & R Corporation.However, while the sale is, indeed, valid, the same is rescissible because it ignored L & R Corporations right of first refusal.

Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original statusquo, with no sale having been made, they should now be allowed to redeem the subject properties, the period of redemption having been suspended during the period of litigation. In effect, the spouses Litonjua want to retain ownership of the same.We cannot, however, sanction this belated reversal of the spouses Litonjuas decision to sell. To do so would afford them undue advantage on account of the appreciation of the value of the subject properties in the intervening years when they precisely were the ones who violated and ignored the right of first refusal of L & R Corporation over the same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R Corporation.

WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:

(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo and Erlinda Litonjua and Philippine White House Auto Supply, Inc. and ordering said spouses to return to Philippine White House Auto Supply, Inc. the purchase price of P430,000.00;

(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine White House Auto Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia to return to it the redemption check of P240,798.94;

(d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but ordering it to pay to the Litonjua spouses the additional sum of P189,201.96 representing the difference from the purchase price of P430,000.00 in the rescinded sale;

(e) Deleting the awards for moral and exemplary damages and attorneys fees to the respondents.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-41555 July 27, 1977

INDUSTRIAL FINANCE CORPORATION, petitioner, vs.CASTOR TOBIAS, respondent.

Santos S. Carlos for petitioner.

Amado J. Garcia for respondent.

 

MARTIN, J:

This is a petition for review of the decision of the Court of Appeals * in CA-G.R. No. 53916, entitled "Industrial Finance Corporation vs. Castor Tobias", affirming that of the Court of First Instance of Manila with a slight modification.

On June 16, 1968, respondent Castor Tobias bought on installment one (1) Dodge truck from Leelin Motors, Inc. To answer for his obligation he executed a promissory note in favor of the latter, for the sum of P29.070.28 payable in thirty-six (36) equal installments with interest at the rate of 12% per annum payable in the amounts and dates indicated in said promissory note. 1 To secure payment of the promissory note, respondent Tobias executed in favor of Leelin Motors, Inc. a chattel mortgage on the Dodge truck.

On June 19, 1969, Leelin Motors, Inc. indorsed the promissory note and assigned the chattel mortgage to petitioner Industrial Finance Corporation. As a consequence respondent Tobias paid six (6) installments on the promissory note directly to the petitioner Industrial Finance Corporation the last of which was made on February 19, 1970. 2

On May 14, 1970, the petitioner's counsel wrote to respondent Tobias the following letter:

xxx xxx xxx

Dear Mr. Tobias:

My client, the INDUSTRIAL FINANCE CORPORATION, has referred to me for appropriate legal action your account with it (LCI-690) which is in arrears in the amount of P4,254.65 and a balance of P25,249.65 as of May 16, 1970. In view of your default in the payment of your installments due pursuant to the Promissory Note and Chattel Mortgage you executed in favor of Leelin Motors, Inc. and assigned to Industrial Finance Corporation, demand is- hereby made upon you to pay the amount of P25,249.65 on or before May 24, 1970 or to surrender within the same period the following described personality:

One (1) Unit 1969 Motor Vehicle DodgeD-600 FFC 197 "WB"Engine No. CPC4007Serial No. 1589070794

otherwise, the corresponding action will be filed against you plus damages and attorney's fees.

Please consider this a final demand.

Very truly yours,

C.R. SANCHEZ LAW OFFICE

SGD. CATALINO R. SANCHEZ. 3

At the time the foregoing letter was written, respondent Tobias was in arrear in the payment of more than two (2) installments. 4

On May 27, 1970, respondent Tobias wrote petitioner's counsel the following letter:

Dear Sir:

This is in response to your letter of demand dated May 14, 1970 asking me to surrender Dodge Truck with engine no. CPC-4007 Serial No. 1589070794. I am now voluntarily and willingly surrendering said truck due to the ff. reasons:

1. That said truck has been with Leelin Motors ever since the later part of February when it met an accident.

2. That there is too much delay in the repair of said truck because until now the truck is not yet completely finished.

3. That upon seeing said truck, I am not satisfied with the repair of the finished portions.

I am now giving full authority to your client Industrial Finance Corporation to get said truck at Leelin Motors, Inc.

I am hoping that due to the ff. good reasons my name will not be blacklisted in your credit division.

Very truly yours,

Castor Tobias 5

Upon learning that the truck met an accident, petitioner decided not to get the truck anymore from Leelin Motors, Inc.

On February 16, 1971, petitioner filed in the Court of First Instance of Manila an action against respondent Tobias to recover the unpaid balance of the promissory note.- The lower court dismissed the complaint on the ground that "(I)nasmuch as the defendant voluntarily and willingly surrendered the truck and gave the Industrial Finance Corporation full authority to get said truck from Leelin Motors, Inc. (Exhibit 2) pursuant to the demand to surrender (Exhibit B) the defendant complied with the demands of the plaintiff. 6

On appeal, the Court of Appeals affirmed the decision of the lower court dismissing the complaint of petitioner Industrial Finance Corporation but modifying the same by ordering respondent Tobias to pay the cost of repairs of the damaged truck in the amount of P5,396.78 plus interest.

The main thrust of the petitioner's argument is that the respondent Court of Appeals erred in affirming the dismissal of the complaint of the petitioner in the lower court by not considering his right as an unpaid vendor of the truck in question under Art. 1484 of the New Civil Code. 7 Petitioner claims that under Art.

1484 of the New Civil Code, an unpaid vendor may choose any of the remedies provided therein and that as an unpaid vendor, it has chosen to exact fulfillment of the obligation for failure of the vendee to pay. Respondent Tobias, however, claims that petitioner is estopped to insist on its claim on the balance of the promissory note when it demanded the return or surrender of the truck in its letter of May 14, 1970, to which demand, respondent acceded in his letter dated May 27, 1970.

The claim of respondent cannot be sustained. Art. 1484 is clear that "should the vendee or purchaser of a personal property be in default in the payment of two or more of the agreed installments, the vendor or seller has the option to either exact fulfillment by the purchaser of -the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted.8 Since the case involves the sale of personal property on installments Art. 1484 of the Civil Code should apply. The remedies provided for in Art. 1484 are considered alternative, not cumulative 9 such that the exercise of one would bar the exercise by the others. 10 Here, petitioner has not cancelled the sale, nor has it exercised the remedy of foreclosure. Foreclosure, judicial or extra-judicial, presupposes something more than a mere demand to surrender possession of the object of the mortgage. 11 Since the petitioner has not availed itself of the remedy of cancelling the sale of the truck in question or of foreclosing the chattel mortgage on said truck, petitioner is still free to avail of the remedy of exacting fulfillment ' of the obligation of respondent Tobias, the vendee of the truck in question. In Radiowealth Inc. vs. Lavin, 12 the facts of which are similar to the 'present case, the issue was "whether the plaintiff is precluded to press for collection of an account secured by a chattel mortgagee after it shall have informed the defendants of its intention to foreclose said mortgage, and the voluntary acceptance of such step (foreclosure) by defendant mortgagor," the Supreme Court ruled in favor of the plaintiff mortgagee. Said the Court:

The contract being a sale of machinery payable in installments, the applicable provision of law is Article 1484 of the Civil Code, which gives the vendor the option to exercise any one of the alternative remedies therein mentioned: exact fulfillment of the obligation, cancel the sale, or foreclose the chattel mortgage. But the vendor- mortgagor in the present case desisted, on its own initiative, from consummating the auction sale, without gaining any advantage or benefit, and without causing any disadvantage, or harm to the vendees-mortgagees. The least that could be said is that such desistance of the plaintiff from proceeding with auction sale was a timely disavowal that cancelled and rendered useless its previous choice to foreclose; its acts, being extra-judicial, brought no trouble upon any court, and were harmless to the defendants. For this reason, the plaintiff can not be considered as having "exercised" (the Code uses the word "exercise") the remedy of foreclosure because of its incomplete implementation, and, therefore, the plaintiff is not barred from suing on the unpaid account.

In effect this ruling answers the issue of estoppel raised by respondent Tobias. Besides, to hold the petitioner in estoppel, it must be shown that when it gave the respondent the choice of either paying the balance of the purchase price or of surrending the truck, it had already knowledge of the accident and the consequent damage to the truck. In the present case petitioner claims it had no knowledge of the accident 13 when it gave the respondent the choice of either paying the balance of the promissory note or of surrendering the truck. It is hard to believe that petitioner would make such offer to respondent either to pay the balance on the promissory, note or to surrender the truck in question if it knew that the truck has had an accident. The more plausible thing it would have asked the respondent is to ask for the balance on the promissory note. Besides the allegation of petitioner that it had no knowledge of the accident is a negative allegation and needs no evidence to support it, not being an essential part of the statement of the right on which the cause of action is founded.14 It is therefore the respondent Tobias who has the burden of disproving the claim of petitioner that he has no knowledge of the accident when it made the offer to respondent either to pay the balance on the promissory note or to surrender the truck. Respondent failed in this.

It is claimed by respondent Tobias that he has surrendered the truck to petitioner in his letter dated May 27, 1970. But the alleged surrender was ineffectual as far as the petitioner is concerned because petitioner could not take possession of the truck in question as it was in the custody of Leelin Motors, Inc., which had a mechanic's lien over it. Even respondent Tobias cannot expect petitioner to accept the term of surrender because aside from the fact that the truck being surrendered met an accident petitioner was not satisfied with the repair of the finished portion of the truck in question. Petitioner therefore was justified refusing to accept such surrender and in bringing suit to recover the balance of the purchase price.

IN VIEW OF THE FOREGOING, the judgment of the respondent Court of Appeals and of the lower court are hereby set aside and a new one rendered ordering respondent Tobias to pay petitioner the balance of the purchase price of the truck in question in the amount of P27,210.77 plus legal rate of interest from the time of the filing of the complaint. Costs against the respondent.

SO ORDERED.

[G.R. No. 121158. December 5, 1996]

CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and RENATO C. TAGUIAM, petitioners, vs. COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING CORP.,respondents.

D E C I S I O N

FRANCISCO, J.:

China Banking Corporation (China Bank) extended several loans to Native West International Trading Corporation (Native West) and to So Ching, Native Wests president. Native West in turn executed promissory notes[1] in favor of China Bank. So Ching, with the marital consent of his wife, Cristina So, additionally executed two mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel of land situated in Cubao, Quezon City, under TCT No. 277797,[2] and another executed on August 10, 1989 covering a parcel of land located in Mandaluyong, under TCT No. 5363.[3] The promissory notes matured and despite due demands by China Bank neither private respondents Native West nor So Ching paid. Pursuant to a provision embodied in the two mortgage contracts, China Bank filed petitions for the extra-judicial foreclosure of the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797,[4] and Notary Public Atty. Reynaldo M. Cabusora for TCT No. 5363,[5] copies of which were given to the spouses So Ching and Cristina So. After due notice and publication, the notaries public scheduled the foreclosure sale of the spouses real estate properties on April 13, 1993. Eight days before the foreclosure sale, however, private respondents filed a complaint [6]with the Regional Trial Court[7]for accounting with damages and with temporary restraining order against petitioners alleging the following causes of action:

A. Defendants failed to comply with the mandates of Administrative Order No. 3 of the Supreme Court dated October 19, 1984.

B. Defendants failed to comply with the mandates of Section 2 Presidential Decree No. 1079 dated January 28, 1977.

C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00 respectively in the Mortgages Annexes A and B respectively, but the same are not included in the notice of foreclosure.

D. Violation of Truth in Lending Act (RP Act No. 3765).

E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers, the Bank charged interests in excess of the rate allowed by the Central Bank.

F. Violation of Article 1308 of the Civil Code.[8]

On April 7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure sale. Thereafter counsels for the respective parties agreed to file their pleadings and to submit the case, without further hearing, for resolution. On April 28, 1993, the trial court, without passing upon the material averments of the complaint, issued an Order granting the private respondents prayer for the issuance of preliminary injunction with the following proffered justification:

From the foregoing, it is quite apparent that a question of accounting poses a thorny issue as between the litigants. Variance in the amounts involved relating to the loan agreements must be judiciously passed upon by the Court and this is

only possible if a trial on the merits could be had as the matters appurtenant thereto are evidentiary in nature.

Under the premises, the accounting issue being evidentiary in character calls for an issuance of a writ of preliminary injunction pending the adjudication of the case. The issuance thereof at this particular stage of the case is merely a preventive remedy designed to protect from irreparable injury to property or other rights plaintiff may suffer, which a court of equity may take cognizance of by commanding acts to be done or prohibiting their commission, as in the instant suit, to restrain notaries public Cabusora and Taguiam as well as defendant China Banking Corporation from continuing with the auction sale of the subject properties, until further orders from this Court.

Wherefore, premises considered, finding that the circumstances warrant the issuance of a preliminary injunction, plaintiffs prayer is hereby GRANTED. Consequent thereto, plaintiffs are hereby ordered to post a bond amounting to P1 (ONE) Million to answer for whatever damages defendant may suffer as a consequence of the writ. [9]

Petitioners moved for reconsideration, but it was denied in an Order dated September 23, 1993. To annul the trial courts Orders of April 28, 1993 and September 23, 1993, petitioners elevated the case through certiorariand prohibition[10] before public respondent Court of Appeals.[11] In a decision dated January 17, 1995, respondent Court of Appeals held that Administrative Circular No. 3 is the governing rule in extra-judicial foreclosure of mortgage, which circular petitioners however failed to follow, and with respect to the publication of the notice of the auction sale, the provisions of P.D. No. 1079 is the applicable statute,[12] which decree petitioners similarly failed to obey. Respondent Court of Appeals did not pass upon the other issues and confined its additional lengthy discussion on the validity of the trial courts issuance of the preliminary injunction, finding the same neither capricious nor whimsical exercise of judgment that could amount to grave abuse of discretion.[13] The Court of Appeals accordingly dismissed the petition, as well as petitioners subsequent motion for reconsideration.[14] Hence, the instant petition under Rule 45 of the Rules of Court reiterating the grounds raised before respondent court, to wit:

I. PETITIONER CBCS PETITIONS TO EXTRA-JUDICIALLY FORECLOSE THE REAL ESTATE MORTGAGES OF JULY 27, 1989 AND AUGUST 10, 1989 THRU PETITIONERS-NOTARIES PUBLIC, AND THE SCHEDULED FORECLOSURE SALE ARE VALID AND LAWFUL;

II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY AGREED TO CONSIDER THE SAME MORTGAGES AS VALID SECURITIES FOR PROMPT AND FULL PAYMENT OF ALL AND ANY OBLIGATIONS OF THE FORMER FROM THE LATTER;

III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID LOANS IS NOT A VALID BASIS TO ENJOIN THE FORECLOSURE OF THE QUESTIONED MORTGAGES. THE MERE FAILURE TO PAY THE LOAN SECURED BY SAID MORTGAGES IS THE ONLY, SINGLE REASON FOR THEIR LAWFUL FORECLOSURE;

IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH COPIES OF DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE TRUTH IN LENDING ACT, AND CHARGED THEM INTERESTS IN ACCORDANCE WITH LAW AND PURSUANT TO ITS EXPRESS AGREEMENT WITH THE LATTER;

V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE HONORABLE COURT A QUO ON PRIVATE RESPONDENTS IS GROSSLY AND PATENTLY INADEQUATE.[15]

At the outset, the Courts attention is drawn to the fact that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or proceeding.[16] The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective

parties on file have amply ventilated their various positions and arguments on the matter necessitating prompt adjudication.

Now to the core issues.

As the Court sees it, the crucial issues are: (1) whether or not the loans in excess of the amounts expressly stated in the mortgage contracts can be included as part of the loans secured by the real estate mortgages, (2) whether or not petitioners can extrajudicially foreclose the properties subject of the mortgages, (3) whether or not Administrative Order No. 3 should govern the extrajudicial foreclosure of the properties, and (4) whether or not the writ of preliminary injunction issued by the trial court is valid.

Petitioners aver that the additional loans extended in favor of private respondents in excess ofP6,500,000.00 and P3,500,000.00 amounts respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts are also secured by the same collaterals or real estate properties, citing as bases the introductory paragraph (whereas clause) of the mortgage contracts, as well as the stipulations stated therein under the first and second paragraphs. Private respondents for their part argue that the additional loans are clean loans, relying on some isolated parts of the same introductory paragraph and first paragraph of the contracts, and also of the third paragraph.

As both parties offered a conflicting interpretation of the contract, then judicial determination of the parties intention is thus, inevitable.[17] Hereunder are the pertinent identical introductory paragraphs and paragraphs 1 to 3 of the July 27, 1989 and August 10, 1989 mortgage contracts:

WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter grant to the MORTGAGOR(S)/either of them/and/or NATIVE WEST INTERNATIONAL TRADING CORP. hereinafter called the DEBTOR(S) credit facilities not exceeding SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* Philippine currency, and the MORTGAGEE had required the MORTGAGOR(S) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, in favor of the MORTGAGEE;

NOW, THEREFORE, as collateral security for the payment of the principal and interest of the indebtedness/obligations herein referred to and the faithful performance by the MORTGAGOR(S) of his (her, its) obligations hereunder, the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE, in favor of the MORTGAGEE, free from all liens and encumbrances of any kind, that (those) certain parcel(s) of land, together with all the buildings/machineries/equipment/ improvements now existing thereon, and which may hereafter be placed thereon, described in the Schedule of mortgaged properties described hereunder and/or which is hereto attached, marked Exhibit A and made a part thereof.

1. It is agreed that this mortgage shall respond for all the obligations contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) or any one of them, in favor of the MORTGAGEE up to the said sum of SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY (P6,500,000.00)* regardless of the manner in which the said obligations may have been contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) whether by advances or loans made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile documents, including trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of money market instruments/commercial papers, undertakings of guaranty of suretyship, or by endorsement of negotiable instruments, or otherwise, the idea being to make this deed a comprehensive and all embracing security that it is.

2. Payments on account of the principal and interest of the credit granted by the MORTGAGEE to the MORTGAGOR(S) and/or DEBTOR(S) may be made from time to time, and as often as the MORTGAGOR(S) may elect; provided, however, that in the event of such payments being so made that the indebtedness to the MORTGAGEE may from time to time be reduced the MORTGAGEE may make further advances and all sums whatsoever advanced by the MORTGAGEE shall be secured by this mortgage, and partial payments of said indebtedness from time to time shall not thereby be taken to reduce by the amount of such payments the credit hereby secured. The said credit shall extend to and account which shall, within the said limit of P6,500,000.00* exclusive of interest, be fluctuating and subject to increase or decrease from time to time as the MORTGAGEE may approve, and this mortgage shall stand as security for all indebtedness of the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, at any and all times outstanding, regardless of partial or full payments at any time or times made by the MORTGAGOR(S) and/or DEBTOR(S).

3. It is hereby agreed that the MORTGAGEE may from time to time grant the MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this mortgage, without affecting the liability of the MORTGAGOR(S) under this mortgage up to the amount stipulated.[18]

An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words, not just a particular word or two, and words in context, not words standing alone. [19] Indeed, Article 1374 of the Civil Code, states that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Applying the rule, we find that the parties intent is to constitute the real estate properties as continuing securities liable for future obligations beyond the amounts of P6.5 million and P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage contracts. Thus, while the whereas clause initially provides that the mortgagee has granted, and may from time to time hereafter grant to the mortgagors x x x credit facilities not exceeding six million five hundred thousand pesos only (P6,500,000.00)** yet in the same clause it provides that the mortgagee had required the mortgagor(s) to give collateral security for the payment of any and all obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee which qualifies the initial part and shows that the collaterals or real estate properties serve as securities for future obligations. The first which ends with the clause, the idea being to make this deed a comprehensive and all embracing security that it is supports this qualification.

Similarly, the second provides that the mortgagee may take further advances and all sums whatsoever advanced by the mortgagee shall be secured by this mortgagee x x x. And although it was stated that [t]he said credit shall extend to any account which shall, within the said limit of P6,500,000.00 exclusive of interest, this part of the second sentence is again qualified by its succeeding portion which provides that this mortgage shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them, at any and all times outstanding ... Again, under the third paragraph, it is provided that the mortgagee may from time to time grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this mortgage x x x. The fourth paragraph,[20] in addition, states that x x x all such withdrawals, and payments, whether evidenced by promissory notes or otherwise, shall be secured by this mortgage which manifestly shows that the parties principally intended to constitute the real estate properties as continuing securities for additional advancements which the mortgagee may, upon application, extend. It is well settled that mortgages given to secure future advancements or loans are valid and legal contracts, and that the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.[21]

Anent the second issue, we find that petitioners are entitled to foreclose the mortgages. In their complaint for accounting with damages pending with the trial court, private respondents averred that:

8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the DEFENDANT-BANK, the amount of THREE HUNDRED FIFTY THOUSAND (P350,000.00) Pesos, Philippine Currency, and was willing to pay the balance in installments of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine Currency, every month, in the meantime, but the DEFENDANT-BANK refused to accept, demanding instead SEVEN HUNDRED MILLION (P700,000,000.00) Pesos, Philippine Currency, a month.

9. Inspite of the expressed willingness and commitment of plaintiffs to pay their obligation in a manner which they could afford, on March 11, 1993, MORTGAGORS and DEFENDANT-CORPORATION, each received a Letter of Demand from DEFENDANT-BANK, for the payment of P28,775,615.14 exclusive of interest and penalty evidenced by 11 promissory notes enclosed therein x x x.

10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President pleaded with the Chairman of the Board of the DEFENDANT-BANK, through whom Defendant-Corporation was transacting business with, to accept its offer of payment of FOUR HUNDRED THOUSAND (P400,000.00) Pesos, Philippine Currency, a month, in the meantime, which was again refused by the said Chairman. [22]

which allegations are a clear admission that they were unable to settle to the fullest their obligation. Foreclosure is valid where the debtors, as in this case, are in default in the payment of their obligation.[23] The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment.[24] It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation.[25] In fact, aside from the mortgage contracts, the promissory notes executed to evidence the loans also authorize the mortgagee to foreclose on the mortgages. Thus:

x x x CHINA BANKING CORPORATION is hereby authorized to sell at public or private sales such securities or things of value for the purpose of applying their proceeds to such payments.[26]

And while private respondents aver that they have already paid ten million pesos, an allegation which has still to be settled before the trial court, the same cannot be utilized as a shield to enjoin the foreclosure sale. A mortgage given to secure advancements, we repeat, is a continuing security and is not discharged by repayment of the amount named in the mortgage, until the full amount of the advancements are paid.[27]

With respect to the third issue, we find private respondents contention that Administrative Order No. 3 is the governing rule in foreclosure of mortgages misplaced. The parties, we note, have stipulated that the provisions of Act No. 3135 is the controlling law in case of foreclosure. Thus:

17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and irrevocable power of attorney coupled with interest, in the event of breach of any of the conditions of this mortgage, to sell, in its discretion, the mortgaged properties at public auction, for cash and to the highest bidder, in the Province or City where the mortgaged properties are located, before the Sheriff, or a Notary Public, without court proceedings, after posting notices of sale for a period of twenty days in three public places in said place; and after publication of such notice in a newspaper of general circulation in the said place once a week, for three consecutive weeks, and the MORTGAGEE is hereby authorized to execute the deed of sale and all such other documents as may be necessary in the premises all in accordance with the provisions of Act No. 3135 of the Philippine Legislature,as amended, and Section 78 of Republic Act No. 337; x x x.[28] (Underscoring supplied. )

By invoking the said Act, there is no doubt that it must govern the manner in which the sale and redemption shall be effected.[29] Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application in the present case,[30] specially where they are not contrary to law, morals, good customs and public policy.

Moreover, Administrative Order No. 3 is a directive for executive judges and clerks of courts which, under its preliminary paragraph is [i]n line with the responsibility of an Executive Judge, under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the Ex-Oficio Sheriff, and his staff, x x x Surely, a petition for foreclosure with the notary public is not within the contemplation of the aforesaid directive as the same is not filed with the court. At any rate, Administrative Order No. 3 cannot prevail over Act No. 3135, as amended. It is an elementary principle in statutory construction that a statute is superior to an administrative directive and the former cannot be repealed or amended by the latter.

On the last issue, we find that the issuance of the writ of injunction by the trial court unjustified. A writ of preliminary injunction, as an ancillary or preventive remedy, may only be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action.[31] But before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. [32] In the case at bench, we fail to see any reason why the foreclosure of the mortgages should be enjoined. On the face of the clear admission by private respondents that they were unable to settle their obligations which were secured by the mortgages, petitioners have a clear right to foreclose the mortgages which is a remedy provided by law. Thus, in Caltex Philippines, Inc. v. Intermediate Appellate Court,[33] we reiterated the rule that:

x x x where a debt is secured by a mortgage and there is a default in payment on the part of the mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but he cannot have both. The mortgagee may:

1) foreclosure the mortgage; or

2) file an ordinary action to collect the debt.

When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings (Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco Nacionalv. Barreto, 53 Phil. 101).

On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor.[34]

WHEREFORE, the instant petition is hereby GRANTED. The assailed Decision, as well as the Resolution, of the Court of Appeals dated January 17, 1995 and July 7, 1995, respectively, are hereby REVERSED and SET ASIDE. The preliminary writ of injunction issued by the trial court is hereby NULLIFIED. This case isREMANDED to the court of origin for further proceedings in conformity with this decision.

SO ORDERED.

G.R. No. 99308 November 13, 1992

STATE INVESTMENT HOUSE, INC., petitioner, vs.COURT OF APPEALS and SABINA VDA. DE CUENCA, respondents.

 

MELO, J.:

The Decision and Amended Decision of the Court of Appeals in CA-G.R. CV 24339, both reversing and affirming in part the Decision of Branch 90 of the Regional Trial Court of Quezon City in "Sabina Vda. de Cuenca vs. State Investment House, Inc." (Civil Case No. Q-42552), for declaration of nullity of the foreclosure sale with an alternative prayer for redemption of the foreclosed property, are assailed in the instant petition on questions of law.

As may be gleaned from the pleadings of the parties, the antecedent facts are as follows:

On February 13, 1979, private respondent Sabina Vda. de Cuenca (Cuenca) obtained a loan from petitioner State Investment House, Inc. (SIHI) under a promissory note for P160,000.00, secured by a mortgage on Cuenca's property at Tandang Sora, Quezon City.

On November 15, 1979, Cuenca obtained another loan of P500,000.00. This loan was secured by a real estate mortgage executed by Cuenca on another property located along Timog, Quezon City, with paragraph 6 of the contract expressly giving SIHI the option of extra-judicially foreclosing the mortgaged property in the event of Cuenca's default in the payment of her indebtedness. Cuenca's unpaid balance of P120,000.00 under the first loan was deducted from the proceeds of the second loan. The mortgage on her property at Tandang Sora, Quezon City was cancelled.

Because of Cuenca's failure to pay on the maturity date of the loan, her account was restructured and rolled over twelve times through the execution of various promissory notes. On November 29, 1982, the maturity date of the twelfth promissory note, SIHI claimed that Cuenca's obligations, inclusive of interest, service charges, and penalties, reached a total of P621,483.57. The loan was not anymore restructured and SIHI, on December 2 and 15, 1982, made written demands on Cuenca for the payment of her outstanding obligation.

Cuenca did not heed SIHI's demands for payment. SIHI thus initiated extra-judicial foreclosure of Cuenca's mortgaged property for which the corresponding notice of sheriff's sale was issued on February 23, 1983, setting the auction sale on March 22, 1983. The scheduled foreclosure sale was, however, deferred by SIHI on account of Cuenca's request to be given time to pay the loan. Although Cuenca did make some payments, these were not enough to fully pay her outstanding obligation and as of July 28, 1983, SIHI claimed that Cuenca's outstanding loan amounted to P637,793.86. Consequently, SIHI proceeded with the auction sale on August 8, 1983 where it was declared the highest bidder for P742,181.55, Cuenca's outstanding debt at that time per SIHI's computation.

The certificate of sale was registered with the Register of Deeds of Quezon City on August 24, 1983.

On July 10, 1984, SIHI received a letter (Exhibit 54, p. 18, Vol. I, Record) from Cuenca requesting that she be furnished a Statement of Account "before and

after the foreclosure/auction sale" for her to be able to redeem the foreclosed property from SIHI. This was followed by another letter (Exhibit 54-A; also Exhibit J, p. 20, Vol. I, Record) from Cuenca on July 17, 1984 wherein she signified her intention to redeem the property for P500,000.00, payable in the following manner:

1. P100,000.00 payable within thirty (30) days upon receipt of (SIHI's) approval of this proposal.

2. The balance of P400,000.00 shall be paid in eight (8) monthly installments. Each installment payment shall be due on the 30th day of each month, the first monthly payment to be reckoned from the date the amount stated in No. 1 has been paid.

In a letter dated August 16, 1984 (Exhibit K, p. 22 Vol. I, Record), SIHI rejected Cuenca's offer to redeem, reasoning that she should pay her total outstanding obligation amounting at that time to P870,739.36.

On August 23, 1984, Cuenca, through counsel, sent another letter to SIHI (Exhibit 54-B; also Exhibit L, pp. 23-24, Vol. I, Record) and reiterated her offer to redeem the property by stating:

. . . we are now finally offering and tendering to you the full sum of P426,874.72 as the redemption price of the property. This sum of P426,874.72 is the difference between the redemption price of P870, 739.36 which you fixed in your letter of 16 August 1984, and the sum of P441,312.76 which is the aggregate of the payment which our client made to you on account of her loan of P500,000.00. . .

Without, however, waiting for SIHI's reply, Cuenca, on August 24, 1984, filed a complaint with the Regional Trial Court of Quezon City seeking annulment of the foreclosure sale on the ground that she had not defaulted in the payment of her loan to SIHI. Alternatively, Cuenca prayed that the trial court fix the redemption price in the event it is found that she is still indebted to SIHI.

After the expiration of the one-year redemption period, the Register of Deeds issued a new title on the foreclosed property in SIHI's name.

On October 19, 1989, Judge Abraham P. Vera, presiding judge of Branch 90 of the Regional Trial Court of the National Capital Judicial Region stationed in Quezon City, promulgated his decision declaring the foreclosure sale, as well as SIHI's title obtained in such sale, null and void.

In its decision, the trial court made the following essential findings: (a) that the filing of the petition for extrajudicial foreclosure was valid because as of the date of the filing thereof, Cuenca was still indebted to SIHI in the sum of P222,890.41 based on the trial court's own computation; and (b) that the foreclosure sale held on August 8, 1983 was not valid because at that time, Cuenca no longer owed any amount to SIHI, as in fact from the computations made by the trial court, Cuenca had made an overpayment to SIHI in the amount of P27,054.14.

The dispositive portion of the trial court's decision stated:

ACCORDINGLY, judgment is hereby rendered:

(a) Declaring plaintiff to have fully paid her obligations under the promissory notes, marked Exhs. 1 and 4, and all of those deriving their being from Exh. 4;

(b) Declaring the sale of the mortgaged property of plaintiff under the foreclosure proceedings and of the resultant Certificate of Sale executed and issued by the foreclosing Sheriff by reason of such foreclosure to be null and void;

(c) Directing the Register of Deeds of Quezon City to cancel Transfer Certificate of Title No. 325372 (Exh. N) in the name of SIHI, and to reinstate Transfer Certificate of Title No. T-12678 (Exh. B) in the name of plaintiff;

(d) Directing defendant SIHI to refund to plaintiff the sum of P27,054.14, which was the overpayment she made on account of her loans with SIHI, with interest at 12% per annum from the date of the filing of the complaint until the same is fully paid;

(e) Directing the defendant SIHI to pay to plaintiff the sums of P50,000.00 as moral damages; P50,000.00 as exemplary damages; and P50,000.00, as attorney's fees;

(f) Directing defendant SIHI to pay [plaintiff the sum of P62,903.18 as a refund of the penalties which it had collected from plaintiff, with interest thereon at 6% per annum from date of this decision until the same is fully paid;

(g) Directing plaintiff to pay to defendant SIHI the sum of P14,645.00, in reimbursement of SIHI's expenses in the foreclosure of the mortgaged property, which includes attorney's fees, with interest thereon at 6% per annum from date of the decision until it is fully paid, which amount shall, however, be offset by an equivalent amount for the amounts due from SIHI to plaintiff; and

(h) Directing defendant SIHI to pay the costs of this suit.

All other claims which the parties may have against each other are hereby denied and dismissed.

SIHI appealed the decision to the court of Appeals in CA-G.R. CV No. 24339. In its Original Decision, the Court of Appeals (Campos [P], Lantin, Sempio-Diy, JJ) rectified several errors committed by the trial court in its computation of Cuenca's account with SIHI, but nevertheless affirmed the trial court's finding that at the time of the foreclosure sale, Cuenca had already paid in full her indebtedness so that the foreclosure sale and the transmission of title to SIHI were null and void.

Both parties asked for a reconsideration of the appellate Court's ruling.

SIHI's Motion for Reconsideration contended that on the basis of the computations made by the trial court and as corrected by the Court of Appeals in its decision, the net result showed that as of the date of the foreclosure sale on August 8, 1983, Cuenca was still indebted to SIHI, and such being the case, the foreclosure sale was valid.

In her Motion for Reconsideration, Cuenca asked the appellate court to reconsider its finding that she had obtained a third loan from SIHI for P61,500.00. She further asked that she be credited two amounts which were disallowed by respondent court.

On April 30, 1991, respondent court promulgated its Amended Decision, reversed its earlier ruling and held that in accordance with its own computations, Cuenca was still indebted to SIHI in the amount of P279,963.42 as of the date of the foreclosure sale. The dispositive portion of this Amended Decision reads:

The decision of this court is hereby modified as follows:

a) Plaintiff-appellee is ordered to pay defendant-appellant the sum of P279,963.42, consisting of the unpaid balance of her outstanding obligation within 30 days from receipt of this Amended Decision with payment of interest at the legal rate from date of this decision until final judgment.

b) The foreclosure proceedings and the resultant Certificate of Sale executed and issued by the foreclosing sheriff by reason of such foreclosure are rendered null and void.

c) Transfer Certificate of Title No. 324372 issued in the name of SIHI is declared null and void and the Register of Deeds of Quezon City is ordered to reinstate Transfer Certificate of Title No. 126578 in the name of plaintiff.

d) No pronouncement as to payment of damages and attorney's fees.

SO ORDERED. (p. 49, Rollo.)

Dissatisfied, SIHI filed the instant petition and as clarified in pages 4 and 5 of the petition, the appeal is limited to the following aspects:

(i) The original Decision in C.A.-G.R. CV No. 24339, "Sabina Vda de Cuenca, plaintiff-appellee v. State Investment House, Inc., defendant-appellant," promulgated by respondent Court on 28 February 1991, only insofar as the decision voided the foreclosure sale of the mortgaged property and SIHI's title acquired by virtue of such foreclosure sale, the challenged part of the dispositive portion reading as follows:

(b) Declaring the sale of the mortgaged property of plaintiff under the foreclosure proceedings and of the resultant Certificate of Sale executed and issued by the foreclosing Sheriff by reason of such foreclosure to be null and void;

(c) Directing the Register of Deeds of Quezon City to cancel Transfer Certificate of Title No. 325372 (Exhibit N) in the name of SIHI, and to reinstate Transfer Certificate of Title No. T-12678 (Exhibit B) in the name of the plaintiff.

(ii) And the Amended Decision in the same appealed case, promulgated on 30 April 1991, only insofar as it adjudicated as follows:

(a) Plaintiff-appellee is ordered to pay defendant-appellant the sum of P279,963.42, consisting of the unpaid balance of her outstanding obligation within 30 days from receipt of this Amended Decision with payment of interest at the legal rate from date of this decision until final judgment.

(b) The foreclosure proceedings and the resultant Certificate of Sale executed and issued by the foreclosing Sheriff by reason of such foreclosure are rendered null and void.

(c) Transfer Certificate of Title No. 324372 issued in the name of SIHI is declared null and void and the Register of Deeds of Quezon City is ordered to reinstate Transfer Certificate of Title No. 126578 in the name of plaintiff.

(b) Petitioner is not appealing the rest of the dispositive portions of the Decision and Amended Decision.

SIHI presents the following as grounds for its petition:

MAIN GROUND OF THE PETITION

RESPONDENT COURT MANIFESTLY ERRED AND MISAPPLIED THE LAW WHEN IT REFUSED TO DECLARE THE FORECLOSURE PROCEEDINGS VALID DESPITE ITS OWN DETERMINATION THAT

RESPONDENT CUENCA WAS TRULY AND GENUINELY INDEBTED TO PETITIONER WHEN THE FORECLOSURE PROCEEDINGS WERE INSTITUTED.

ALTERNATIVE GROUND

SHOULD THE SUPREME COURT AFFIRM THE VOIDING OF THE FORECLOSURE SALE AND OF PETITIONER'S TITLE, PETITIONER IS ENTITLED, IN LAW AND EQUITY TO THE PAYMENT OF LEGAL INTEREST ON THE PRINCIPAL SUM OF P279,963.42 (THE SUM ADJUDGED IN PETITIONER'S FAVOR BY RESPONDENT COURT) COMPUTED FROM THE DATE OF THE FORECLOSURE SALE UP TO THE DATE OF ACTUAL PAYMENT OF THE PRINCIPAL SUM. (pp. 15-16, Rollo)

On July 25 1991, shortly after she filed her Comment, Cuenca consigned with this Court Metro Bank Cashier's Check No. CC-17743 in the sum of P279,963.42, representing the amount ordered by the Court of Appeals (in its Amended Decision) to be paid to SIHI. Thereafter, SIHI filed its Reply on August 15, 1991, to which a Rejoinder was filed by Cuenca on August 27, 1991.

As correctly formulated by SIHI, the principal issue in this case is the effect upon the validity of the extra-judicial foreclosure proceedings of a judicial determination that the debtor-mortgagor (Cuenca), at the time of the foreclosure, was still indebted and in default in the payment of the obligations to the creditor-mortgagee (SIHI).

Cuenca's loan with SIHI was restructured and rolled over twelve (12) times, with the last promissory note indicating the maturity date of November 29, 1982. The recomputation (attached to the Amended Decision) of the Court of Appeals shows, however, that on the said date Cuenca still had an outstanding indebtedness of P416,188,08. SIHI, in its letters to Cuenca dated December 2 and 15, 1982 (Exhibits 36 and 36-A, pp. 435 and 436, Vol. I, Record) demanded the payment of this unpaid amount. Cuenca, however, failed to make any payments and thus, even at that point in time, was already debtor in default under Article 1168 of the New Civil Code.

The extra-judicial foreclosure instituted by SIHI in February 1983 was, therefore, valid as at that time, Cuenca's loan being then already almost three (3) months overdue (Bonnevie vs. Court of Appeals, 125 SCRA 122 [1983]). Aside from the fact that Cuenca was already in default, the Real Estate Mortgage executed by the parties expressly granted SIHI the option to foreclose when it provided that:

6. In the event that the Mortgagor/Debtor herein, should fail or refuse to pay any of the sums of money secured by this mortgage, or any part thereof, in accordance with the terms and conditions herein set forth or those stipulated in the correlative promissory note(s), or should he/it fail to perform any of the conditions stipulated herein, or those in the promissory note(s), then and in such case the Mortgagee shall have the right, at its election, to foreclose this mortgage. . .

SIHI, however, deferred the auction sale when Cuenca subsequently asked for more time to pay her obligation. Cuenca's account, however, was not restructured and she herself gave SIHI permission to proceed with the auction sale on August 8, 1983 should she not be able to pay her account by then (Exhibit 47, p. 457 Vol. I, Record). As of that date, the Court of Appeals computed Cuenca's unpaid account with SIHI to be P279,963.42. It is worth noting that this computation is not challenged or questioned by either SIHI or Cuenca and We find no reason to disturb the same.

The obvious implication is that, at the time of the foreclosure sale on August 8, 1983, Cuenca had defaulted in the payment of P279,963.42. Thus, SIHI had the option under the aforequoted provision of the Real Estate Mortgage, to foreclose on the mortgaged property. SIHI cannot be faulted for having chosen that option.

The Court of Appeals, therefore, erred in concluding that despite Cuenca's default, the foreclosure sale and the resultant issuance of the certificate of sale by the foreclosing Sheriff were null and void. Foreclosure is valid where the debtor is in default in the payment of his obligation (Cf, Bicol Savings and Loan Association vs. Court of Appeals, 171 SCRA 630 [1989]). In a real estate mortgage when the principal obligation is not paid when due, the mortgagee has the right to foreclose the mortgage and to have the property seized and sold with the view of applying the proceeds to the payment of the obligation (Commodity

Financing Co., Inc., vs. Jimenez, 91 SCRA 57 [1979]). Once the proceeds have been applied to the payment of the obligation, the debtor cannot anymore be required to pay, unless, of course, there is a deficiency between the amount of the loan and the foreclosure sale price, because the obligation has already been extinguished.

We now come to the second issue posed by the parties: with the auction sale having been done on August 8, 1992 and the certificate of foreclosure sale having been validly registered with the Register of Deeds of Quezon City on August 24, 1983, was Cuenca able to redeem the property in the manner and within the period provided by law?

With the aforequoted provision of the Real Estate Mortgage having expressly authorized SIHI to extra-judicially foreclose the mortgage in case of Cuenca's failure to comply with her obligation to pay, the law governing the foreclosure is Republic Act No. 3135 (An Act To Regulate The Sale of Property Under Special Powers Inserted In Or Annexed To Real Estate Mortgages), as amended by Republic Act No. 4118 (See Luna vs. Encarnacion, 91 Phil. 531 [1952]). Section 6 of the said Act states:

Sec. 6. In all cases in which an extrajudicial sale is made under the special power herein before referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale . . . (Emphasis supplied.)

In a long line of cases, We have consistently held that this one-year redemption period should be counted not from the date of foreclosure sale, but from the time the certificate of sale is registered with the Register of Deeds (Agbulos vs. Alberto, 5 SCRA 790 [1962]; Salazar vs. Meneses, 8 SCRA 495 [1963]; Reyes vs. Noblejas, 21 SCRA 1027 [1970]; Quimson vs. Philippine National Bank, 36 SCRA 26 [1970]). In this case, therefore, the one-year redemption period should be reckoned from the time the certificate of sale was registered on August 24, 1983 (Bernardez vs. Reyes, 201 SCRA 648 [1991]).

Under Article 13 of the New Civil Code, a year is understood to be of three hundred sixty-five (365) days. Thus, excluding the first day and counting from August 25, 1983 (under paragraph 3 of Article 13 of the New Civil Code), and bearing in mind that 1984 was a leap year, Cuenca had only until August 23, 1984, the 365th day after registration of the sale on August 24, 1983, within which to redeem the foreclosed property in accordance with law. It was thus already beyond the redemption period when Cuenca filed her suit below on August 24, 1984.

It should be stressed in this regard that it is not proper to count, as Cuenca submits in her Rejoinder, the period on the basis of 30 days per month. The law speaks of a "one year" period within which to redeem, not twelve months as in the case of redemption by a judgment debtor under Section 30 of Rule 39. Applying Article 13 of the Civil Code, the period of one year within which to redeem in the case at bar is to count 365 days from August 24, 1983. Consequently, the last day to redeem would be and indeed fell on August 23, 1984, said year being a leap year (Cf Go vs. Dizon, et al., G.R. No. 75915-16, Sept. 18, 1992).

Cuenca, however, was not able to exercise her right of redemption on or before August 23, 1984. Although she wrote to SIHI twice on July 17 and August 23, 1984 and offered to redeem her property, these offers were not accompanied by simultaneous bona fide tender or delivery of the redemption price to SIHI. In Belisario vs. Intermediate Appellate Court (165 SCRA 101 [1988]), this Court, through Justice Medialdea, held:

The general rule in redemption is that in making a repurchase, it is not sufficient that a person offering to redeem make manifestation of his desire to repurchase; this statement of intention must be accompanied by an actual and simultaneous tender of payment, which constitutes the legal use of exercise of the right to repurchase (Angao vs. Clavano, 17 Phil. 152). Likewise, in several cases decided by this Court (Fructo vs. Fuentes, 15 Phil. 362; Retes vs. Suelto, 20 Phil. 394; Rosales vs. Reyes, et al., 98 Phil. 975) where the right to repurchase was held to have been properly exercised, there was definite finding of tender of payment having been made by the vendor. The tender of payment must be for the full amount of the repurchase price, otherwise

the offer to redeem will be held ineffectual. (Rumbaoa vs. Arzaga, 84 Phil. 812). Bona fide redemption necessarily imports a reasonable and valid tender of the entire repurchase price. There is no cogent reason for requiring the vendee to accept payment by installments from the redemptioner, as it would ultimately result in an indefinite extension of the redemption period (Conejero, et al. vs. Court of Appeals, et al., L-21812, April 29, 1966, 16 SCRA 775, 780).

The rule that tender of payment of the repurchase price is necessary to exercise in the right of redemption finds support in civil law. Article 1616 of the Civil Code of the Philippines, in the absence of an applicable provision in Commonwealth Act No. 141, furnishes the guide, to wit: The vendor cannot avail himself of the right to repurchase without returning to the vendee the price of the sale . . . (Uy Lee vs. Court of Appeals, L-28126, November 28, 1975, 68 SCRA 196, 204). (at pp. 107-108.)

Cuenca's use of the phrase "offering and tendering" in her letter dated August 23, 1984 does not comply with the ruling in Belisario. There is no showing whatsoever here that the redemption price was delivered to SIHI. Redemption is not a matter of intent but involves making the proper payment or tender of the price of the land within the specified period (De la Merced vs. De Guzman, 160 SCRA 87 [1988]).

Neither is Cuenca correct in contending that SIHI in effect extended the redemption period when it stated in its letter dated August 16, 1984 that Cuenca had until August 24, 1984 within which to pay its outstanding account in full. In Lazo vs. Republic Surety & Insurance Co., Inc., (31 SCRA 329 [1970]). We held that it is only where, by voluntary agreement of the parties, consisting of extensions of the redemption period, followed by commitment by the debtor to pay the redemption price at a fixed date, will the concept of legal redemption be converted by the parties into one of conventional redemption such that it generates binding contracts when approved by the creditor. In the instant case, however, there is no showing that Cuenca agreed to pay the redemption price on or before August 24, 1984, as set by SIHI. On the contrary, Cuenca's filing of her complaint on August 24, 1984 principally seeking to declare the nullity of the foreclosure sale is indicative of her refusal to pay the redemption price on the deadline mistakenly set by SIHI.

Cuenca's complaint filed on August 24, 1984 (the 365th day from the registration of the certificate of sale, having fallen on August 23, 1984), did not have the effect of a formal offer to redeem. In Belisario (supra), We further explained.

This case is different from Uy Lee vs. Court of Appeals, supra where the action to compel redemption was filed after the lapse of the period of redemption. Thus, the Court held in said case, to wit:

It is clear that the mere sending of letters by vendor Simeon expressing his desire to repurchase the property without an accompanying tender of redemption price fell short of the requirements of law. Having failed to properly exercise his right of redemption within the statutory five-year period, the right is lost and the same can no longer be revived by the filing of an action to compel redemption after the lapse of the period.

The same factual antecedent obtained in Conejero, et al. vs. Court of Appeals, supra, where the complaint seeking to be declared entitled to redeem was filed after the expiration of the statutory period of redemption. What was proper for determination then in said cases was whether or not the right of redemption sans judicial action was validly exercised. In said cases, the Court applied the general rule that bona fide redemption necessarily imports a reasonable and valid tender of the entire purchase price. (at p. 109; emphasis added.)

Thus, it is only when the complaint to enforce a repurchase is filed within the period of redemption will it be equivalent to an offer to redeem and have the

effect of preserving the right of redemption (Belisario, supra, citingReoveros vs. Abel and Sandoval, 48 O.G. 5318). Where, as in this case, the complaint for redemption was filed after the redemption period expired, the complaint is a useless exercise which can not defeat the purchaser's right to have the title of the property transferred in his name. Cuenca's reliance on the ruling in Hulganza vs. Court of Appeals (147 SCRA 77 [1987]) is without any basis. The doctrine laid down in Hulganza finds no applicability to the instant case for unlike the complaint filed by Cuenca in the case at bar, the action for redemption in Hulganza was filed within the period of redemption.

Moreover, it bears noting that Cuenca sent letters (dated July 17 and August 23, 1984) to SIHI within the redemption period in which she offered to redeem her property. In her letter dated July 17, 1984, she offered to pay her indebtedness according to an installment plan which, if carefully analyzed, had the effect of extending the period of redemption beyond one year contrary to the policy of the law (Belisario, supra). In her other letter dated August 23, 1984, she offered to pay the amount P426,874.72 in full settlement of her obligation, althrough, as We earlier stated, this amount was never properly delivered to SIHI in accordance with law. There is thus no proof at that time that Cuenca possessed the ability to pay the redemption amount she was offering. This is especially true in the light of the fact that in her first letter she merely offered to pay in installments.

If only to prove the veracity of her claim that at that time she was capable of paying SIHI the full amount of what she thought was a reasonable redemption price, the least that Cuenca could have done was to consign payment in court simultaneous with her filing of the action to redeem on August 24, 1992. In so stating, We do not here depart from our consistent ruling that a formal offer to redeem, accompanied by a bona fide tender of the redemption price, although proper, is not essential where the right to redeem is exercised through the filing of a judicial action (Tolentino vs. Court of Appeals, 106 SCRA 513 [1981]; Tioseco vs. Court of Appeals, 143 SCRA 705 [1986]; Hulganza, supra; Beliserio, supra). As earlier stated, this rule only holds where the action to redeem is filed within the redemption period. Where, as in the instant case, the action is filed after the statutory period has expired, the determination of whether the plaintiff consigned the redemption price with the court simultaneous with the filing of the action is necessary to see if the right of redemption sans judicial action was validly exercised (Beliserio, supra).

Cuenca's consignation with this Court of the amount ordered by the Court of Appeals to be paid to SIHI only eight (8) years after her action to redeem was filed in 1984 is a belated move which merely shows that in 1984 she had no ability to pay SIHI the redemption price. Her filing of the action was a mere devise and scheme to buy time to raise the amount needed to redeem her property. In Conejero, et al. vs. Court of Appeals, et al. (16 SCRA 775 [1966]), We precisely stated that "a buyer can not be expected to entertain an offer of redemption without attendant evidence that the redemptioner can, and is willing to accomplish the repurchase immediately. A different rule would leave the buyer open to harassment by speculators or crackpots, as well as to unnecessary prolongation of the redemption period, contrary to the policy of the law. . . . Of course, consignation of the price would remove all controversy as to the redemptioner's ability to pay at the proper time. (at pp. 781-782.)"

We further stated in Basbas vs. Entena (28 SCRA 665, 671 [1969]) that:

. . . the right of legal redemption must be exercised within specified time limits: and the statutory periods would be rendered meaningless and of easy evasion unless the redemptioner is required to make an actual tender in good faith of what he believed to be the reasonable price of the land sought to be redeemed. The existence of the right of redemption operates to depress the market value of the land until the period expires, and to render that period indefinite by permitting the tenant to file a suit for redemption, with either party unable to foresee when final judgment will terminate the action, would render nugatory the period of two years fixed by the statute for making the redemption and virtually paralyze any efforts of the landowner to realize the value of his land. No buyer can be expected to acquire it without any certainty as to the amount for which it may be redeemed, so that he can recover at least his investment in case of redemption. In the meantime, the landowner's needs and obligations cannot be met. It is doubtful if any such result was intended by the statute, absent clear wording to that effect.

The situation becomes worse when as shown by the evidence in this case, the redemptioner has no funds and must apply for them to the Land Authority, which, in turn, must depend on the availability of funds from the Land

Bank. It then becomes practically certain that the landowner will not be able to realize the value of his property for an indefinite time beyond the two years redemption period. (at pp. 671-672.)

WHEREFORE, the appealed portions of the Original Decision and the Amended Decision are REVERSED and SET ASIDE and new judgment is hereby entered:

1) Declaring valid and effective the extrajudicial foreclosure of the mortgage of respondent Sabina Vda. de Cuenca's property in Timog, Quezon City on August 8, 1983; and

2) Upholding and confirming the cancellation of Transfer Certificate of Title No. 126578 of the Register of Deeds of Quezon City in the name of Sabina Vda. de Cuenca, as well as its replacement by Transfer Certificate of Title No. 324372 in the name of State Investment House, Inc.

Neither party is to recover damages or costs.

SO ORDERED.

[G.R. No. 139884. February 15, 2001]

SPOUSES OCTAVIO and EPIFANIA LORBES, petitioners, vs. COURT OF APPEALS, RICARDO DELOS REYES and JOSEFINA CRUZ, respondents.

D E C I S I O N

GONZAGA-REYES, J.:

This petition for review on certiorari arose from an action for reformation of instrument and damages originally filed with the Regional Trial Court of Antipolo, Rizal, Branch 74, the decision on which was reviewed and reversed by the Third Division of the Court of Appeals.

Petitioners were the registered owners of a 225-square meter parcel of land located in Antipolo, Rizal covered by Transfer Certificate of Title No. 165009. Sometime in August 1991, petitioners mortgaged this property to Florencio and Nestor Carlos in the amount of P150,000.00.

About a year later, the mortgage obligation had increased to P500,000.00 and fearing foreclosure of the property, petitioners asked their son-in-law, herein private respondent Ricardo delos Reyes, for help in redeeming their property.Private respondent delos Reyes agreed to redeem the property but because he allegedly had no money then for the purpose he solicited the assistance of private respondent Josefina Cruz, a family friend of the delos Reyeses and an employee of the Land Bank of the Philippines.

It was agreed that petitioners will sign a deed of sale conveying the mortgaged property in favor of private respondent Cruz and thereafter, Cruz will apply for a housing loan with Land Bank, using the subject property as collateral. It was further agreed that out of the proceeds of the loan, P500,000.00 will be paid to the Carloses as mortgagees, and any such balance will be applied by petitioners for capital gains tax, expenses for the cancellation of the mortgage to the Carloses, transfer of title to Josefina Cruz, and registration of a mortgage in favor of Land Bank.[1] Moreover, the monthly amortization on the housing loan which was supposed to be deducted from the salary of private respondent Cruz will be reimbursed by private respondent delos Reyes.

On September 29, 1992, the Land Bank issued a letter of guarantee in favor of the Carloses, informing them that Cruzs loan had been approved. On October 22, 1992, Transfer Certificate of Title No. 165009 was cancelled and Transfer Certificate of Title No. 229891 in the name of Josefina Cruz was issued in lieu thereof.[2] On November 25, 1992, the mortgage was discharged.

Sometime in 1993, petitioners notified private respondent delos Reyes that they were ready to redeem the property but the offer was refused. Aggrieved, petitioners filed on July 22, 1994 a complaint for reformation of instrument and damages with the RTC of Antipolo, Rizal, docketed as Civil Case No. 94-3296.

In the complaint, petitioners claimed that the deed was merely a formality to meet the requirements of the bank for the housing loan, and that the real intention of the parties in securing the loan was to apply the proceeds thereof for the payment of the mortgage obligation.[3] They alleged that the deed of sale did not reflect the true intention of the parties, and that the transaction was not an absolute sale but an equitable mortgage, considering that the price of the sale was inadequate considering the market value of the subject property and because they continued paying the real estate taxes thereto even after the execution of the said deed of sale. Petitioners averred that they did not see any reason why private respondents would retract from their original agreement other than that they (petitioners) and the members of their family resigned en masse from the Mahal Namin Organization, of which private respondent delos Reyes was the president and chairman of the board of directors, and private respondent Cruz was the treasurer. In the same complaint, they demanded moral damages, exemplary damages, and attorneys fees.

On July 29, 1996, the trial court issued a temporary restraining order enjoining private respondents from ejecting petitioners from the premises of the disputed property; this was soon replaced by a writ of preliminary injunction.

Summons and a copy of the complaint were served upon private respondents on August 1, 1994. Private respondents filed their answer beyond the reglamentary period, or only on September 1, 1994. Thus, on September 5, 1994, petitioners filed a motion to declare private respondents in default, which the trial court granted in an order dated September 16, 1994.On September 30 of the same year, petitioners presented their evidence ex parte before the trial court. The principal witness presented was petitioner Octavio Lorbes, whose testimony was corroborated by his son, Atty. Salvador Lorbes.

On October 12, 1994, private respondents filed a motion to lift order of default and to strike out evidence presented ex parte, which the court denied in an order dated October 26, 1994.

On June 20, 1995, the trial court rendered judgment in favor of petitioners, upon finding that: (1) the Deed of Absolute Sale dated October 21, 1992 did not reflect the true intention of the parties, and (2) the transaction entered into between petitioners and Cruz was not an absolute sale but an equitable mortgage, considering that the price stated in the Deed of Absolute Sale was insufficient compared to the value of the property, petitioners are still in possession of the property, and petitioners had continued to pay the real estate taxes thereon after the execution of the said deed of sale. As explained by the trial court in its decision:

The foregoing uncontroverted facts clearly show that the transaction entered into between the plaintiffs and the defendants is not an absolute sale but merely an equitable mortgage as the sale was executed in order to secure a loan from a certain bank to save the property from the danger of foreclosure and to use it as collateral thereof for bank loan purposes and that the same does not reflect the real intention of the parties in executing the said Deed of Sale. The court notes that at the time the transaction and the Deed of Absolute Sale was executed by the plaintiffs sometime in 1992, the prevailing market value of the lot alone was P400,000.00 per square meter such that the lot alone consisting of 255 square meters, excluding the house and improvements thereon would already cost more than a million pesos already hence, the consideration of P600,000.00 in the said Deed of Sale is considerably insufficient compared to the value of the property. Further, the plaintiffs are still in possession of the subject property and had been paying the realty taxes thereon even after the execution of the sale and the transfer of the title from the plaintiffs to defendant Josephine Cruz which clearly evinces the true badge of the transaction which occurred between the plaintiffs and defendants as that of an equitable mortgage and not an absolute sale and that the plaintiffs were only compelled to enter into the said transaction of sale with the defendants as the former were in extreme need of money in order to redeem their only conjugal property and to save it from being foreclosed for non-payment of the mortgage obligation and that it was never the intention of the plaintiffs to sell the property to the defendants, as it was their agreement that plaintiffs can redeem the property or any member of the family thereof, when they become financially stable.[4]

The dispositive portion of the trial courts decision thus provides:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiffs and against the defendants, ordering the latter jointly and severally, as follows:

1. To reconvey the subject property to the plaintiffs upon payment of the price stipulated in the contract of sale;

2. To pay plaintiffs the sum of P50,000.00 as moral damages;

3. To pay plaintiffs the sum of P50,000.00 as and by way of attorneys fees plus P1,000.00 per court appearance;

4. To pay the costs of suit.

SO ORDERED.[5]

The Court of Appeals reversed the above decision, finding that private respondents were denied due process by the refusal of the trial court to lift the order of default against them, and that the transaction between petitioners and Cruz was one of absolute sale, not of equitable mortgage. It also held the RTC decision to be constitutionally infirm for its failure to clearly and distinctly state the facts and the law on which it is based.

The Court of Appeals held that the reformation of the Deed of Absolute Sale in the instant case is improper because there is no showing that such instrument failed to express the true intention of the parties by reason of mistake, fraud, inequitable conduct, or accident in the execution thereof.[6] To the Court of Appeals, the transaction was unmistakably a contract of sale, as evidenced by the numerous supporting documents thereto, such as the Contract to Sell dated June 1992, Affidavit of Waiver/Assignment dated August 14, 1992, Receipt of Partial Advance Payment dated September 9, 1992, and Transfer Certificate of Title No. 229891 issued in the name of private respondent Cruz. Going over the indicators giving rise to a presumption of equitable mortgage cited in the decision of the RTC, the Court of Appeals held: (1) inadequacy of price is material only in a sale with right to repurchase, which is not the case with herein petitioners and Cruz; moreover, the estimate of the market value of the property came only from the bare testimony of petitioner Octavio Lorbes, (2) petitioners remaining in possession of the property resulted only from their refusal to vacate the same despite the lawful demands of private respondent Cruz, and (3) there was no documentary evidence that petitioners continued paying the taxes on the disputed property after the execution of the Deed of Absolute Sale.

In its decision, the Court of Appeals also pointed out that under the usual arrangement of pacto de retro the vendor of the property is a debtor of the vendee, and the property is used as security for his obligation. In the instant case, the mortgage creditors (the Carloses) are third persons to the Deed of Absolute Sale.

This petition raises three issues before the Court: (1) whether respondent court erred in ruling that the Deed of Absolute Sale dated October 21, 1992 was an equitable mortgage, (2) whether respondent court erred in ruling that by declaring private respondents in default they were denied due process of law, and (3) whether respondent court erred in ruling that the trial courts decision violates the constitutional requirement that it should clearly and distinctly state the facts and the law on which it is based.[7]

We shall first deal with the second and third issues, these being preliminary matters.

Well-settled is the rule that courts should be liberal in setting aside orders of default for judgments of default are frowned upon, unless in cases where it clearly appears that the reopening of the case is intended for delay. [8] The issuance of orders of default should be the exception rather than the rule, to be allowed only in clear cases of obstinate refusal by the defendant to comply with the orders of the trial court.[9]

Under the factual milieu of this case, the RTC was indeed remiss in denying private respondents motion to lift the order of default and to strike out the evidence presented by petitioners ex parte, especially considering that an answer was filed, though out of time. We thus sustain the holding of the Court of Appeals that the default order of the RTC was immoderate and in violation of private respondents due process rights. However, we do not think that the violation was of a degree as to justify a remand of the proceedings to the trial court, first, because such relief was not prayed for by private respondents, and second, because the affirmative defenses and evidence that private respondents would have presented before the RTC were capably ventilated before respondent court, and were taken into account by the latter in reviewing the correctness of the evaluation of petitioners evidence by the RTC and ultimately, in reversing the decision of the RTC. This is evident from the discussions in the decision of the Court of Appeals, which cited with approval a number of private respondents arguments and evidence, including the documents annexed to their opposition to the issuance of a writ of preliminary injunction filed with the RTC.[10] To emphasize, the reversal of respondent court was not simply on due process grounds but on the merits, going into the issue of whether the transaction was one of equitable mortgage or of sale, and so we find that we can properly take cognizance of the substantive issue in this case, while of course bearing in mind the inordinate manner by which the RTC issued its default order.

As regards the third issue, we reverse for being unfounded the holding of the Court of Appeals since the RTC decision, some parts of which we even reproduced in our earlier discussions, clearly complied with the constitutional requirement to state clearly and distinctly the facts and the law on which it was based.

Thus, the one issue essential to the resolution of this case is the nature of the transaction between petitioners and private respondent Cruz concerning the

subject parcel of land. Did the parties intend for the contested Deed of Absolute Sale to be abona fide and absolute conveyance of the property, or merely an equitable mortgage?

On the outset, it must be emphasized that there is no conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage.[11] The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at that time, the attitude, acts, conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature of their design and understanding. As such, documentary and parol evidence may be submitted and admitted to prove the intention of the parties.[12]

The conditions which give way to a presumption of equitable mortgage, as set out in Article 1602 of the Civil Code, apply with equal force to a contract purporting to be one of absolute sale.[13] Moreover, the presence of even one of the circumstances laid out in Article 1602, and not a concurrence of the circumstances therein enumerated, suffices to construe a contract of sale to be one of equitable mortgage.[14] This is simply in consonance with the rule that the law favors the least transmission of property rights.[15]

Thus, under Article 1602 of the Civil Code, a contract shall be presumed to be an equitable mortgage when --- (a) the price of a sale with right to repurchase is unusually inadequate; (b) the vendor remains in possession as lessee or otherwise; (c) upon or after the expiration of the right of repurchase another instrument extending the period of redemption or granting a new period is executed; (d) the purchaser retains for himself a part of the purchase price; (e) the vendor binds himself to pay the taxes on the thing sold; and, (f) in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

Applying the foregoing considerations to the instant case, the Court finds that the true intention between the parties for executing the Deed of Absolute Sale was not to convey ownership of the property in question but merely to secure the housing loan of Cruz, in which petitioners had a direct interest since the proceeds thereof were to be immediately applied to their outstanding mortgage obligation to the Carloses.

It is not disputed that before the execution of the Deed of Absolute Sale petitioners mortgage obligation to the Carloses was nearing maturity and they were in dire need of money to meet the same. Hence, they asked for the help of their son-in-law delos Reyes who in turn requested Cruz to take out a housing loan with Land Bank. Since collateral is a standard requirement of banks in giving out loans, it was made to appear that the subject property was sold to Cruz so she can declare the same as collateral for the housing loan. This was simply in line with the basic requirement in our laws that the mortgagor be the absolute owner of the property sought to be mortgaged.[16] Consistent with their agreement, as soon as the housing loan was approved, the full amount of the proceeds were immediately turned over to petitioners, who promptly paid P500,000.00 therefrom to the Carloses in full satisfaction of their mortgage obligation. The balance was spent by petitioners in transferring title to the property to Cruz and registering the new mortgage with Land Bank.

Understandably, the Deed of Absolute Sale and its supporting documents do not reflect the true arrangement between the parties as to how the loan proceeds are to be actually applied because it was not the intention of the parties for these documents to do so. The sole purpose for preparing these documents was to satisfy Land Bank that the requirement of collateral relative to Cruzs application for a housing loan was met.

Were we to accept, as respondent court had, that the loan that Cruz took out with Land Bank was indeed a housing loan, then it is rather curious that Cruz kept none of the loan proceeds but allowed for the bulk thereof to be immediately applied to the payment of petitioners outstanding mortgage obligation. It also strains credulity that petitioners, who were exhausting all means to save their sole conjugal real property from being foreclosed by the Carloses, would concurrently part with the same in favor of Cruz.

Such urgent prospect of foreclosure helps to explain why petitioners would subscribe to an agreement like the Deed of Absolute Sale in the herein case, which on its face represents their unconditional relinquishment of ownership over their property. Passing upon previous similar situations the Court has declared that while it was true that plaintiffs were aware of the contents of the contracts, the preponderance of the evidence showed however that they signed knowing that said contracts did not express their real intention, and if they did so notwithstanding this, it was due to the urgent necessity of obtaining funds. Necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them.[17]

The facts further bear out that petitioners remained in possession of the disputed property after the execution of the Deed of Absolute Sale and the transfer of registered title to Cruz in October 1992. Cruz made no demand on

petitioners to vacate the subject premises until March 19, 1994; [18] interestingly, this was two days after petitioners signified their intention to redeem the property by paying the full amount of P600,000.00.[19] On this basis, the finding of respondent court that petitioners remained in possession of the property only because they refused to vacate on Cruzs demand is not accurate because the records reflect that no such demand was made until more than a year since the purported sale of the property.

Copies of realty tax receipts attached to the record also show that petitioners continued paying for the taxes on the property for the period 1992 to 1994,[20] or after the property was supposed to have been sold to Cruz.

From the above, the Court is satisfied that enough of the circumstances set out in Article 1602 of the Civil Code are attendant in the instant case, as to show that the true arrangement between petitioners and private respondent Cruz was an equitable mortgage.

That a transfer certificate of title was issued in favor of private respondent Cruz also does not import conclusive evidence of ownership or that the agreement between the parties was one of sale. As was stated in Oronce vs. Court of Appeals,[21] citing Macapinlac vs. Gutierrez Repide[22]

xxx it must be borne in mind that the equitable doctrine xxx to the effect that any conveyance intended as security for a debt will be held in effect to be a mortgage, whether so actually expressed in the instrument or not, operates regardless of the form of the agreement chosen by the contracting parties as the repository of their will. Equity looks through the form and considers the substance; and no kind of engagement can be adopted which will enable the parties to escape from the equitable doctrine to which reference is made. In other words, a conveyance of land, accompanied by registration in the name of the transferee and the issuance of a new certificate, is no more secured from the operation of the equitable doctrine than the most informal conveyance that could be devised.

Before we fully set aside this issue, it will be recalled that the instant petition originated as a complaint for reformation filed before the RTC of Antipolo, Rizal. The Court of Appeals found petitioners action for reformation unmeritorious because there was no showing that the failure of the deed of sale to express the parties true intention was because of mistake, fraud, inequitable conduct, or accident.[23] Indeed, under the facts of the present case, reformation may not be proper for failure to fully meet the requisites in Article 1359 of the Civil Code, and because as the evidence eventually bore out the contested Deed of Absolute Sale was not intended to reflect the true agreement between the parties but was merely to comply with the collateral requirements of Land Bank. However, the fact that the complaint filed by petitioners before the trial court was categorized to be one for reformation of instrument should not preclude the Court from passing upon the issue of whether the transaction was in fact an equitable mortgage as the same has been squarely raised in the complaint and had been the subject of arguments and evidence of the parties. Thus we have held that it is not the caption of the pleading but the allegations therein that determine the nature of the action, and the Court shall grant relief warranted by the allegations and the proof even if no such relief is prayed for.[24]

Finally, on the award of damages. Considering the due process flaws that attended the default judgment of the RTC, and applying the rule adopted by this Court that in instances where no actual damages are adjudicated the awards for moral and exemplary damages may be reduced,[25] we reduce the award for moral damages in the instant case from P50,000.00 to P30,000.00. At the same time, we sustain the award of attorneys fees in the amount of P50,000.00, it being clear that petitioners were compelled to incur expenses and undergo the rigors of litigation to recover their property.

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Antipolo, Rizal is REINSTATED, with the MODIFICATION that the award of moral damages is reduced to P30,000.00, and in all other respects AFFIRMED. Costs against private respondents.

SO ORDERED.

TO: ALL EXECUTIVE JUDGES AND CLERKS OF COURTS OF THE REGIONAL TRIAL COURTS

SUBJECT: PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE.

For the information and guidance of all concerned, quoted hereunder is the Resolution of the Court En Banc dated December 14, 1999 in Administrative Matter No. 99-10-05-0 Re: Procedure in Extra-Judicial Foreclosure of Mortgage.

"A.M. No. 99-10-05-0 Re: Procedure in Extra-Judicial Foreclosure of Mortgage.

 

"In line with the responsibility of an Executive Judge under Administrative Order No. 6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the task of supervising directly the work of the Clerk of Court, who is also the Ex-Officio Sheriff and his staff, and the issuance of commissions to notaries public and enforcement of their duties under the law, the following procedures are hereby prescribed in extra-judicial foreclosure of mortgage:chanroblesvirtuallawlibrary      

"1. All applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a notary public, pursuant to Act 3135, as amended by Act 4118, and Act 1508, as amended, shall be filed with the Executive Judge, through the Clerk of Court who is also the Ex-Officio Sheriff.

"2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it shall be the duty of the Clerk of Court to:chanroblesvirtuallawlibrary

 

(a) receive and docket said application and to stamp thereon the corresponding file number, date and time of filing;

(b) collect the filing fees therefor and issue the corresponding official receipt. 

(c) examine, in case of real estate mortgage foreclosure, whether the applicant has complied with all the requirements before the public auction is conducted under the direction of the sheriff or a notary public, pursuant to Sec. 4 of Act 3135, as amended;

(d) sign and issue the certificate of sale, subject to the approval of the Executive Judge, or in his absence, the Vice-Executive Judge;

(e) after the certificate of sale has been issued to the highest bidder, keep the complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale with the Register of Deeds concerned, after which the records shall be archived.     

"Where the application concerns the extra-judicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness, only one filing fee corresponding to such indebtedness shall be collected. The collecting Clerk of Court shall, apart from the official receipt of the fees, issue a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real estates and/or chattels mortgages and their respective locations, which certificate shall serve the purpose of having the application docketed with the Clerks of Court of the places where the other properties are located and of allowing the extrajudicial foreclosure to proceed thereat.         "3. The notices of auction sale in extra-judicial foreclosure for publication by the sheriff or by a notary public shall be published in a newspaper of general circulation pursuant to Section 1, Presidential Decree No. [1079], dated January 26, 1977, and non-compliance therewith shall constitute a violation of Section 6, thereof.

"4. The Executive Judge shall, with the assistance of the Clerk of Court, raffle applications for extrajudicial foreclosure of mortgage under the direction of the sheriff among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriff IV assigned in the branches.cralaw

"5. No auction sale shall be held unless there are at least two (2) participating bidders, otherwise the sale shall be postponed to another date. If on the new date set for the sale there shall not be at least two bidders, the sale shall then proceed. The names of the bidders shall be reported by the sheriff or the notary public who conducted the sale to the Clerk of Court before the issuance of the certificate of sale.        "This Resolutions amends or modifies accordingly Administrative Order No. 3 issued by the then Chief Justice Enrique M. Fernando on 19 October 1984 and Administrative Circular No. 3-98 issued by [then] Chief Justice Andres R. Narvasa on 5 February 1998.cralaw

"The Court Administrator may issue the necessary guidelines for the effective enforcement of this Resolution.cralaw

"The Clerk of Court shall cause the publication of this Resolution in a newspaper of general circulation not later than 27 December 1999 and furnish copies to the Integrated Bar of the Philippines.cralaw

"This Resolution shall take effect on the fifteenth day of January of the year 2000.cralaw

"Enacted this 14th day of December 1999 in the City of Manila."

January 3, 2000. 

G.R. No. 111584            September 17, 2001

PRODUCERS BANK OF THE PHILIPPINES, petitioner, vs.COURT OF APPEALS and SPOUSES SALVADOR Y. CHUA and EMILIA U. CHUA, respondents.

MELO, J.:

The instant petition assails the decision of the Court of Appeals in its CA G.R.CV No. 20220, dated October 31, 1991, affirming with modification the decision of Branch 48 of the Regional Trial Court of the 6th Judicial Region stationed in Bacolod City, as well as the resolution dated August 12, 1993 denying petitioner's motion for partial consideration. Undersigned ponente was given this case in pursuance of A. M. No. 00-9-03-SC dated February 27, 2001 distributing the so-called back-log cases.

The generative facts of the case may be chronicled as follows:

Sometime in April, 1982, respondent Salvador Chua was offered by Mr. Jimmy Rojas, manager of petitioner bank, to transfer his account from Pacific Banking Corporation to herein petitioner Producers Bank of the Philippines. In view of Rojas' assurances of longer loan terms and lower rates of interest, respondent spouses opened and maintained substantial savings and current deposits with the Bacolod branch of petitioner bank. Likewise, private respondents obtained various loans from petitioner bank, one of which was a loan for P2,000,000.00 which was secured by a real estate mortgage and payable within a period of three (3) years or from 1982 to 1985. On January 20, 1984, private respondents deposited with petitioner bank the total sum of P960,000.00, which was duly entered in private respondents' savings account passbook. However, petitioner bank failed to credit this deposit in private respondents' savings account due to the fact that its Branch Manager, Sixto Castillo, absconded with the money of the bank's depositors. Also, petitioner bank dishonored the checks drawn out by private respondents in favor of their various creditors on the ground of insufficient funds, despite the fact that at that time, the balance of private respondents' deposit was in the amount of P1,051,051.19. These events prompted private respondents to request for copies of their ledgers covering their savings and current accounts, but petitioner bank refused. Due to petitioner bank's refusal to furnish private respondents copies of their ledgers, private respondents instituted on January 30, 1984 an action for damages against petitioner bank which was docketed as Civil Case No. 2718. On the other hand, petitioner bank filed with the City Sheriff of Bacolod a petition for extrajudicial foreclosure of the real estate mortgage during the pendency of Civil Case No. 2718. As a result, private respondents filed a complaint for injunction and damages docketed as Civil Case No. 3276, alleging that the petition for extrajudicial foreclosure was without basis and was instituted maliciously in order to harass private respondents. On April 26, 1988, the trial court rendered its decision on the latter case, the dispositive portion of which reads:

WHEREFORE, from the evidence adduced, judgment is hereby rendered in favor of plaintiff ordering the defendant as follows:

1) To pay plaintiff the sum of P2,000,000.00 as moral damages, with legal rate of interest; the sum of P90,000.00 per month and P18,000.00 per month representing plaintiff's unrealized profits from his cement and gasoline station business, respectively, to commence from October 16, 1984, with legal rate of interest until fully paid; the sum of P250,000.00 as exemplary damages;

2) To off-set the sum of P960,000.00 deposited by plaintiff on January 20, 1984 and entered in his Passbook No. 38240, together with its incremental interests computed at banking rate and to commence from January 20, 1984 with his agricultural loan account in the sum of P1,300,000.00 with interest thereon computed at fourteen (14%) percent per annum, to commence from January 4, 1984, covered by a real estate mortgage, both of which shall have a cut-off time frame on the date of this decision;

3) That should the said savings deposit and its interest be sufficient to cover the off-setting, compensation shall take place and to be taken from the amounts awarded to plaintiff in the form of moral, actual and compensatory damages;

4) That the time loan in the sum of P175,000.00 and the clean loan of P400,000.00, both without interest, shall be off-settled by the moral, actual and compensatory damages herein awarded to plaintiff;

5) That after compensation or set-off had taken place, to pay plaintiff the balance of the adjudged moral, actual and compensatory damages, with legal rate of interest until fully paid;

6) To render an accounting to plaintiff with respect to his Account Nos. 0142-0014-0 and 042-0014-1 for the period covering January to December, 1982;

7) That in order to make the bank's record complete, to reform the deed of real estate mortgage conformably with the agreement by stipulating in the said document that the maturity date of the agricultural loan is April 5, 1987 at the same rate of interest of fourteen (14%) percent per annum, deducting from the original amount of the loan the payments made on the principal and interests; this reformation shall take place simultaneously with the off-setting of accounts;

8) To pay plaintiff the sum equivalent to fifteen (15%) percent of the amount representing the balance of the sums awarded as moral, actual and compensatory damages as attorney's fees;

9) To pay plaintiff the costs of suit;

10) The writ of preliminary injunction issued by this Court is rendered permanent; and

11) The counterclaim is hereby dismissed.

SO ORDERED.

(Rollo, pp. 261-263.)

On October 31, 1991, upon appeal by petitioner bank, the Court of Appeals modified the decision of the trial court as follows:

WHEREFORE, from the evidence adduced, judgment is hereby rendered as follows:

1. Ordering the defendant —

a. To pay plaintiff the sum of P500,000.00 as moral and exemplary damages;

b. To pay the sum of P18,000.00 per month representing plaintiffs' unrealized profits from his gasoline station business to commence from October 16, 1984, with legal rate of interest, until fully paid;

c. To allow the plaintiffs to offset their financial obligation with the defendant bank by the moral, exemplary, actual and compensatory damages herein awarded in favor of the aforesaid plaintiffs;

d. If, after the off-setting, a balance remains in favor of the plaintiffs, to pay the said plaintiffs such balance of the adjudged moral, exemplary, actual and compensatory

damages, with legal rate of interest until fully paid, as of the time of off-setting;

e. To render an accounting to plaintiffs with respect to their Account Nos. 0142-0014-0 and 042-0014-1 for the period covering January to December, 1982;

f. To pay plaintiffs the sum of P100,000.00 as attorney's fees.

g. To pay the costs of suit.

2. Ordering the plaintiffs —

a. To settle their loan obligation with the defendant bank within 90 days from the finality of this decision, subject to the resolution of this Court to the effect that they shall be relieved from the payment of penalties and surcharges on their outstanding balance starting January 20, 1984;

3. The plaintiffs' prayer for reformation of their mortgage contract or annulment thereof is hereby denied;

4. The counterclaim of defendant-appellant are hereby dismissed.

SO ORDERED.

(Rollo, pp. 86-87.)

Petitioner moved for a partial reconsideration of the above decision but the same was denied on August 12, 1993. Hence, the instant petition with the following submissions which allegedly warrant our review of the assailed decision, viz.:

1. The Court of Appeals erred in not ruling that the application for extrajudicial foreclosure of real estate mortgage is legal and valid;

2. The Court of Appeals erred in not granting petitioner bank its right to foreclose extrajudicially the real estate mortgage and to proceed with its application for extrajudicial foreclosure of real estate mortgage;

3. The Court of Appeals erred in ruling that private respondents be relieved from the payment of penalties and surcharges on their outstanding balance starting January 20, 1984;

4. The Court of Appeals erred in awarding moral and exemplary damages of P500,000.00, unrealized profit of P18,000.00 per month, and attorney's fees of P100,000.00 against petitioner bank;

5. The Court of Appeals erred in ordering an accounting to private respondents with respect to their Account Nos. 0142-0014-0 and 042-0014-1 for the period covering January to December, 1982.

It should at once be apparent that except for the first and second imputed errors which involve petitioner bank's right to foreclose extrajudicially the real estate mortgage, the resolution of the assigned errors entails a review of the factual conclusions of the appellate court and the evidentiary bases thereof. Such an assessment is not, as a rule, proper in appeals from the Court of Appeals which should be confined to a consideration and determination only of issues of law as its findings of fact are deemed conclusive (Villanueva vs. Court of Appeals, 294 SCRA 90 [1998]) especially so in this case because the findings of fact of the appellate court concur with those of the trial court. To reiterate, this Court's jurisdiction is only limited to reviewing errors of law in the absence of any showing that the findings complained of are totally devoid of support in the record or they are glaringly erroneous as to constitute serious abuse of discretion. Nonetheless, considering the amount involved, as well as for the satisfaction of the parties who have vigorously pursued this case since 1984, the Court, in the exercise of its discretion, examined the factual bases, particularly with respect to the propriety of the damages awarded to private respondents.

The first and second assignments of error, being interrelated, shall be jointly discussed.

Petitioner contends that it has the right to foreclose the real estate mortgage executed by private respondents in its favor as the loan under the real estate mortgage contract had become due and demandable. This argument is not well-taken. Foreclosure is but a necessary consequence of non-payment of a mortgage indebtedness. As a rule, the mortgage can be foreclosed only when the debt remains unpaid at the time it is due (Gov't. of the P.I. vs. Espejo, 57 Phil. 496 [1932]). As found by the trial court and the Court of Appeals, and as borne by the evidence on record, private respondents were constantly paying their loan obligations with petitioner bank. In fact the amount of P960,000.00 was properly deposited with petitioner bank as evidenced by the corresponding deposit slip and the entry made in private respondents' savings account passbook. It is, therefore, not the fault of private respondents that their payment amounting to P960,000.00 was not credited to their account. Thus, it is certain that the loan which was secured by a real estate mortgage cannot be considered as unpaid so as to warrant foreclosure on the mortgage.

Clearly, private respondents have not yet defaulted on the payment of their loans. Moreover, the term of the loan, as agreed upon by the parties, is three years, or from 1982 to 1985. But petitioner filed its application for extrajudicial foreclosure on October 15, 1984. Indisputably, the application for foreclosure of the mortgage on October 15, 1984 was premature because by then, private respondents' loan was not yet due and demandable.

Likewise, both the Court of Appeals and the trial court found that private respondents are entitled to moral and exemplary damages. We agree. Moral and exemplary damages may be awarded without proof of pecuniary loss. In awarding such damages, the court shall take into account the circumstances obtaining in the case and assess damages according to its discretion. As borne out by the record of this case, private respondents are engaged in several businesses, such as rice and corn trading, cement dealership, and gasoline proprietorship. The dishonor of private respondents' checks and the foreclosure initiated by petitioner adversely affected the credit standing as well as the business dealings of private respondents as their suppliers discontinued credit lines resulting in the collapse of their businesses. In the case of Leopoldo Araneta vs. Bank of America (40 SCRA 144 [1971]), we held that:

"The financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some financial loss to him."

The damage to private respondents' reputation and social standing entitles them to moral damages. Article 2217, in relation to Article 2220, of the Civil Code explicitly provides that "moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury." Obviously, petitioner bank's wrongful act caused serious anxiety, embarrassment, and humiliation to private respondents for which they are entitled to recover moral damages in the amount of P300,000.00 which we deem to be reasonable.

The award of exemplary damages is in order in view of the malicious and unwarranted application for extrajudicial foreclosure by petitioner which was obviously done to harass, embarrass, annoy, or ridicule private respondents. Likewise, petitioner, in its application for extrajudicial foreclosure, included the other loans of private respondents which were not covered by the real estate mortgage agreement, such as the loan of P175,000.00 which was a time loan, and the amount of P400,000.00 which was a clean loan. Moreover, petitioner unjustifiably refused to give private respondents copies of their account ledgers which would show the deposits made by them. Also, petitioner bank's failure to credit the deposit in the account of private respondents constituted gross negligence in the performance of its contractual obligation which amounts to evident bad faith. Verily, all these acts of petitioner were accompanied by bad faith and done in wanton, fraudulent and malevolent manner warranting the award of exemplary damages in favor of private respondents, in accordance with Article 2232 of the Civil Code which provides:

ART. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

Of course, a plaintiff need not prove the actual extent of exemplary damages, for its determination is addressed to the sound discretion of the court upon proof of the plaintiff's entitlement to moral, temperate, or compensatory damages (Article 2234, Civil Code). In the instant case, exemplary damages in the amount of P150,000.00 are proper.

Anent the award of actual damages, the Court of Appeals granted private respondents the amount of P18,000.00 per month representing private respondents' unrealized profits from his gasoline station business, to commence from October 16, 1984. Under Articles 2199 and 2200 of the Civil Code, actual or compensatory damages are those awarded in satisfaction of, or in recompense for, loss or injury sustained. They proceed from a sense of natural justice and are designed to repair the wrong that has been done. There are two kinds of actual or compensatory damages one is the loss of what a person already possesses, and the other is the failure to receive as a benefit that which would have pertained to him (Tolentino, Civil Code of the Phil., Vol. V, 1992 ed., pp. 633-636). In the latter instance, the familiar rule is that damages consisting of unrealized profits, frequently referred as "ganacias frustradas" or "lucrum cessans," are not to be granted on the basis of mere speculation, conjecture, or surmise, but rather by reference to some reasonably definite standard such as market value, established experienced, or direct inference from known circumstances (Talisay-Silay Milling Co., Inc. vs. Asociacion de Agricultores de Talisay-Silay, Inc., 247 SCRA 361 [1995])

In the case at bar, actual damages in the form of unrealized profits were awarded on the basis of the sole testimony of private respondent Salvador Chua, to wit:

Atty. Chua:

Q:         You mentioned earlier during your direct testimony that you are engaged in gasoline business. Do you have a gasoline station?

A:         Yes, sir.

Q:         Where is that located?

A:         It is located at Corner Araneta-San Sebastian Sts.

Q:         Before the filing of the Extra Judicial Foreclosure, how much more or less, you earned from that gasoline station by way of conservative estimate?

A:         In my gasoline business, based on my record, I have an average of 114,000 liters.

Q:         Do you mean to say you can dispose 114,000 liters a month?

A:         Yes, sir.

Q:         How much is the mark up per liter?

A:         Before the publication of the Extra Judicial Foreclosure the markup is P0.27 per liter. So, it comes out that the profit is P30,78.00 (sic).

Q:         How much is your overhead for disposing that much liters of gasoline every month?

A:         The overhead is about 12,280.00.

Q:         That will give you an average of P18,000.00 a month?

A:         Yes, sir.

Q:         After the filing of the Extra Judicial Foreclosure, what happened to your gasoline business?

A:         Because of the publication of the Extra Judicial Foreclosure I did not have credit line anymore. Since I have no capital I was forced to sell my right to operate to my relatives.

(tsn, March 25, 1986, pp. 9-12)

However, other than the testimony of Salvador Chua, private respondents failed to present documentary evidence which is necessary to substantiate their claim

for actual or compensatory damages. In order to recover this kind of damages, the injured party must prove his case, thus:

When the existence of a loss is established, absolute certainty as to its amount is not required. The benefit to be derived from a contract which one of the parties has absolutely failed to perform is of necessity to some extent, a matter of speculation, but the injured party is not to be denied for that reason alone. He must produce the best evidence of which his case is susceptible and if that evidence warrants the inference that he has been damaged by the loss of profits which he might with reasonable certainty have anticipated but for the defendant's wrongful act, he is entitled to recover. (Cerreno vs. Tan Chuco, 28 Phil. 312 [1914] quoted in Central Bank of the Philippines vs. Court of Appeals, 63 SCRA 431 [1975])

Applying the foregoing test to the instant case, the Court finds the evidence of private respondents insufficient to be considered within the purview of "best evidence." The bare assertion of private respondent Salvador Chua that he lost an average of P18,000.00 per month is inadequate if not speculative and should be admitted with extreme caution especially because it is not supported by independent evidence. Private respondents could have presented such evidence as reports on the average actual profits earned by their gasoline business, their financial statements, and other evidence of profitability which could aid the court in arriving with reasonable certainty at the amount of profits which private respondents failed to earn. Private respondents did not even present any instrument or deed evidencing their claim that they have transferred their right to operate their gasoline station to their relatives. We cannot, therefore, sustain the award of P18,000.00 a month as unrealized profits commencing from October 16, 1984 because this amount is not amply justified by the evidence on record.

Further, well-settled is the rule that even if the petition for extrajudicial foreclosure filed by petitioner against private respondents is clearly unfounded, this does not necessarily mean, in the absence of specific facts proving damages, that actual damage has been sustained. The Court cannot rely on speculations as to the fact and amount of damages. It must depend on actual proof of the damages alleged to have been suffered (Perfecto vs. Gonzales, 128 SCRA 635 [1984]).

Finally, the award of attorney's fees as part of damages is deemed just and equitable under the circumstances. Attorney's fees may be awarded when a party is compelled to litigate or to incur expenses to protect his interest by reason of an unjustified act of the other party (Ching Sen Ben vs. Court of Appeals, 314 SCRA 762 [1999]). In this case, petitioner bank's act of not crediting private respondents' deposit of P960,000.00, as well as the premature filing of the extrajudicial foreclosure, have compelled private respondents to institute an action for injunction and damages primarily in order to protect their rights and interests. The award of attorney's fees is also justified under Article 2208 of the Civil Code which provides:

ART. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:

(1) when exemplary damages are awarded;

(2) when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest;

WHEREFORE, the decision of the Court of Appeals in its CA-G.R. CV No. 20220 is affirmed with MODIFICATION only as to the award of damages in that petitioner bank is ordered to pay private respondents the following:

1. Three Hundred Thousand Pesos (P300,000.00) as moral damages;

2. One Hundred Fifty Thousand Pesos (P150,000.00) as exemplary damages; and

3. One Hundred Thousand Pesos (P100,000.00) as attorney's fees and litigation expenses.

In all other respects, the said judgment is affirmed.

SO ORDERED.

G.R. No. L-24571 December 18, 1970

JOSE L. PONCE DE LEON, plaintiff-appellant, vs.REHABILITATION FINANCE CORPORATION, defendant-appellant and third-party defendant-appellant,ROSALINA SORIANO, TEOFILA SORIANO and REV. FR. EUGENIO R. SORIANO, third-party plaintiffs-appellants.

 

CONCEPCION, C.J.:

Appeal from a decision of the Court of First Instance of Rizal, the dispositive part of which reads:

IN VIEW OF THE FOREGOING, the Court hereby renders judgment dismissing plaintiff's complaint with costs against plaintiff; ordering plaintiff Jose Ponce de Leon to pay the defendant RFC the amount of FIVE HUNDRED TWENTY-NINE THOUSAND TWO HUNDRED SIXTY FIVE PESOS AND FIFTY FOUR (P529,265.54) CENTAVOS, with interest at six percent per annum from November 24, 1954 until fully paid, the further sum of ONE HUNDRED EIGHTY (P180.00) pesos per month from May 20, 1955 until plaintiff vacates the house and lot at Taft Avenue, Pasay City, and FIVE THOUSAND (P5,000.00) PESOS as damages for the injunction and costs.

The Court declares the mortgage of one-half of the lot covered by Original transfer certificate of title No. 8094 of the lands records of Rizal Province belonging to the third-party plaintiffs, namely Rosalina Soriano, Rev. Fr. Eugenio Soriano and Teofila Soriano del Rosario null and void and the sheriff's sale in favor of the RFC of said one-half share likewise null and void. 1

As correctly set forth in said decision, the main facts are:

On August 14, 1945, herein plaintiff Jose L. Ponce de Leon and Francisco Soriano, father of third-party plaintiffs Teofila Soriano del Rosario, Rosalina Soriano and Rev. Fr. Eugenio Soriano, obtained a loan for P10,000.00 from the Philippine National Bank (PNB), Manila, mortgaging a parcel of land situated at Barrio Ibayo, Municipality of Parañaque, Rizal, covered by original certificate of title No. 8094 of the land records of Rizal Province in the name of Francisco Soriano, married to Tomasa Rodriguez, as security for the loan (Exhibit 15-Soriano). On August 16, 1945, Ponce de Leon gave P2,000.00 to Soriano from the proceeds of the loan (Exhibit "N"). The loan was subsequently increased to P17,500.00 and an amendment to the real estate mortgage, Exhibit "15-Soriano," was executed by Jose L. Ponce de Leon and Francisco Soriano on March 13, 1946 (Exhibit "16-Soriano").

On May 4, 1951, Jose L. Ponce de Leon filed with the Rehabilitation Finance Corporation (RFC for short) Manila, his loan application, Exhibit "1-RFC," for an industrial loan, for putting up a sawmill, in the amount of P800,000.00 offering as security certain parcels of land, among which, was the parcel which Ponce de Leon and Soriano mortgaged to the PNB. The application stated that the properties offered for security for the RFC loan are encumbered to the PNB, Bacolod, and to Cu Unjieng Bros. The properties offered for security to the RFC were inspected by the appraisers of the latter, who submitted the following appraisals:

1. Land ............................................. P480,228.00

2. Building ........................................ P 12,000.00

3. Machinery & equiptment .......... P 67,101.00

4. Transportation equipment ......... P 14,000.00

Total .............................................. P573,329.00 (Exh. "6-a RFC")

The application was approved for P495,000.00 and the mortgage contract (Exhibit "A," also "16-RFC & "33-Soriano") was executed on October 8, 1951 by Jose L. Ponce de Leon, his wife Carmelina Russel, and Francisco Soriano. The same parties signed a promissory note (Exhibit "A") for P495,000.00, with interest at 6% per annum, payable on installments every month for P28,831.64 in connection with the mortgage deed. Before the mortgage deed was signed, the Notary Public, Felipe Cuaderno, Jr. before whom it was acknowledged, translated it in Tagalog to Francisco Soriano, who thereafter affixed his signature to the document. At the time that Francisco Soriano signed the mortgage deed, Exhibit "A," his spouse Tomasa Rodriguez was already dead leaving as her heirs, her children namely, Rosalina, Teofila and Rev. Fr. Eugenio Soriano, none of whom signed the said mortgage deed or the promissory note.

The mortgage deed specifically stipulated that the proceeds thereof shall be used exclusively for the purchase of machinery and equipment, construction of buildings and the payment of obligations and that the release of the amounts loaned shall be at the discretion of the RFC. In view of these conditions, the RFC paid Ponce de Leon's obligations of P100,000.00 to the PNB; P30,000.00 to Cu Unjieng Bros; and P5,000.00 to Arturo Colmenares. From the balance of P360,000.00, the sum of P352,000.00 was released to Jose L. Ponce de Leon at various amounts during the period from December, 1951 to July 1952. The checks covering these releases were issued to Jose L. Ponce de Leon in view of the authority given to him in writing by Francisco Soriano and Carmelina Russel (Exhibit "33-A-Soriano," Exhibit "A" and Exhibit "16-RFC").

On March 12, 1952, Jose L. Ponce de Leon and his wife Carmelina Russel executed an addendum to the chattel mortgage for machineries and equipments (Exhibit "F").

None of the amortization and interests which had become due was paid and, for this reason, the RFC took steps for the extra-judicial foreclosure of the mortgaged properties consisting of real estates and the sawmill and its equipments of Ponce de Leon situated in two places in Samar. The RFC was the purchaser of all the mortgaged properties in the ensuing sheriff's sales, with the exception of two parcels of land situated in Bacolod City which were purchased by private individuals. Many items of the mortgaged machineries and equipments could not be found. The parcels of land mortgaged were sold as follows:

1) Nine parcels at Bacolod City ................................................P78,800.00

2) Two parcels acquired by private individuals .................... P5,790.00

3) Two parcels at Pasay City with improvements ................. P15,000.00

4) The land of Soriano at Parañaque, Rizal ............................ P10,000.00

5) The Machineries & equipments that were left ............................. P6,000.00

The Sheriff sold the land covered by original certificate of Title No. 8094 in the name of Francisco Soriano, married to Tomasa Rodriguez, on June 15, 1954 and the deed of sale, dated April 19, 1955 was executed by the sheriff in

favor of the purchaser thereof, the RFC, including all the other properties sold (Exhibit "15-RFC," also "54-Soriano").

Previous to the expiration of the one-year period of redemption, Francisco Soriano, through Teofila Soriano del Rosario offered to repurchase the Soriano lot for P14,000.00 and on June 14, 1955, the last day for the redemption of the lot, Francisco Soriano, in company with his daughter, Rosalina and Teofila, went to see Mr. Bernardo, Chief of the assets department of the RFC, and offered to redeem said lot for P14,000.00 but the offer was rejected and they were told to participate in the public sale of the land to be conducted by the RFC. Jose L. Ponce de Leon did not offer to redeem the mortgaged properties sold at anytime before the expiration of the period of redemption.

The RFC scheduled a public sale of the lot registered in the name of Francisco Soriano and of the other lots which the RFC acquired in the Sheriff's sale for February 20, 1956 in view of the inability of Ponce de Leon or Soriano to legally redeem the properties sold by the Sheriff within the one year period after the sale.

On February 18, 1956, Jose L. Ponce de Leon instituted the present action alleging that there was delay in the releases of the amount of the loan; that the RFC withheld the amount of P19,000.00 from the loan until it had verified whether Ponce de Leon had still an unpaid indebtedness to the defunct Agricultural and Industrial Bank, the RFC's predecessor, and this was paid only after one year had passed; that the typhoon in October and November, 1952 had caused destructions to his sawmills and hampered his operations for which reason, he asks, in his complaint, that the amortizations on his obligations which became due since October, 1952 be declared extinguished; that the sheriff's sales be declared null and void because the properties were sold at grossly inadequate prices and that said sales were not conducted in accordance with law; that the RFC be compelled to account for his machineries and equipments at his lumber mill in Calbayog and to reimburse him for the value of the unaccounted machineries and equipments; that the RFC be ordered to pay him actual and moral damages for P105,000.00 and costs. De Leon asked for the issuance of a writ of preliminary injunction to restrain the RFC from carrying out its contemplated public sale. The Court set the petition for injunction for hearing but no one appeared for the RFC at the hearing thereof so that the Court had to issue the preliminary injunction prayed for. De Leon caused notice of lis pendens to be recorded in relation with this case.

The RFC filed its answer sustaining the legality of the mortgage and Sheriff's sales and counter-claimed that Ponce de Leon be ordered to pay the deficiency claim representing the balance of the latter's indebtedness, rental of the lot and house at Taft Avenue, Pasay City occupied by Ponce de Leon and damages.

Subsequent to the filing of Ponce de Leon's complaint against the RFC, Francisco Soriano wrote a letter, dated February 20, 1956, to the President asking the latter's intervention so that the projected sale on the same date to be conducted by the RFC may be suspended insofar as the lot in his name is concerned and that he be allowed to redeem it (Exhibit "27-Soriano"). This letter was referred by the Executive Office to the RFC, which sent a letter, Exhibit "29-Soriano," to Francisco Soriano informing the latter that he could redeem his former property for not less than its appraised value of P59,647.05, payable 20% down and the balance in ten years, with 6% interest. Soriano did not redeem the lot under the conditions of the RFC. He then filed a third-party complaint in this case with the RFC and Jose L. Ponce de Leon as the third-party defendants. Due to the death of Francisco Soriano, he was substituted as third-party plaintiff by his children, namely, Teofila Soriano del Rosario, Rosalina Soriano and Rev. Fr. Eugenio Soriano.

The Sorianos contend that the mortgage in favor of the RFC and promissory note signed by Francisco Soriano lacked the latter's consent and was without consideration insofar as Francisco Soriano is concerned and hence null and void as to him and his children; that the lot covered by original certificate of title No. 8094 in the name of Francisco Soriano belonged to the conjugal partnership of the latter and his wife, Tomasa Rodriguez, now deceased, and since the latter was already dead when the mortgage was executed and her children who have thus inherited her share have not signed the mortgage contract and promissory note, at least, the one-half share of the lot belonging now to the Soriano sisters and brothers, the third-party plaintiffs, have not been legally included in the mortgage to the RFC so that the latter had not acquired said one-half share in the sheriff's sale. The Sorianos further ask that they be allowed to redeem the remaining one-half share, that which belonged to their father, for one-half of P10,000.00 which was the amount for which the RFC acquired the whole lot in the sheriff's sale. The third party-plaintiffs also ask that Ponce de Leon be ordered to reimburse them for whatever amount they may use in redeeming the lot and expenses incident thereto and that Ponce de Leon and the RFC be made to pay them moral damages which their father suffered and attorney's fees.

Answering the third-party complaint, the RFC and Ponce de Leon affirm the legality of the mortgage deed insofar as Soriano is concerned. The RFC further contends that the mortgage was binding on the whole Soriano lot and that there was no valid redemption of this lot.

Ponce de Leon interposed a counterclaim for various sums of money allegedly received from him by Francisco Soriano and the present third-party plaintiffs. 2

In due course, the lower court rendered judgment the dispositive part of which is quoted at the beginning of this decision. Said court held that the typhoons in October and November 1952 did not relieve the plaintiff from his obligations under the promissory note and the deed of mortgage in favor of the RFC; that the sheriff's sale of the mortgaged properties is valid; that the RFC need not account for the machineries and equipment of the sawmill in Samar or reimburse the value of such machinery and equipment as may be unaccounted for, they having become property of the RFC, owing to plaintiff's failure to exercise the right of redemption in accordance with law; that neither may he recover damages from the RFC for the alleged delay in the releases made by the same, since their contract stipulates that the proceeds of the loan shall be released at the discretion of the Mortgagee and plaintiff's offer of redemption came long after the expiration of the period therefor, and was not for the full amount of plaintiff's liability, which he, moreover, asked to be reduced and wanted to pay in installments; and that, accordingly, plaintiff has no right to recover any damages.

Upon the other hand, the court found that plaintiff should pay: (1) rentals for the use of the mortgaged property (house and lot) at Pasay City, after the title thereto had passed to the RFC, and (2) the sum of P529,265.54, representing the balance of plaintiff's obligation in favor of the RFC — which, as of November 24, 1954, amounted to P583,270.49, plus 10% thereof, as stipulated penalty, or the aggregate sum of P641,597.54 -after deducting therefrom the sum of P112,332.00 for which the mortgaged properties had been sold, (3) apart from the sum of P5,000.00, as damages for the injunction issued, at his behest, and the costs.

As regards the third party complaint of the Sorianos, the lower court: (1) overruled their claim to the effect that Francisco Soriano had signed the promissory note and the deed of mortgage in favor of the RFC without knowledge of the contents thereof and without any consideration therefor; but (b) held that, being registered in the name of "Francisco Soriano, married to Tomasa Rodriguez," the property covered by original certificate of title No. 8094 — hereinafter referred to as the Parañaque property — is presumed to belong to the conjugal partnership of said spouses, and that, the RFC having failed to offset this presumption, the mortgage on and the sale of the property by the sheriff are null and void as to one-half (½) thereof.

Moreover, the court declared: (a) that the RFC was justified in rejecting the offer, made by the Sorianos, to redeem said property for, pursuant to section 78 of Republic Act No. 337, redemption could be effected "only by paying the amount fixed in the order of execution;" (b) that plaintiff's counterclaim against the Sorianos is barred by the statute of limitations; (c) that neither may he recover damages from the Sorianos, their alleged bad faith not bound to pay damages to

the RFC, the action of the former against the latter not being altogether unjustified.

All of the parties — namely, plaintiff, Jose Ponce de Leon, defendant, Rehabilitation Finance Corporation, hereinafter referred to as RFC (now Development Bank of the Philippines), and Rosalina Soriano, Fr. Eugenio Soriano and Teofila Soriano del Rosario, hereinafter referred to as the Sorianos — have appealed from said decision.

Appeal of the Sorianos

The Sorianos maintain that the lower court erred: (1) in holding that the promissory note and the deed of mortgage executed by Francisco Soriano in favor of the RFC are valid as regards one-half of the Parañaque property; (2) in ruling that the extrajudicial sale thereof to the RFC is valid as to the aforementioned one-half of said property; (3) in not sentencing the RFC to allow the redemption of such half of said property by the Sorianos, as heirs of the deceased Francisco Soriano, for one-half of the sum of P10,000 for which the whole lot was sold to the RFC, or, at least, for the whole sum of P10,000; (4) in not declaring that section 78 of Rep. Act No. 337 is unconstitutional and in holding that the same, instead of Act No. 3135, as amended by Act No. 4118, is the law applicable to the case; (5) in considering that the case of Villar v. de Paderanga 3 is authoritative or controlling in the case at bar; (6) in not sentencing the plaintiff and the RFC to pay damages to the Sorianos; (7) in not ordering the RFC to return OCT No. 8094, covering the Parañaque property, to the Sorianos, free from any lien or encumbrance; and (8) in denying the motion for reconsideration of the Sorianos.

The latter's first assignment of error is predicated upon theory that, when the promissory note and the deed of mortgage in question were executed by Francisco Soriano, he was somewhat absent-minded, owing to senility, he being then a septuagenarian, apart from illiterate, for he could write only his name; that he was persuaded to sign said promissory note and deed of mortrage thru fraud, deceit and undue influence, and did not know the true nature of these instruments when he affixed his signatures thereon; and that said instruments are also null and void for lack of cause and consideration. In this connection, the appealed decision has the following to say:

The third-party plaintiffs ask that the mortgage deed and promissory note be declared null and void with respect to Francisco Soriano for lack of consent and consideration. It is claimed that Francisco Soriano was made to believe by Ponce de Leon when he signed the mortgage deed and the promissory note that these were documents releasing his land from the previous mortgage in favor of the PNB and that Francisco Soriano did not receive a single centavo out of the RFC loan.

The principal witness on the above allegation of the third-party plaintiffs is Rosalina Soriano, who testified that her father, Francisco was an old man who was absent-minded; that in 1945, Ponce de Leon merely borrowed her father's certificate of title on the pretext that he would see if it were valid; that she gave it to Ponce de Leon who never returned the certificate and it turned out that the latter mortgaged it to the PNB by deceiving her father in signing the mortgage contract; that in 1951, her father received a sheriff's notice that the land would be foreclosed; that her father went to see Ponce de Leon in Negros but the latter assured him that nothing would happen to his land; that in October, 1951, she and her father went to see Ponce de Leon; that when the latter told her father that the property was mortgaged to the RFC, her father got angry at Ponce de Leon saying that the latter fooled him but Ponce de Leon assured him that he would redeem the land but he failed to do so.

Ponce de Leon denied having deceived Francisco Soriano into signing the mortgage deed covering his land, saying that the transaction was with the full and complete knowledge and understanding of Francisco Soriano. He was supported by Felipe Cuaderno, Jr., the Notary Public, who notarized the mortgage deed, who said that he explained and translated into Tagalog, a language known and spoken by Francisco Soriano, the mortgage deed.

The fact that Francisco Soriano may have been absent-minded could not be said to have the effect of vitiating his consent to the mortgage deed because the execution and

signing of a contract is not a matter that concerns past events in which absent-mindedness may be taken into account. Besides, the testimony of Rosalina Soriano to the effect that her father told Ponce de Leon that the latter fooled him shows that the old man Soriano could remember past events, for if truly absent-minded, Francisco would not recollect what he claims to be what really took place at the RFC office as testified to by Rosalina.

Neither could Francisco Soriano be considered feeble-minded if we believe the testimony of Rosalina which shows Soriano's determination to see to it that the wrong done him was righted and that his property may not be taken away from him, for according to Rosalina, he even went to Negros alone to see Ponce de Leon he received the Sheriff's notice of foreclosure and as shown by his alleged going to see Ponce de Leon a number of times about his land and of his enlisting the aid of Ramon Lacson.

The Sorianos stress that, according to Felipe Cuaderno, Jr., the Notary Public, when the latter asked Francisco Soriano, after he had translated the mortgage deed into Tagalog if he (Francisco) understood it, it was Ponce de Leon who said that the old man already (k)new it. But, granting that this was what happened, yet, Francisco Soriano would certainly have protested against the statement of Ponce de Leon if Francisco did not really know what the transaction was about or he would have told Cuaderno that the document was not in accordance with the agreement between him and Ponce de Leon considering that the document was already translated to the old man by Cuaderno in the Tagalog language which Soriano understood.

Besides, if Ponce de Leon really deceived Francisco Soriano into signing the mortgage deed and promissory note so much so that in October, 1951, the old man Soriano was so angry at Ponce de Leon that he told the latter that he fooled him as testified to by Rosalina Soriano, then why was it thatPonce de Leon was made one of the sponsors of the thanksgiving mass of the Neo-Prysbeter Rev. Fr. Eugenio Soriano, the old man's son and one of the present third-party plaintiffs? The conduct of the Sorianos in making Ponce de Leon one of the sponsors in the thanksgiving mass of Rev. Fr. Eugenio Soriano in which Ponce de Leon spent a considerable amount for the big feast that followed the mass is inconsistent with the Sorianos' claim that Ponce de Leon had hoodwinked Francisco Soriano into signing the mortgage instrument and the promissory note.

Moreover, the mere oral unsupported testimony of Rosalina Soriano, an interested party and one of the plaintiffs herein, is not sufficient to overcome the legal presumption of the regularity of the mortgage deed, a contract celebrated with all the legal requisites under the safeguard of a notarial certificate (Naval, et al. v. Enriquez, 3 Phil. 670-72). Such unsupported testimony of the interested party Rosalina Soriano is not that clear, strong and convincing evidence beyond mere preponderance of evidence, required to show the falsity or nullity of a notarial document (Sigue, et al. v. Escaro CA, 53 Q.C. 1161; Jocson v. Ratacion, G.R. No. 41687; Palanca v. Chillanchin v. Coquinco, G.R. No. L-1355; Robinson v. Villafuerte, 18 Phil. 171).

With reference to the contention that there was no consideration received by Francisco Soriano out of the mortgage contract and the promissory note executed in connection therewith, this is a matter which concerned merely Francisco Soriano and Jose L. Ponce de Leon for Francisco Soriano had expressly in writing (Exhibit '33-a-Soriano') authorized Jose L. Ponce de Leon to have the check or checks covering the amount of the mortgage issued in the name of said Jose L. Ponce de Leon. Whatever arrangements the latter and Francisco Soriano may have had with respect to the amounts thus given by the RFC on account of the mortgage is not the concern of the RFC if Ponce de Leon did not in fact give any portion

of the amount to Francisco Soriano. At any rate, there is ample evidence to show that Francisco Soriano received part of the consideration of the loan from the RFC. It will be recalled that part of this loan was paid for the obligation of Francisco Soriano and Ponce de Leon to the Philippine National Bank secured by a mortgage of the lot in the name of Francisco Soriano. That Francisco Soriano received portions of this PNB loan from Ponce de Leon is shown by the fact that on August 16, 1945, Francisco Soriano received the amount of P2,000.00 from Ponce de Leon, evidenced by the receipt exhibit "N", and this amount must have been part of the P10,000.00 consideration of the PNB mortgage because this mortgage was executed on August 11, 1945 or two days before Soriano received from Ponce de Leon the amount of P2,000.00 on August 16, 1945. And two days thereafter, on August 18, 1945, Francisco Soriano again received from Ponce de Leon the amount of P350.00 as shown by the receipt exhibit '0-3' and, on April 27, 1945, the amount of P1,000.00 was received by Francisco Soriano from Ponce de Leon as shown by his receipt exhibit "0-1" to pay the mortgage on his lot to Apolonio Pascual. On March 12, 1952,Francisco Soriano received the amount of P3,000.00 from de Leon as shown by the check exhibit 'X-2" and on June 3, 1952, the amount of P50.00 as shown by the check exhibit "X-6" and P200.00 on October 22, 1952 as shown by the check exhibit "X-7". Rosalina Soriano herself received P50.00 on March 30, 1952 from Ponce de Leon as shown by the check marked Exhibit "X-3" and third-party plaintiff Rev. Eugenio Soriano received P100.00 on March 3, 1952 as shown by the check exhibit "X-1" and P50.00 on March 13, 1952 as shown by exhibit "X-4." There is therefore no ground for declaring the mortgage contract and promissory note invalid for lack of consideration insofar as Francisco Soriano and his children are concerned. 4

The facts thus relied upon by His Honor, the Trial Judge, are borne out by the record, and We are fully in accord with the conclusions drawn therefrom.

In support of their second assignment of error, the Sorianos maintain that the sum of P10,000, for which the Parañaque property was sold to the RFC, is ridiculously inadequate, considering that said property had been assessed at P59,647.05. This pretense is devoid of merit, for said property was subject to redemption and:

... where there is the right to redeem ... — inadequacy of price should not be material, because the judgment debtor may re-acquire the property or else sell his right to redeem and thus recover any loss he claims to have suffered by reason of the price obtained at the execution sale. 5

Then, again, as the trial court had correctly of served:

But, mere inadequacy of the price obtained at the sheriff's sale unless shocking to the conscience will not be sufficient to set aside the sale if there is no showing that, in the event of a regular sale, a better price can be obtained. The reason is that, generally, and, in forced sales, low prices are usually offered (1 Moran's Rules of Court, pp. 834-835). Considering that in Gov't of P.I. v. Sorna, G.R. No. 32196, wherein property worth P120,000.00 was sold for only P15,000.00, in Philippine National Bank v. Gonzales, 45 Phil. 693, wherein property valued at P45,000.00 was sold for P15,000.00 and in Cu Unjieng & Sons v. Mabalacat Sugar Co., 58 Phil. 439, property worth P300,000.00 to P400,000.00 was sold for P177,000.00, the Court cannot consider the sale of the Bacolod properties, the Taft Avenue house and lot and the Parañaque property of the Sorianos null and void for having been sold at inadequate prices shocking to the conscience and there being no showing that in the event of a resale, better prices can be obtained. 6

The third, fourth and fifth assignments of error of the Sorianos refer to the amount for which they feel entitled to redeem the aforementioned property.

It will be recalled that, before the expiration of the redemption period, Teofila Soriano del Rosario offered to repurchase said property for P14,000; that she and her sister Rosalina reiterated the offer on the last day of said period; and that the offer was rejected by the RFC, whose action was upheld by the lower court, inasmuch as sec. 78 of Rep. Act 337 provides that, "(i)n the event of foreclosure ... the mortgagor or debtor whose real property has been sold at public auction ... for the ... payment of an obligation to any bank, banking, or credit institution, ... shall have the right ... to redeem the property by paying the amount fixed by the court in the order of execution, ...," not the amount for which it had been purchased by the buyer at public auction. We have already declared that" ... (o)nly foreclosure of mortgages to banking institutions (including the Rehabilitation Finance Corporation) and those made extrajudicially are subject to legal redemption, by express provision of statute, ..." 7 and, although neither an ordinary bank nor the RFC was involved in the case in which this pronouncement had been made, the same was relevant to the subject-matter of said case and to the issue raised therein. At any rate, We reiterate the aforementioned pronouncement, it being in accordance with law, for, pursuant to Rep. Act No. 337:

... The terms "banking institution" and "bank," as used in this Act, are synonymous and interchangeable and specifically include banks, banking institutions, commercial banks, savings banks, mortgage banks, trust companies, building and loan associations, branches and agencies in the Philippines of foreign banks, hereinafter called Philippine branches, and all other corporations, companies, partnerships, and associations performing banking functions in the Philippines. 8

The Sorianos insist that the present case is governed, not by Rep. Act No. 337, but by Act No. 3135, as amended by Act No. 4118 — pursuant to which, in relation to section 465 of Act No. 190, the redemption may be made by "paying the purchaser the amount of his purchase," with interest and taxes — the deed of real estate mortgage in favor of the RFC having allegedly been executed and the aforementioned property having been sold pursuant to said Acts Nos. 3135 and 4118.

The conclusion drawn by the Sorianos from these facts is untenable. As set forth in its title, Act No. 3135 was promulgated "to regulate the sale of property under special powers inserted in or annexed to real estate mortgages," Section 6 thereof provides that in all cases of "extrajudicial sale ... made under the special power hereinbefore referred to," the property sold may be redeemed within "one year from and after the date of the sale ...." Act No. 4118 amended Act No. 3135 by merely adding thereto three (3) new sections. Upon the other hand, Rep. Act No. 337, otherwise known as "The General Banking Act," is entitled "An Act Regulating Banks and Banking Institutions and for other purposes." Section 78 thereof limits the amount of the loans that may be given by banks and banking or credit institutions on the basis of the appraised value of the property given as security, as well as provides that, in the event of foreclosure of a real estate mortgage to said banks or institutions, the property sold may be redeemed "by paying the amount fixed by the court in the order of execution," or the amount judicially adjudicated to the creditor bank. This provision had the effect of ammending section 6 of Act No. 3135, insofar as the redemption price is concerned, when the mortgagee is a bank or a banking or credit institution, said section 6 of Act No. 3135 being, in this respect, inconsistent with the above-quoted portion of section 78 of Rep. Act No. 337. In short, the Parañaque property was sold pursuant to said Act No. 3135, but the sum for which it is redeemable shall be governed by Rep. Act No. 337, which partakes of the nature of an amendment to Act No. 3135, insofar as mortgages to banks are banking or credit institutions are concerned, to which class the RFC belongs. At any rate, the conflict between the two (2) laws must be resolved in favor of Rep. Act No. 337, both as a special and as the subsequent legislation. 9

The sixth, seventh and eighth assignments of error made by the Sorianos are mere consequences of those already disposed of. Hence, no further discussion thereof is necessary.

Plaintiff's Appeal

Plaintiff Ponce de Leon alleges that the lower court has erred: (1) "in not setting aside the foreclosure sales on the mortgage contract dated October 8, 1951"; (2) "in stating that the proceeds of the foreclosure sales were conscionable"; (3) in not granting Ponce de Leon's claim for adjustment and not "giving him a reasonable time to pay whatever obligations he may have"; (4) in not granting him damages nor directing the return of his properties; (5) "in not ordering a new trial for the purpose of adjusting" his "obligations and determining the terms and conditions of his obligation"; and (6) in not granting his claim against the Sorianos.

With respect to his first assignment of error, plaintiff maintains that his promissory note Exhibit A was not yet overdue when the mortgage was foreclosed, because the installments stipulated in said promissory note have "no fixed or determined dates of payment," so that the note is unenforceable and "the RFC should have first asked the court to determine the terms, conditions and period of maturity thereof."

In this connection, it should be noted that, pursuant to Exhibit A, the total sum of P495,000 involved therein shall be satisfied in quarterly installments of P28,831.64 each — representing interest and amortization — and that, although the date of maturity of the first installment was left blank, the promissory note states that the "date of maturity (was) to be fixed as of the date of the last release," completing the delivery to the plaintiff of the sum of P495,000 lent to him by the RFC. He now says that this sum of P495,000 has not, as yet, been fully released by the RFC. But this is contrary to the facts of record, for, during the trial, his counsel, Atty. Jose Orozco, made the following admission:

Out of the loan of P495,000.00, the following were paid to the creditors of Jose Ponce de Leon: P100,000.00 to the PNB, P30,000.00 to Cu Unijeng Bros. P5,000.00 to Arturo Colmenares, P1,000.00 to Lorenzo Balagtas. The total amount paid to the creditors is P136,000.00 which weretaken out of the proceeds of P495,000.00. The rest were all paid in the name of Jose Ponce de Leon. 10

In short, part of the sum of P495,000 had been delivered by the RFC to the creditors of the plaintiff and Francisco Soriano, as agreed upon by them, in payment of their outstanding obligations, and the balance of said sum of P495,000 was turned over to the plaintiff, with the written authorization and conformity of Francisco Soriano. This is borne out by the fact that, prior to the institution of this case, plaintiff had not complained of failure of the RFC to fully release the aforementioned sum of P495,000. Indeed, in his own complaint herein, he merely alleged a "delay in the release." Even so, he impliedly admitted that the first installment was due in October 1952 — or, more specifically, on October 24, 1952, this being the date given therefor in the letter-demands of the RFC, the accuracy of which were not questioned by the plaintiff — so that the last release made by the RFC to complete the sum of P495,000 must have taken place on July 24, 1952, although, in answer to a question propounded to him, by his own counsel, as regards the date he "received the total amount granted by the RFC," plaintiff said — on the witness stand — he "believed that it was in the last part or quarter of 1953." At this juncture, it is noteworthy that plaintiff claims the right to a suspension of payment or an extension of the period to pay the RFC owing to the typhoons that had lashed his sawmill in October and November 1952, thus indicating clearly that the amount of the loan extended to him and Francisco Soriano had then been fully released by the RFC three (3) months before October 1952 and that the first installment under the promissory note Exhibit A was due that month, as claimed by the RFC.

At any rate, Annex A, in effect, authorized the RFC to fix the date of maturity of the installments therein stipulated, which is allowed by the Negotiable Instruments Law 11 and when a promissory note expresses "no time for payment," it is deemed "payable on demand." 12

Under his second assignment of error, plaintiff maintains that the aggregate price of P112,332.00, for which the mortgaged properties had been sold at public auction, is unconscionable, said properties being allegedly worth P1,202,976. This premise is inaccurate.

It should be noted that plaintiff and Francisco Soriano were granted a P495,000 loan on the security, not only, of the existing properties offered as guarantee, but, also, on that of assets — appraised at P570,000 — yet to be acquired only plaintiff, partly with money thus received from the RFC and partly with his own funds. After obtaining said loan and receiving the amount thereof, less the sum of P136,000 applied to the payment of outstanding obligations, plaintiff failed to purchase the machinery and equiptment he had promised to get, or to set up the constructions he had undertaken to make. Moreover, the RFC found that the mortgaged lots in the cities of Pasay and Bacolod, which were originally appraised at P492,288.00, were actually worth P172,530,00 only. Again, a good part of the machinery and equipment existing in one of the mortgaged lands, when it was inspected before the granting of the loan, were subsequently lost or missing, and those that remained were, at the time of the sale to the RFC, in bad shape, so that the appraised value thereof was then estimated at P10,000 only. Under these circumstances, it is clear that the lower court did not err in approving the sale of the mortgaged properties for the aggregate sum of P112,332.

As regards his third assignment of error, it is urged by the plaintiff that he is entitled to a "suspension of payment," or a postponement of the date of maturity of obligation to pay, in view of the typhoons that had "practically wiped out" his

sawmill in Samar during the months of October and November 1952. This claim is predicated upon Article 1174 of our Civil Code, reading:

... Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.

Plaintiff cannot avail of the benefits of this provision since he was not bound to deliver the aforementioned sawmill, or any other specific thing damaged or destroyed by typhoons, to the RFC. His obligation was merely generic, namely, to pay certain sums of money to the RFC, at stated intervals. As His Honor, the Trial Judge had aptly put it:

... in the instant case, there was an obligation on the part of the debtor to pay his loan, independently of the purpose for which the money loaned was intended to be used and this obligation to pay continues to subsist notwithstanding the fact that it may have become impossible for the debtor to use the money loaned for the particular purpose that was intended (Milan v. Rio y Glabarrieta, 45 Phil. 718). There is hence no ground for declaring the amortizations due on the principal loan since October, 1952 as extinguished due to fortuitous event or to grant plaintiff a reasonable time to pay the due amortizations as asked for by Ponce de Leon in his complaint. 13

Being mere corollaries to his first three assignments of error, which cannot be sustained, plaintiff's fourth, fifth and sixth assignments of error must have the same fate.

Defendant's Appeals

The RFC contends that the lower court erred: (1) in holding that the Parañaque property is presumed to belong to the conjugal partnership of Mr. and Mrs. Francisco Soriano; (2) in failing to give due weight to the testimony of Gregorio Soriano, and in holding that the same is insufficient to overcome the presumption in favor of the conjugal nature of said property; (3) in failing to consider that the Sorianos are now estopped from questioning the validity of the mortgage on and the foreclosure sale of said property; (4) in annulling the mortgage insofar as one-half of said property is concerned, despite the finding that part of the proceeds of the RFC loan was paid to settle the PNB loan secured by the same property; and (5) in holding that the mortgage thereon and the sheriff's sale thereof to the RFC are null and void as regards, one-half of said property. These assignments of error may be reduced to one, namely that the lower court erred in avoiding the sale to the RFC of the Parañaque property, upon the ground that the same formed part of the conjugal partnership of Mr. and Mrs. Francisco Soriano.

In this connection, it appears that the property was registered in the name of "Francisco Soriano, married to Tomasa Rodriguez," and that based upon this fact alone — without any proof establishing satisfactorily that the property had been acquired during coverture — the lower court presumed that it belongs to the conjugal partnership of said spouses. We agree with the RFC that the lower court has erred in applying said presumption.

We should not overlook the fact that the title to said property was not a transfer certificate of title, but an originalone, issued in accordance with a decree which, pursuant to law, merely confirms a pre-existing title. 14 Said original certificate of title does not establish, therefore, the time of acquisition of the Parañaque property by the registered owner thereof.

Then, again, the lower court applied said presumption, having in mind, presumably, Article 160 of our Civil Code, which reads:

... All property of the marriage is presumed to belong to the conjugal partnership, unless it be proved that it pertains exclusively to the husband or to the wife.

This provision must be construed in relation to Articles 153 to 159 of the same Code, enumerating the properties "acquired ... during the marriage" that constitute the conjugal partnership. Consistently therewith, We have held that "the party who invokes this presumption must first prove that the property in controversy was acquired during the marriage. In other words, proof of

acquisition during coverture is a condition sine qua non for the operation of the presumption in favor of conjugal partnership." 15 It had, earlier, been declared, 16 that "(t)he presumption under Article 160 of the Civil Code refers to property acquired during the marriage ...." We even added that, there being "no showing as to when the property in question was acquired ... the fact that the title is in the wife's name alone is determinative." This is borne out by the fact that, in the previous cases applying said presumption, 17 it was duly established that the property in question therein had been acquired during coverture. Such was, also, the situation obtaining in Servidad v. Alejandrino 18 cited in the decision appealed from.

The case at bar is differently situated. The Sorianos have not succeeded in proving that the Parañaque property was acquired "during the marriage" of their parents. What is more, there is substantial evidence to the contrary.

Gregorio Soriano testified that his first cousin, Francisco Soriano, had acquired said property from his parents, long before he got married. In this connection, the lower court, however, said that:

... the credibility of this witness is subject to doubt for it was shown that he had an improper motive in testifying against the third-party plaintiffs because he had a niece who was prosecuted by the third-party plaintiffs for estafa, .... 19

This observation is, to our mind, hardly justifiable. To begin with, when counsel for the Sorianos asked the witness whether or not his grandchild or grandniece Flordeliza Clemente had been accused of "estafa" by the Sorianos, counsel for the RFC objected thereto, and the court sustained the objection, upon the ground that the question was "irrelevant." As a consequence, there is no evidence of the prosecution of Flordeliza Clemente by the Sorianos. What is more, the ruling of the court declaring the matter "irrelevant" to the present case rendered it unnecessary for the RFC to prove that said prosecution — if it were a fact — had nothing to do with the testimony of Gregorio Soriano. It would, therefore, be less than fair to the RFC to draw an inference adverse thereto resulting from the absence of evidence to this effect. At any rate, said prosecution does not necessarily warrant the conclusion that Gregorio Soriano was impelled by an "improper motive" in testifying as he did. After all, the Sorianos are, likewise, nieces of Gregorio Soriano and he was not the party allegedly accused by them.

Again, this witness testified in a straightforward manner, and disclosed a good number of details bearing the ear-marks of veracity. What is more, his testimony was corroborated, not only by Felipe Cuaderno, Jr. and OCT No. 8094, but, also, by the testimony of third-party plaintiff Rosalina Soriano. Indeed, Felipe Cuaderno, Jr. — an assistant attorney and notary public of the RFC, before whom the deed of mortgage was acknowledged — testified that, in a conference he had before the execution of the promissory note and the deed of mortgage in favor of said institution, Francisco Soriano assured him that the Parañaque property was "his own separate property, having acquired it from his deceased father by inheritance and that his children have nothing to do with the property." This was, in effect, confirmed by no less than Rosalina Soriano, for she stated, on cross-examination, that her father, Francisco Soriano, "was born and ... raised" in said property, so that — contrary to her testimony in chief — he could not have told her that he and his wife had bought it, as the Sorianos would have Us believe.

Needless to say, had the property been acquired by them during coverture, it would have been registered, in the name not of "Francisco Soriano, married to Tomasa Rodriguez," but of the spouses "Francisco Soriano and Tomasa Rodriguez." In Litam v. Espiritu, 20 We quoted with approval the following observation made in the decision under review therein:

Further strong proofs that the properties in question are the paraphernal properties of Marcosa Rivera, are the very Torrens Titles covering said properties. All the said properties are registered in the name of "Marcosa Rivera, married to Rafael Litam." This circumstance indicates that the properties in question belong to the registered owner, Marcosa Rivera, as her paraphernal properties, for if they were conjugal, the titles coveting the same should have been issued in the names of Rafael Litam and Marcosa Rivera. The words 'married to Rafael Litam'written after the name of Marcosa Rivera, in each of the above mentioned titles are merely descriptive of the civil status of Marcosa Rivera, the registered owner of the properties covered by said titles.

The records further show that on August 16, 1945 — or two (2) days after the execution of the deed of mortgage for P10,000 in favor of the PNB — Francisco

Soriano received P2,000 from plaintiff herein; that, early in 1951, Francisco Soriano received a letter informing him that the PNB mortgage on the Parañaque property would be foreclosed, unless the debt guaranteed therewith were settled; that, accordingly, his children came to know of the mortgage in favor of the PNB; that on October 8, 1951, said mortgage was transferred to the RFC; that, thereafter, or from March to October 1952, Francisco Soriano and his children, Rosalina Soriano and Eugenio Soriano, received several sums of money, aggregating P3,450, from plaintiff herein; that the latter, moreover, spent over P6,000 on the occasion of the ordination of third-party plaintiff, Eugenio Soriano, as a priest, on April 20, 1952; that plaintiff, also, paid the bills of Francisco Soriano in the Singian Clinic when he fell sick in 1953; and that the former had, likewise, paid the real estate tax on the Parañaque property from 1947 to 1952.

Under these circumstances, it is difficult to believe that Sorianos did not know then of the mortgage constituted by Francisco Soriano, on October 8, 1951, in favor of the RFC. In fact, Rosalina Soriano testified that when, that month, Francisco Soriano and she conferred with the plaintiff, he stated that the Parañaque property was mortgaged to the RFC, whereupon her father got angry at the plaintiff and said that he had fooled him (Francisco Soriano). Being thus aware of said mortgage since October 1951, the Sorianos did not question its validity — until January 12, 1957, when they filed in this cage their third-party complaint in intervention — as regards, at least, one-half of the Parañaque property, which they now claim to be their mother's share in the conjugal partnership. Worse still, after the foreclosure sale in favor of the RFC, they tried to redeem the property for P14,000, and, when the RFC did not agree thereto, they even sought the help of the Office of the President to effect said redemption.

Their aforementioned failure to contest the legality of the mortgage for over five (5) years and these attempts to redeem the property constitute further indicia that the same belonged exclusively to Francisco Soriano, not to the conjugal partnership with his deceased wife, Tomasa Rodriguez. Apart from the fact that said attempts to redeem the property constitute an implied admission of the validity of its sale — and, hence, of its mortgage to the RFC — there are authorities to the effect that they bar the Sorianos from assailing the same.

... defendants, by their repeated requests for time to redeem had impliedly admitted — and were estopped to question — the validity and regularity of the Sheriff's sale. 21

The petitioner himself believed that the company had a right to cancel, because in March, 1932, i.e., after the cancellation, he proposed the repurchase of the property, and the company agreed to resell it to him .... Unluckily he could make no down payment and the repurchase fell through. Wherefore, it is now too late for him to question the cancellation, inasmuch as he practically ratified it, .... 22

The fact that Mallorca failed to exercise her right of redemption, which she sought to enforce in a judicial court, ends her interest to the land she claims, and, doubtless, estops her from denying PNB's mortgage lien thereon. 23

It is thus clear that the lower court erred in annulling the RFC mortgage on the Parañaque property and its sale to the RFC as regards one-half of said property, and that the decision appealed from should, accordingly, be modified, by eliminating therefrom the second paragraph of its dispositive part, quoted earlier in this decision.

With this modification and that of other pertinent parts of the decision appealed from, the same is hereby affirmed in all other respects, with the costs of this instance against plaintiff, Jose L. Ponce de Leon and third-party plaintiffs, Rosalina Soriano, Teofila Soriano del Rosario and Father Eugenio Soriano. It is so ordered.

[G.R. No. 139437. December 8, 2000]

LANGKAAN REALTY DEVELOPMENT, INC., petitioner, vs. UNITED COCONUT PLANTERS BANK, and HON. COURT OF APPEALS, respondents.

D E C I S I O N

GONZAGA-REYES, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking to set aside the decision of the Court of Appeals in CA-G.R. No. CV 53514 which affirmed the decision of the Regional Trial Court of Imus, Cavite, Branch 20, in Civil Case No. 360-89, and the Resolution of the Court of Appeals denying the petitioners Motion for Reconsideration.

The antecedent facts are as follows:

Petitioner Langkaan Realty Development Corporation (LANGKAAN, for brevity) was the registered owner of a 631,693 square meter parcel of land covered by Transfer Certificate of Title No. 111322, and located at Langkaan, Dasmarinas, Cavite.

On April 8, 1983, petitioner LANGKAAN executed a Real Estate Mortgage over the above-mentioned property in favor of private respondent United Coconut Planters Bank (UCPB) as a security for a loan obtained from the bank by Guimaras Agricultural Development, Inc. (GUIMARAS) in the amount of P3,000,000.00.[1]LANGKAAN and GUIMARAS agreed to share in the total loan proceeds that the latter may obtain from UCPB.[2]Subsequently, another loan of P2,000,000.00 was obtained by GUIMARAS, totaling its obligation to the bank to P5,000,000.00. The loan was fully secured by the real estate mortgage which covered all obligations obtained from UCPB by either GUIMARAS or LANGKAAN before, during or after the constitution of the mortgage.[3] Also provided in the mortgage agreement is an acceleration clause stating that any default in payment of the secured obligations will render all such obligations due and payable, and that UCPB may immediately foreclose the mortgage.[4]

GUIMARAS defaulted in the payment of its loan obligation. [5] On July 28, 1986, private respondent UCPB filed a Petition for Sale under Act No. 3135[6], as amended, with the Office of the Clerk of Court and Ex-officio Sheriff of RTC of Imus, Cavite. The petition was given due course, and a Notice of Extra-judicial Sale of LANGKAANs property was issued by Acting Clerk of Court II and Ex-officio Sheriff Regalado Eusebio on August 4, 1986, setting the sale on August 29, 1986 at the main entrance of the Office of the Clerk of Court of RTC of Imus.[7] The Notice of Extra-judicial Sale was published in the Record Newsweekly,[8] and was certified by Court Deputy Sheriff Nonilon A. Caniya to have been duly posted.[9]

On August 29, 1986, the mortgaged property was sold for P3,095,000.00 at public auction to private respondent UCPB as the highest bidder, and a corresponding Certificate of Sale was issued in favor of the bank.

As petitioner LANGKAAN failed to redeem the foreclosed property within the redemption period, the title of the property was consolidated in the name of UCPB on December 21, 1987, and a new Transfer Certificate of Title with no. T-232040 was issued in the latters favor.

On March 31, 1989, LANGKAAN, through counsel, Atty. Franco L. Loyola wrote UCPB a letter offering to buy back the foreclosed property for P4,000,000.00.[10] This offer was rejected by the bank in a letter dated May 22, 1989, stating that the current selling price for the property was already P6,500,000.00.[11]

On May 30, 1989, petitioner LANGKAAN filed a Complaint for Annulment of Extra-judicial Foreclosure and Sale, and of TCT No. 232040 with Damages, with the RTC of Imus, Cavite, docketed as Civil Case No. 360-89.

After trial, the RTC of Imus ruled in favor of private respondent UCPB, and dismissed the petition of LANGKAAN for lack of merit. On appeal, the Court of Appeals affirmed en toto the decision of the RTC of Imus.The petitioner filed a Motion for Reconsideration which was denied by the Court of Appeals in a Resolution dated July 28, 1999. Hence this petition.

The sole issue in this case, as stated by the petitioner in its Memorandum, is whether or not the extra-judicial foreclosure sale is valid and legal on account of the alleged non-compliance with the provisions of Act No. 3135 on venue, posting and publication of the Notice of Sale, and of the alleged defects in such Notice.[12]

At the outset, it must be stated that only questions of law may be raised before this Court in a Petition for Review under Rule 45 of the Revised Rules of Civil Procedure.[13] This Court is not a trier of facts, and it is not the function of this Court to re-examine the evidences submitted by the parties.[14]

After a careful analysis of the issue set forth by the petitioner, we find the same not to involve a pure question of law [15] It has been our consistent ruling that the question of compliance or non-compliance with notice and publication requirements of an extra-judicial foreclosure sale is a factual issue binding on this Court.[16] In the case of Reyes vs. Court of Appeals, we declined to entertain the petitioners argument as to lack of compliance with the requirements of notice and publication prescribed in Act No. 3135, for being factual. [17] Hence, the matter of

sufficiency of posting and publication of a notice of foreclosure sale need not be resolved by this Court, especially since the findings of the Regional Trial Court thereon were sustained by the Court of Appeals. Well-established is the rule that factual findings of the Court of Appeals are conclusive on the parties and carry even more weight when the said court affirms the factual findings of the trial court.[18]

The RTC found the posting of the Notice of Sale to have been duly complied with, thus:

As regards the posting of the notices of sale, Deputy Sheriff Nonilon Caniya has categorically declared that he posted the same in three conspicuous places, to wit: (1) Municipal Hall of Dasmarinas, Cavite, (2) Barangay Hall of Langkaan, and (3) in the place where the property is located (Exh. 6). He added gratuitously that he even posted it at the Dasmarinas Public Market. Such being the case, the negative testimony of Virgilio Mangubat, a retired sheriff of Trece Martires City, to the effect that he did not see any notice posted in the Bulletin Board of Dasmarinas, Cavite cannot prevail over the positive testimony of Deputy Sheriff Caniya. In like manner, the general denial advanced by Barangay Captain Benjamin Sangco of Langkaan that no notice was posted at the bulletin board of said barangay in August, 1986 cannot take precedence over the positive declaration of Deputy Sheriff Caniya who is presumed to have performed his duties as such. Credence is generally accorded the testimonies of (sic) sheriff who is presumed to have performed their (sic) duties in regular manner. xxx

xxx xxx xxx

xxx In another case, Bonnevie vs. Court of Appeals, 125 SCRA 122, it was even ruled that a single act of posting satisfies the requirement of law.[19]

Due publication was likewise found by the RTC to have been effected.

It is beyond dispute that notice of Sheriffs Sale was published in Record Newsweekly, a newspaper of general circulation in the Province of Cavite after a raffle among the accredited newspaper thereat. No evidence was adduced by plaintiff to disprove this fact. Its claim that said newspaper has no subscribers in Cavite is without merit and belied by the Affidavit of Publication executed by the Publisher of Records Newsweekly (Exh. 5) and by the Clerk of Court and Ex-Oficio Sheriff of the Multiple Sala of Imus, Cavite. As held in the case of Olizon vs. Court of Appeals, 236 SCRA 148, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary. Sec. 3 of Act No. 3135 governing extra-judicial foreclosure of real estate mortgages, as amended by Act No. 4118, requires only posting of the notice of sale in three public places and the publication of that notice in a newspaper of general circulation. Hence, the lack of personal notice to the mortgagors is not a ground to set aside the foreclosure sale. It was further held thereat (ibid) that publication of the notice alone in the newspaper of general circulation is more than sufficient compliance with the notice-posting requirement of the law.[20]

On appeal, the findings of the RTC were sustained by the Court of Appeals, to wit:

Next, appellant contends that the notice of sale was posted, at the very least, at only one [1] public place the Municipal Building of Dasmarinas, Cavite contrary to and in violation of the requirement in Act No. 3135, as amended, that said notice shall be posted in at least three [3] public places. Deputy Sheriff Nonilon Caniya, however, has categorically declared that he had posted Notices of Sale in four public places; namely: (1) Municipal Hall of Dasmarinas, Cavite, (2) Barangay Hall of Langkaan, (3) in the place where the property is located and (4) at the Dasmarinas Public Market (t.s.n., January 12, 1994, pp. 6-11). We give credence to said Sheriffs testimony and accord his actions with the presumption of regularity of performance, having come from a public officer to whom no improper motive to testify has been attributed.

At any rate, even if it were true that the Notice of Sale was not posted in three public places as required, this would not invalidate the foreclosure conducted. As explained in Olizon vs. Court of Appeals, 238 SCRA 148, 155-156

Furthermore, unlike the situation in previous cases where the foreclosure sales were annulled by reason of failure to comply with the notice requirement under Section 3 of Act 3135, as amended, what is allegedly lacking here is the posting of the notice in three public places, and not the publication thereof in a newspaper of general circulation.

We take judicial notice of the fact that newspaper publications have more far-reaching effects than posting on bulletin boards in public places. There is a greater probability that an announcement or notice published in a newspaper of

general circulation which is distributed nationwide, shall have a readership of more people than that posted in a public bulletin board, no matter how strategic its location may be, which caters only to a limited few. Hence the publication of the notice of sale in the newspaper of general circulation alone is more than sufficient compliance with the notice-posting requirement of the law. By such publication, a reasonably wide publicity had been effected such that those interested might attend the public sale, and the purpose of the law had been thereby subserved.

The object of a notice of sale is to inform the public of the nature and condition of the property to be sold, and of the time, place and terms of the sale. Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice; but if mistakes or omissions occur in the notices of sale which are calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant thereto.

In the case at bench, this objective was attained considering that there was sufficient publicity of the sale through the Record Newsweekly.

Appellant next charges that the certificate of posting executed by Deputy Sheriff Caniya is a falsified document resulting from the unlawful intercalations made thereon, calculated to change the import and meaning of said certificate; and contains untruthful statements of facts. A certificate of posting is however not a statutory requirement and as such, is not considered indispensable for the validity of a foreclosure sale under Act 3135 (see Bohanan vs. Court of Appeals, 256 SCRA 355)

Again, We accord a presumption of regularity in the conduct of the raffle whereby publication of the Notice of Sale was awarded to the Record Newsweekly.

As to the erroneous designation of Guimaras Agricultural Development, Inc. as a mortgagor as well as the mistakes in the technical description of the subject property, both appearing in the Notice of Sale, We find these immaterial errors and mistakes which do not affect the sufficiency of the Notice (Olizon vs. Court of Appeals,supra.) xxx [21]

We refuse to disturb the factual findings of the lower courts. The notice of the extra-judicial foreclosure sale was duly published and posted, and clerical errors therein are not sufficient to invalidate the notice and nullify the sale.

We are left with the issue on the legal propriety of the venue of the extra-judicial foreclosure sale which we deem proper for determination.

In ascertaining whether or not the venue of the extra-judicial foreclosure sale was improperly laid, it is imperative to consult Act No. 3135, as amended, the law applicable to such a sale.[22] Act 3135 provides, insofar as pertinent, as follows:

SECTION 1. When a sale is made under a special power inserted in or attached to any real estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following sections shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power.

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

Thus, the extra-judicial foreclosure sale cannot be held outside the province where the property is situated.Should a place within the province be a subject of stipulation, the sale shall be held at the stipulated place or in the municipal building of the municipality where the property or part thereof is situated.

In the case at bar, the Real Estate Mortgage contract contains the following stipulation on the venue of the auction sale, viz:

ARTICLE XX

VENUE OF AUCTION SALE

It is hereby agreed that in case of foreclosure of this mortgage under Act 3135, as amended, and Presidential Decree No. 385, the auction sale shall be held at the capital of the province, if the property is within the territorial jurisdiction of the province concerned, or shall be held in the city, if the property is within the territorial jurisdiction of the city concerned.[23]

The foreclosed property is located in Dasmarinas, a municipality in Cavite. Dasmarinas is within the territorial jurisdiction of the province of Cavite, but not within that of the provincial capital, Trece Martires City, nor of any other city in Cavite. The territorial jurisdiction of Dasmarinas is covered by the RTC of Imus,[24] another municipality in Cavite.

The petitioner contends that the extra-judicial foreclosure sale should have been held in Trece Martires City, the capital of Cavite, following the above-quoted stipulation in the real estate mortgage contract; or, in the alternative, Section 2 of Act 3135 should have been applied, and the sale conducted at the municipal building of Dasmarinas where the property is situated.[25] On the other hand, the private respondent argues that the extra-judicial foreclosure sale was properly held at the main entrance of the Office of the Clerk of Court and Ex-officio Sheriff of the RTC of Imus which has territorial jurisdiction over Dasmarinas, as provided in the Supreme Court Administrative Order No. 7 (1983) issued pursuant to Section 18 of B.P. Blg. 129.[26] The private respondent further contends that Section 18 of B.P. Blg. 129 repealed the provision on venue under Section 2 of Act 3135.

We agree with the petitioner that under the terms of the contract, the extra-judicial foreclosure sale could be held at Trece Martires, the capital of the province which has territorial jurisdiction over the foreclosed property.The stipulation of the parties in the real estate mortgage contract is clear, and therefore, should be respected absent any showing that such stipulation is contrary to law, morals, good customs, public policy or public order.A contract is the law between the parties.[27] However, since the stipulation of the parties lack qualifying or restrictive words to indicate the exclusivity of the agreed forum, the stipulated place is considered only as an additional, not a limiting venue.[28] Therefore, the stipulated venue and that provided under Act 3135 can be applied alternatively. Now, applying Act 3135, the venue of the sale should be at the municipal building of Dasmarinas since the foreclosed property is located in the municipality of Dasmarinas.

We cannot sustain the contention of the private respondent that the proper venue for the sale of the Dasmarinas property is the RTC of Imus which has territorial jurisdiction thereon as provided under SC Administrative Order No. 7 issued pursuant to Section 18 of B.P. Blg. 129, which allegedly repealed the venue provision under Section 2 of Act 3135.

Section 18 of B.P. Blg. 129[29] provides for the power of the Supreme Court to define the territorial jurisdiction of the Regional Trial Courts. Pursuant thereto, the Supreme Court issued Administrative Order No. 7[30], placing the municipalities of Imus, Dasmarinas and Kawit within the territorial jurisdiction of the RTC of Imus.[31] On the other hand, Section 2 of Act 3135 refers to the venue of an extra-judicial foreclosure sale.[32]

It is difficult to fathom how a general law such as B.P. Blg. 129 can repeal a special law like Act 3135. Aside from involving two entirely different legal concepts such as jurisdiction (B.P. Blg. 129) and venue (Section 2 of Act 3135),[33] this proposition goes against a basic rule in statutory construction that the enactment of a later legislation which is a general law cannot be construed to have repealed a special law.[34] Much less can the private respondent invoke Supreme Court administrative issuances[35] as having amended or repealed Section 2 of Act 3135. A statute is superior to an administrative issuance, and the former cannot be repealed or amended by the latter.[36]

Notwithstanding the foregoing, however, this Court finds the extra-judicial foreclosure sale held at the RTC of Imus to be valid and legal.

Well-known is the basic legal principle that venue is waivable. Failure of any party to object to the impropriety of venue is deemed a waiver of his right to do so. In the case at bar, we find that such waiver was exercised by the petitioner.

An extra-judicial foreclosure sale is an action in rem, and thus requires only notice by publication and posting to bind the parties interested in the foreclosed property. No personal notice is necessary. As such, the due publication and posting of the extra-judicial foreclosure sale of the Dasmarinas property binds the petitioner, and failure of the latter to object to the venue of the sale constitutes waiver.

In the testimony of the President of LANGKAAN, Alfredo Concepcion, the latter admitted that he was informed sometime in 1986 by GUIMARAS President Antonio Barredo about the foreclosure sale of the Dasmarinas property held on August 6, 1986, viz:

COURT:

Q: ATTORNEY CONCEPCION, YOU SAID THAT YOU CAME TO KNOW THAT THE PROPERTY OF YOUR CORPORATION WAS SOLD BY COCONUT PLANTERS BANK ONLY IN 1989?

A: At or about the date when Atty. Loyola made that written offer to the bank.

Q: IN THE YEAR 1989 OR PRIOR TO THAT DATE

ATTY. LOYOLA:

I think 1986, Your Honor.

COURT:

1986 WHEN HE LEARNED ABOUT THE SALE?

ATTY. LOYOLA:

Yes, Your Honor.

xxx xxx xxx

ATTY CATUBAY:

xxx xxx xxx

Q: So you talked to Ex-Justice Barredo?

A: I did.

Q: And of course he informed you about the proposal that took place on August 6, 1986?

A: He told me that he is aware.

Q: And you were also aware of the Certificate of Sale executed by the Sheriff, isnt it? (sic)

A: At that point there was a foreclosure sale and that it was the mortgagee bank that was the highest bidder.

Q: After you were informed there was a foreclosure sale, you did not do anything about it, isnt it? (sic)

A: Well, at that point when I was so informed, I did not take any step yet but on the first opportunity, I consulted Atty. Loyola.

Q: And that was in 1986 also?

A: 1986, correct.[37]

From 1986 to April 1989, despite knowledge of the foreclosure sale of their property, the President of petitioner LANGKAAN did not take any step to question the propriety of the venue of the sale. It was only on May 30, 1989 that the petitioner filed a Complaint for Annulment of the foreclosure sale, and only after its offer to repurchase the foreclosed property, the title to which had been consolidated in the name of private respondent UCPB, had been rejected by the bank.

In the letter denominated as Offer to Reacquire by Langkaan Realty Development, Inc. Without Prejudice, petitioner LANGKAAN, through its counsel Atty. Franco L. Loyola, who is likewise the petitioners counsel in this case, acknowledged that the title to the property then registered under the name of LANGKAAN has been consolidated under the name of UCPB, which was the highest bidder in the extra-judicial foreclosure sale conducted by the sheriff.[38] Nowhere can it be found that the petitioner objected to or opposed the holding of the sale at the RTC of Imus. By neglecting to do so, petitioner LANGKAAN is deemed to have waived its right to object to the venue of the sale, and cannot belatedly raise its objection in this petition filed before us.

WHEREFORE, premises considered, the petition is hereby DENIED.

SO ORDERED.

[G.R. No. L-77468. August 25, 1999]

EDUARDO LUCENA and NATIVIDAD PARALES, petitioners, vs. COURT OF APPEALS and RURAL BANK OF NAUJAN, INC., ROGELIO PINEDA, MARIANITO BAJA, PATRICIA ARAJA, BRAULIO

BAGUS, REYNALDO MAMBIL and RAMON GARCIA, respondents.

D E C I S I O N

QUISUMBING, J.:

This is a petition for review of the Decision dated January 20, 1987 of the Court of Appeals in CA - G.R. CV No. 65526-R entitled Eduardo Lucena, et al. vs. Rural Bank of Naujan, Inc., et al. as well as its Resolution dated February 16, 1987 denying petitioners motion for reconsideration.[1] The assailed decision reversed the judgment of the then Court of First Instance of Oriental Mindoro in Civil Case No. R-3004, Eduardo Lucena, et al. vs. Rural Bank of Naujan, et al. (Reconveyance with Damages) and dismissed herein petitioners complaint.[2]

The factual antecedents are as follows:

Petitioners allege they are the registered owners of a parcel of land located at the barrio of Mag-asawang Tubig, Municipality of Naujan, Oriental Mindoro, covered by Transfer Certificate of Title No. T-41512 of the Registry of Deeds of Oriental Mindoro. On October 29, 1969, petitioner Eduardo Lucena obtained a loan from the private respondent Rural Bank of Naujan, Inc. in the amount of three-thousand pesos (P3,000.00) secured by a real estate mortgage constituted on said parcel of land. On October 1, 1970, after the loan had matured, petitioners paid to the Rural Bank of Naujan, Inc., the sum of two-thousand six pesos and ninety centavos (P2,006.90) in partial satisfaction of their debt, thereby leaving a balance of one-thousand pesos (P1,000.00) in its favor.

On May 7, 1974, after previous demand by the rural bank for the petitioners to settle the balance of their matured loan went unheeded, the subject property was extrajudicially foreclosed and sold at public auction where the rural bank as highest bidder acquired the property. Prior to the auction sale, notices of foreclosure were posted in at least three conspicuous public places in the municipality where the subject property was located, as indicated in the affidavit of posting dated May 6, 1974.[3] No notices were posted in the barrio where the property was located, nor were any published in a newspaper of general circulation. The Certificate of Sale dated May 7, 1974 issued by private respondent Deputy Sheriff Braulio Bagus was registered with the Registry of Deeds of Oriental Mindoro only on January 9, 1975.[4]

On June 26, 1975, an affidavit of consolidation of ownership was executed by the Rural Bank of Naujan through its manager, private respondent Rogelio P. Pineda. The affidavit of consolidation was subsequently registered by private respondent Reynaldo Mambil in his capacity as acting Register of Deeds on July 8, 1975, under Entry No. 134351. Transfer Certificate of Title No. T-41512 in the name of the petitioners was thus cancelled and Transfer Certificate of Title No. T-68547 of the Registry of Deeds of Oriental Mindoro was then issued in favor of the rural bank also on July 8, 1975.Thereafter, on July 14, 1975, a deed of sale was executed by the rural bank through its manager whereby the subject property was sold to private respondent spouses Marianito Baja and Patricia Araja, resulting in the cancellation of TCT No. T-68547 and the subsequent issuance of TCT No. T-68680 in the name of said respondents. Said deed of sale dated July 14, 1975 was accepted and registered by private respondent Ramon G. Garcia, then acting Register of Deeds of Oriental Mindoro.[5]

On January 12, 1977, petitioners filed a complaint for reconveyance and damages against private respondents before the then Court of First Instance of Oriental Mindoro, to recover the subject property from private respondents and to compel the latter to compensate them for damages and losses suffered. [6] After trial, the court a quo promulgated its decision dated September 12, 1978, ruling in sum that there was no valid foreclosure sale of the subject property. The dispositive portion thereof reads:

WHEREFORE, in view of the foregoing the Court believes and so holds that the preponderance of evidence militates in favor of the plaintiffs and against the defendants, and the Court renders judgment, to wit:

(1) Orders the defendants Marianito Baja and Patricia Araja to reconvey the parcel of land registered in their name under TCT No. T-68680 of the Register of Deeds of Oriental Mindoro in favor of herein plaintiffs Eduardo Lucena and Natividad Parales, free from all liens and encumbrances, except the remaining unpaid balance including accrued interest thereon in favor of the Rural Bank of Naujan, Inc.;

(2) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly and severally, to pay the herein plaintiffs actual damages in the amount of P17,500.00 for unrealized rentals from subject property;

(3) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly and severally, to pay herein plaintiffs moral damages in the amount of P10,000.00;

(4) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly and severally, to pay plaintiffs attorneys fees in the amount of P5,000.00, and to pay the costs of suit.

SO ORDERED.[7]

Not satisfied with the judgement, both petitioners and private respondents elevated the case to the Court of Appeals. On January 20, 1987, the respondent court rendered its decision reversing and setting aside the trial courts judgment. It ruled in sum that (a) posting of notices in the barrio where the property is situated is not required, as all the law requires is posting in the municipality or city where the property is located; (b) there is no need to publish the notice of auction sale in a newspaper of general circulation, because the balance of the loan was only one-thousand pesos (P1,000.00); (c) personal notice of the auction sale to the petitioners was not required; (d) the trial court was correct in holding that the date of registration of the sheriffs certificate of sale and not the date of the sale itself was the reckoning point for the start of the one-year redemption period of the petitioners; and (e) the petitioners did not redeem their property within the one-year period from the date of registration of the certificate of sale, and having lost their right of redemption, cannot squirm their way out of their predicament by asking for reconveyance of the subject property.[8]

Petitioners now seek recourse through this petition. They assign the following errors:

(1) ABSENCE OF POSTING OF NOTICES IN THE BARRIO OF MAGASAWANG TUBIG, WHERE THE LAND IS LOCATED, AS REQUIRED BY REPUBLIC ACT NO. 5939, RENDERED NULL AND VOID THE SALE IN QUESTION.

(2) PUBLICATION WAS A REQUISITE SINE QUA NON IN THIS CASE, BECAUSE THE AMOUNT OF THE LOAN WAS P3,000.00; HENCE, PARAGRAPH 3, SECTION 5 OF REPUBLIC ACT NO. 720, WAS NOT APPLICABLE, BECAUSE THE LAW DOES NOT SPEAK OF THE BALANCE UNPAID BUT THE AMOUNT OF THE LOAN.

(3) THE PREMATURE AND FRAUDULENT CONSOLIDATION OF OWNERSHIP AND MALICIOUS IMMEDIATE SALE OF THE LAND IN QUESTION IN FAVOR OF MARIANITO BAJA AND PATRICIA ARAJA BEFORE THE EXPIRATION OF THE PERIOD OF REDEMPTION CLOSED THE DOOR FOR LEGAL REDEMPTION; SO THAT AN ACTION FOR RECONVEYANCE BECAME THE PROPER REMEDY.

(4) THE AFFIDAVIT OF CONSOLIDATION OF OWNERSHIP HEREIN WAS NULL AND VOID FOR LACK OF NOTARIZATION.[9]

We find that the pertinent issues to be resolved are: (1) whether or not a valid foreclosure sale of the subject property was conducted and (2) whether or not reconveyance and damages is the proper remedy available to petitioners.

With respect to the first issue, this Court has ruled that failure to comply with statutory requirements as to publication of notice of auction sale constitutes a jurisdictional defect which invalidates the sale.[10] Even slight deviations therefrom are not allowed.[11] Section 5 of Republic Act No. 720 as amended by Republic Act No. 5939 provides:[12]

The foreclosure of mortgages covering loans granted by rural banks shall be exempt from the publication in newspapers were the total amount of the loan, including interests due and unpaid, does not exceed three thousand pesos. It shall be sufficient publication in such cases if the notices of foreclosure are posted in at least three of the most conspicuous public places in the municipality and barrio were the land mortgaged is situated during the period of sixty days immediately preceding the public auction. Proof of publication as required herein shall be accomplished by affidavit of the sheriff or officer conducting the foreclosure sale and shall be attached with the records of the case: x x x. (italics supplied)

In the case at bar, the affidavit of posting executed by the sheriff states that notices of the public auction sale were posted in three (3) conspicuous public places in the municipality such as (1) the bulletin board of the Municipal Building (2) the Public Market and (3) the Bus Station. There is no indication that notices were posted in the barrio where the subject property lies. Clearly, there was a failure to publish the notices of auction sale as required by law.

In Roxas vs. Court of Appeals,[13] this Court has ruled that the foreclosure and public auction sale of a parcel of land foreclosed by a rural bank were null and void when there was failure to post notices of auction sale in the barrio

where the subject property was located. This Court finds that the same situation obtains in the case at bar. Further still, there was a failure on the part of private respondents to publish notices of foreclosure sale in a newspaper of general circulation. Section 5 of R.A. 720 as amended by R.A. 5939 provides that such foreclosures are exempt from the publication requirement whenthe total amount of the loan including interests due and unpaid does not exceed three-thousand pesos (P3,000.00). The law clearly refers to the total amount of the loan along with interests and not merely the balance thereof, as stressed by the use of the word total. At the time of foreclosure, the total amount of petitioners loan including interests due and unpaid was P3,006.90. Publication of notices of auction sale in a newspaper was thus necessary.

In light of private respondents failure to comply with the statutory requirements of notice and publication, we rule that the foreclosure and public auction sale of petitioners property are null and void. Hence, the Rural Bank of Naujan did not acquire valid title to the property in question. This reversal of the Court of Appeals disposes of the other errors assigned by petitioners.

Anent the second issue, the above conclusion requires a determination of whether or not petitioners are entitled to a reconveyance of their property. If the property has not yet passed to an innocent purchaser for value, an action for reconveyance is still available.[14] It is a condition sine qua non for an action for reconveyance to prosper that the property should not have passed to the hands of an innocent purchaser for value.[15] He is considered an innocent purchaser who acquired the property for a valuable consideration not knowing that the title of the vendor or grantor was null and void.[16]Good faith or its absence must thus be established on the part of spouses Marianito Baja and Patricia Araja at the time that they purchased the subject property from the Rural Bank of Naujan.

Good faith, or the lack of it, is in the last analysis a question of intention; but in ascertaining the intention by which one is actuated on a given occasion, we are necessarily controlled by the evidence as to the conduct and outward acts by which alone the inward motive may, with safety, be determined. [17] To determine whether or not the Baja spouses were in good faith at the time they purchased the subject property from the Rural Bank of Naujan thus entails a review of the evidence on record.

The trial court concluded that Marianito Baja and Patricia Araja were purchasers in bad faith. The trial court noted that when Marianito Baja verified the title of the subject property at the rural bank, he must have noticed that the certificate of sale was registered with the Office of the Register of Deeds only on January 9, 1975, so that he is presumed to know that the petitioners had at least one year from that date or up to January 8, 1976 to redeem the subject property.[18]

It is a well-settled rule that a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. His mere refusal to believe that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in his vendors title, will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery had he acted with that measure of precaution which may reasonably be required of a prudent man in a like situation.[19]

In the case at bar, Marianito Baja testified on cross-examination that Victor Atienza, Bajas cousin and petitioners tenant on the subject property, informed him of the rural banks intention to sell the land in question.[20] He said that from the time this information was relayed to him until the execution of the deed of sale by the bank in favor of the Baja spouses on July 14, 1975, a period of about half a year elapsed.[21] He further stated that upon learning from Victor Atienza that the property was being sold, he immediately went to the rural bank to verify this information, as well as ascertain if the land was titled. [22] Baja also said that before the deed of sale was executed on July 14, 1975, he made his offer to buy the property from the bank about one month before said date. [23] On direct examination, however, Baja claimed that he verified the title to the subject property to be in the rural banks name before the sale was effected.[24]

From the records, it appears that title to the property was issued in the rural banks name only on July 8, 1975, when the banks affidavit of consolidation of ownership dated June 26, 1975 was registered with the Registry of Deeds of Oriental Mindoro.[25] Said registration was the operative act to prompt the Register of Deeds to cancel the title in the name of petitioners and to issue a new one in the name of the rural bank. Hence, if Marianito Baja claims to have offered to buy the property one month before July 14 1975, or sometime in the middle of June of that year, he must have noticed that the title was not yet in the rural banks name. More so, he also would have noticed that the title was not yet in the banks name when he verified the status of the property and the title thereto immediately after Victor Atienza told him that the property was being sold, which, according to him, was about half a year before July 14, 1975.

What Baja should have noticed, if we follow his own chronological estimates, was that the title was still in the petitioners name when he verified the status of the land in question. Thus, he must have seen that the certificate of auction sale was registered only on January 9, 1975. As the trial court has said,

he is presumed by law to know that the petitioners had one year from this date or until January 8, 1976 to redeem the subject property.

In addition, Baja was completely aware of the fact that Victor Atienza was a tenant of the petitioners. Hence, at the time the property in question was being sold to him by the rural bank, possession thereof was with the petitioners, exercised through their tenant Victor Atienza. In Santiago vs. Court of Appeals,[26] we cited De Guzman, Jr. vs. Court of Appeals(156 SCRA 701 [1987]):

The failure of appellees to take the ordinary precautions which a prudent man would have taken under the circumstances, specially in buying a piece of land in the actual, visible and public possession of another person, other than the vendor, constitutes gross negligence amounting to bad faith.

In this connection, it has been held that where, as in this case, the land sold is in the possession of a person other than the vendor, the purchaser is required to go beyond the certificate of title and ma[k]e inquiries concerning the rights of the actual possessor. (Incala vs. Mendoza, CA-G.R. No. 13677-R, November 9, 1965; De Jesus vs. Revilla, CA-G.R. No. 13562-R, October 5, 1965; Martelino vs. Manikan, CA-G.R. No. 32792-R, June 22, 1956])

x x x

One who purchases real property which is in the actual possession of another should, at least make some inquiry concerning the right of those in possession. The actual possession by other than the vendor should, at least put the purchaser upon inquiry. He can scarcely, in the absence of such inquiry, be regarded as a bona fide purchaser as against such possessors (Conspecto vs. Fruto, 31 Phil. 144).

x x x

Marianito Baja testified on cross-examination that he was working for about half a year in another area about a hundred meters away from the subject property before the same was offered to him for sale.[27] He thus had visual notice that petitioners tenant Victor Atienza was working on the land in question. He also learned from Atienza that petitioner Eduardo Lucena was the landlord of the former.[28] In fact, prior to the date that he acquired the property, Baja instructed Atienza to inform said petitioner that the rural bank was selling the property to him.[29] Baja, however, never communicated directly with petitioner Eduardo Lucena, nor did he receive any response coming from said petitioner. [30] He did learn, however, that Lucena scolded Victor Atienza when the latter went to see him, indicating that he was aware of said petitioners aversion to the sale of the property by the rural bank.[31]

All things considered, Marianito Baja did not make any reasonable inquiry regarding the status of the land in question, despite being aware that the property was still in the possession of the petitioners. He did not even make any effort to communicate directly with petitioner Eduardo Lucena. All he did was to instruct Victor Atienza to inform Lucena of the proposed sale of the property. He did not instruct Atienza, however, to make inquiries concerning the status of the property.Furthermore, Bajas claim that he saw that title to the property was in the name of the rural bank prior to the sale is not credible. Granting arguendo that the title was in the name of the rural bank when he first saw it, he nonetheless had notice that possession of the property was with persons other than the vendors thereof. It was thus incumbent upon him to look beyond the title to the subject property and make the necessary inquiries. This he neglected to do.

When the Baja spouses purchased the subject property from the rural bank on July 14, 1975, they did so well within the one-year redemption period of petitioners. In doing so, not only did said respondents have notice of a defect in the title of the rural bank over the subject property, but by purchasing the latter, they also closed the door on the petitioners right to redeem it.  Accordingly, we adopt the finding of the lower court that said respondents purchased the subject property in bad faith. We rule that petitioners are entitled to a reconveyance of the property as it has not yet passed to an innocent purchaser for value.

In their petition, petitioners also pray that this Court render a decision pursuant to their prayers as appellants in the Court of Appeals. Essentially, petitioners implored the respondent court to raise the amount of damages awarded them by the trial court and to find private respondents Braulio Bagus, Reynaldo Mambil and Ramon Garcia liable for damages as well. Petitioners also asked for the inclusion of exemplary damages and litigation fees in the award.

We find that there is no substantial reason to modify the trial courts award of damages. There is no convincing proof to support petitioners allegations that private respondents Braulio Bagus, Reynaldo Mambil and Ramon Garcia performed their duties as Deputy Provincial Sheriff and Registers of Deeds with unlawful intent and in bad faith. Furthermore, petitioners allegations as to the amount of unrealized rentals due them as actual damages are mere assertions unsupported by factual evidence. In determining actual damages, the court

cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof and on the best evidence obtainable regarding the actual amount of loss.[32]

There is also no sound basis for increasing the award of moral damages. The well-entrenched rule is that the grant of moral damages depends upon the discretion of the court based on the circumstances of each case. [33] We find that the trial court exercised its sound discretion in awarding actual and moral damages as it did to the petitioners, as well as in not granting the exemplary damages for lack of sufficient basis.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals dated January 20, 1987 is hereby SET ASIDE; and the decision of the CFI of Oriental Mindoro dated September 12, 1978, is hereby REINSTATED and AFFIRMED.

Costs against private respondents.

SO ORDERED.

[G.R. No. 134406. November 15, 2000]

PHILIPPINE NATIONAL BANK, petitioner, vs. SPOUSES FRANCISCO and MERCED RABAT, respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

In its petition for review, petitioner Philippine National Bank (hereafter PNB) seeks the reversal of the decision of 29 July 1998 of the Court of Appeals in CA-GR. CV No. 49800,[1] which affirmed the decision of 14 June 1994 of the Regional Trial Court of Manila, Branch 14, in Civil Case No. 92-61122.[2]

The factual and procedural antecedents which gave rise to this appeal are hereunder summarized.

On 25 August 1979, respondent spouses Francisco and Merced Rabat (hereafter RABATs) applied for a loan with PNB.[3] Subsequently, the RABATs were granted on 14 January 1980 a medium-term loan of P4.0 Million to mature three years from the date of implementation.[4]

On 28 January 1980, the RABATs signed a Credit Agreement and executed a Real Estate Mortgage[5] over twelve (12) parcels of land which stipulated that the loan would be subject to interest at the rate of 17% per annum, plus the appropriate service charge and penalty charge of 3% per annum on any amount remaining unpaid or not renewed when due.[6]

On 25 September 1980, the RABATs executed another document denominated as "Amendment to the Credit Agreement" purposely to increase the interest rate from 17% to 21% per annum, inclusive of service charge and a penalty charge of 3% per annum to be imposed on any amount remaining unpaid or not renewed when due.[7] They also executed another Real Estate Mortgage[8] over nine (9) parcels of land as additional security for their medium-term loan of Four Million (P4.0 M).[9] These parcels of land are agricultural, commercial and residential lots situated in Mati, Davao Oriental.

The several availments of the loan accommodation on various dates by the RABATs reached the aggregate amount of THREE MILLION FIVE HUNDRED SEVENTEEN THOUSAND THREE HUNDRED EIGHTY (P3,517,380), as evidenced by the several promissory notes,[10] all of which were due on 14 March 1983.

The RABATs failed to pay their outstanding balance on due date.

In its letter[11] of 24 July 1986, in response to the letter of the RABATs of 16 June 1986 requesting for more time within which to arrive at a viable proposal for the settlement of their account, PNB informed the RABATs that their request has been denied and gave the RABATs until 30 August 1986 to settle their account. The PNB sent the letter to 197 Wilson Street, San Juan, Metro Manila.

For failure of the RABATs to pay their obligation, the PNB filed a petition for the extrajudicial foreclosure of the real estate mortgage executed by the RABATs. After due notice and publication, the mortgaged parcels of land were sold at a public auction held on 20 February 1987 and 14 April 1987.  The PNB was the lone and highest bidder with a bid of P3,874,800.00.[12]

As the proceeds of the public auction were not enough to satisfy the entire obligation of the RABATs, the PNB sent anew demand letters. The letter dated 15 November 1990[13] was sent to the RABATs at 197 Wilson Street, San Juan, Metro Manila; while another dated 30 August 1991[14] was sent to the RABATs at 197 Wilson Street, Greenhills, San Juan, Metro Manila, and also in Mati, Davao Oriental.

Upon failure of the RABATs to comply with the demand to settle their remaining outstanding obligation which then stood at P14,745,398.25,[15] including interest, penalties and other charges, PNB eventually filed on 5 May 1992 a complaint for a sum of money before the Regional Trial Court of Manila. The case was docketed as Civil Case No. 92-61122, which was assigned to Branch 14 thereof.

The RABATs filed their answer with counterclaim [16] on 28 July 1992 to which PNB filed its Reply and Answer to Counterclaim.[17] On 2 January 1993, the RABATs filed an amended answer.[18] The RABATs admitted their loan availments from PNB and their default in the payment thereof. However, they assailed the validity of the auction sales for want of notice to them before and after the foreclosure sales.

They further added that as residents of Mati, Davao Oriental since 1970 up to the present, they never received any notice nor heard about the foreclosure proceeding in spite of the claim of PNB that the foreclosure proceeding had been duly published in the San Pedro Times, which is not a newspaper of general circulation.

The RABATs likewise averred that the bid price was grossly inadequate and unconscionable.

Lastly, the RABATs attacked the validity of the accumulated interest and penalty charges because since their properties were sold in 1987, and yet PNB waited until 1992 before filing the case. Consequently, the RABATs contended that they should not be made to suffer for the interest and penalty charges from May 1987 up to the present. Otherwise, PNB would be allowed to profit from its questionable scheme.

The PNB filed on 5 February 1993 its Reply to the Amended Answer and Answer to Counterclaim.[19]

After appropriate proceedings, the trial court rendered on 14 June 1994 a decision,[20] whose dispositive portion reads as follows:

WHEREFORE, and in view of the foregoing considerations, judgment is hereby rendered dismissing the complaint.

On the counterclaim, the two (2) auction sales of the mortgaged properties are hereby set aside and ordering the plaintiff to reconvey to the defendants the remaining properties after the sale [of] sufficient properties for the satisfaction of the obligation of the defendants.

The parties will bear their respective cost.

So ordered.

The trial court addressed these five issues:

1. The validity of the foreclosure proceedings;

2. The validity of the auction sales;

3. The validity of the penalty charges and the interest charged by the plaintiff;

4. Whether or not the defendants should be liable for the interests and penalty charges from the date of the auction sales up to the filing of this case; and

5. Whether or not the plaintiff is entitled to deficiency judgment.

The first issue was resolved against the RABATs who claimed that the foreclosure was void due to lack of notice to them at their address in Mati, Davao Oriental, and that there was no publication of the notice in a newspaper of general circulation. It held that the mortgage contract did not specifically require that personal service of notice of foreclosure sale be given to them and that the San Pedro Times which published the notice of foreclosure sale is a newspaper of general circulation as certified by the Sheriff and as shown in the affidavit of its publisher.

Nevertheless, the trial court agreed with the RABATs that the two auction sales were void in view of the gross inadequacy of the price, which is shocking to the conscience. It ratiocinated thus:

Certainly, the price of P6.00/sq.m. for the properties sold in the first auction sale and P3.00/sq.m. for the properties sold in the second auction sale are too low as compared with P80.00 which according to Atty. Sibala was the price per square meter of the properties in 1986.

The evidence show that the foreclosed propert[ies] are near the Municipal building, public market, provincial capital of Davao Oriental, the provincial hospital of Davao Oriental, and the Sibala Village Subdivision wherein the last sold at P200.00 per square meter. The prices paid for are indeed too low as [to] be shocking to the conscience.

On the third and fourth issue, the trial court ruled:

although the movants properties were sold in 1987, the plaintiff waited until 1992 before filing this case, hence, the tremendous accumulation of interest and penalty charges. The plaintiff has not given any plausible explanation for the delay, hence, it may be presumed that the plaintiff had deliberately delayed the filing of this case in order that it can collect more interest and penalty charges. Consequently, the defendants should not be made to suffer for the interest and penalty charges from May 1987 up to the present. Otherwise, the plaintiff would be allowed to profit from its questionable scheme. Therefore, the defendants should not only be made to answer for their loan in the amount of P4,000,000.00 plus interest up to May 1987.

The defendants further claim that the interest and penalty charges should be 21% and 3% respectively pursuant to the provision of the amended credit accommodation; that the acceleration close should not be enforced as it is in nature of a contract of adhesion. The amendment to the credit accommodation is not a contract of adhesion. A contract of adhesion is one solely prepared by one of the parties where the other party had no participation, but merely gives his asset [sic] by adhering thereto. It is a take it or leave it situation.Standardized contract form offered to consumers of goods and services on essentially (take it or leave it) basis without affording consumer realistic opportunity to bargain and under such conditions that consumers cannot obtain desires products or services except by acquiescing in form contract. Distinctive feature of adhesion contract is that weaker party has no realistic choice up to its term. (Cubic Corporation versus Marty, Dist., 185 C.A. 3d 438-229 Cal/Rptr. 828, 833; Standard Oil Co. of California versus Perkins, C.A. Or. 347 F. 2d 379, 383.).

Anent the last issue, the trial court ruled that while a mortgagee is entitled to a deficiency judgment, it would be premature to adjudge it in the case since the two auction sales in question are null and void.

Only PNB appealed from the judgment to the Court of Appeals. Its appeal was docketed as CA-G.R. CV No. 49800.

In its Appellants Brief filed in CA-G.R. CV No. 49800, PNB raised the following issues:[21]

I

WHETHER OR NOT THE TRIAL COURT ERRED IN NULLIFYING THE SHERIFF'S AUCTION SALE ON THE GROUND THAT THE PNB'S WINNING BID IS VERY LOW

II

WHETHER OR NOT THE TRIAL COURT ERRED IN RULING THAT THE DEFENDANTS-APPELLEES ARE NOT LIABLE TO PAY INTEREST AND PENALTY CHARGES AFTER THE AUCTION SALES UP TO THE FILING OF THIS CASE.

In their Appellees Brief,[22] the RABATs prayed for the appellate court to affirm in toto the decision of the trial court.

On 29 June 1998, the Court of Appeals rendered a decision[23] affirming the trial court's ruling nullifying the auction sales, but on a different ground.

The Court of Appeals discovered that the RABATs did not actually receive personal notices concerning the foreclosure proceedings. Hence, they could not have known of said foreclosure sales. It pronounced and decreed, thus:

An examination of the exhibits show that the defendant-appellees given address is Mati, Davao Oriental and not 197 Wilson Street, Greenhills, San Juan, Metro Manila as alleged by the plaintiff-appellant (Exhibit C to J, pp. 208, 217, 220, 229, 236-239, Records). Records further show that all subsequent communications by plaintiff-appellant was sent to defendant-appellees address at Wilson Street,

Greenhills, San Juan. This was the very reason why defendant-appellees were not aware of the foreclosure proceedings.

As correctly found out by the trial court, there is a need for the setting aside of the two (2) auction sales hence, there is yet no deficiency judgment to speak of.

WHEREFORE, the decision of the trial court dated 14 June 1994, is hereby affirmed in toto.

SO ORDERED.

Unsatisfied with the decision, the PNB seasonably filed before us the present petition raising the lone issue of:

WHETHER OR NOT THE COURT OF APPEALS MAY REVIEW AND PASS UPON THE TRIAL COURTS FINDING AND CONCLUSION ON AN ISSUE WHICH WAS NEVER RAISED ON APPEAL, AND, THEREFORE, HAD ATTAINED FINALITY

In support thereof, PNB argues:

1. THE COURT OF APPEALS HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT DECIDED AND RESOLVED A QUESTION/OR ISSUE NOT RAISED IN PETITIONER PNBS APPEAL;

2. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT REVERSED THE FINDING AND CONCLUSION OF THE TRIAL COURT ON AN ISSUE WHICH HAD ALREADY ATTAINED FINALITY.

PNB maintains that pursuant to Section 8 of Rule 51 of the 1997 Rules of Civil Procedure no error which does not affect the jurisdiction over the subject matter or the validity of the judgment appealed from or the proceedings therein will be considered unless stated in the assignment of errors, or closely related to or dependent on an assigned error and properly argued on the Brief, save as the court may pass upon plain errors and clerical errors.

PNB adds that nowhere in its Appellants Brief did it raise the issue of "lack of notice" to the RABATs. Such being the case, in addition to the fact that the RABATs did not appeal from the decision, the trial courts rejection of the RABATs claim of lack of personal notice regarding the foreclosure proceedings had already attained finality. The RABATs can no longer obtain from the appellate court any affirmative relief other than the ones granted in the decision of the court below.

PNB concludes that the Court of Appeals committed grave abuse of discretion amounting to lack of jurisdiction when it resolved an issue which was not raised in the appeal and the ruling on which by the trial court had already become final.

In their Comment filed on 18 November 1998, the RABATs assert that the petition is procedurally defective, presents no justiciable question and categorically frivolous. They point out that while the petition is designated as one under Rule 45 of the 1997 Rules of Civil Procedure, yet it is predicated on grounds involving question of law and lack or excess of jurisdiction, under Rule 65. The PNB cannot be allowed to avail simultaneously of both remedies.

Anent the want of justiciable question, the RABATs maintain that this case involves the simple and fundamental issue of the validity of the auction sales conducted by PNB, which hinges on compliance with the requirements set forth under Republic Act (sic) 3135, governing extrajudicial foreclosure, as amended by Republic Act No. 4148 (publication, posting and notices) and the reasonableness of the bid price, which should be considered jointly for a judicious resolution of the controversy/issue.

Consequently, the RABATs conclude that the Court of Appeals cannot be faulted for ruling on a material fact whose consideration is essential to a complete determination of the rights and obligations of the parties.

On 16 March 1999, the PNB filed its Reply to the Comment of the RABATs.

In our resolution of 21 April 1999 we gave due course to the petition and required the parties to submit their respective memoranda which they complied with.

Section 8, Rule 51 of the 1997 Rules of Civil Procedure expressly provides:

SEC. 8. Questions that may be decided. -- No error which does not affect the jurisdiction over the subject matter or the validity of the judgment appealed from or the proceedings therein will be considered unless stated in the assignment of errors, or closely related to or dependent on an assigned error and properly argued in the brief, save as the court pass upon plain errors and clerical errors.

In his book,[24] Mr. Justice Florenz D. Regalado commented on this section, thus:

1. Sec. 8, which is an amendment of the former Sec. 7 of this Rule, now includes some substantial changes in the rules on assignment of errors. The basic procedural rule is that only errors claimed and assigned by a party will be considered by the court, except errors affecting its jurisdiction over the subject matter. To this exception has now been added errors affecting the validity of the judgment appealed from or the proceedings therein.

Also, even if the error complained of by a party is not expressly stated in his assignment of errors but the same is closely related to or dependent on an assigned error and properly argued in his brief, such error may now be considered by the court. These changes are of jurisprudential origin.

2. The procedure in the Supreme Court being generally the same as that in the Court of Appeals, unless otherwise indicated (see Secs. 2 and 4, Rule 56), it has been held that the latter is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Also, an unassigned error closely related to an error properly assigned (PCIB vs. CA, et al., L-34931, Mar. 18, 1988), or upon which the determination of the question raised by error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as error (Ortigas, Jr. vs. Lufthansa German Airlines, L-28773, June 30, 1975; Soco vs. Militante, et al., G.R. No. 58961, June 28, 1983).

It may also be observed that under Sec. 8 of this Rule, the appellate court is authorized to consider a plain error, although it was not specifically assigned by the appellant (Dilag vs. Heirs of Resurreccion, 76 Phil. 649), otherwise it would be sacrificing substance for technicalities.

It may at once be noticed that the exceptions are for the benefit of the appellant and not for the appellee.

The RABATs did not appeal from the decision of the trial court. As a matter of fact, in their Appellees Brief filed with the Court of Appeals they prayed that said decision be affirmed in toto. As against the RABATs the trial courts findings of fact and conclusion are already settled and final. More specifically, they are deemed to have unqualifiedly agreed with the trial court that the foreclosure proceedings were valid in all respects, except as to the bid price.

On the other hand, PNB, the sole appellant, never raised the issue of lack of personal notice to the RABATs.Neither is such issue closely related to or dependent on PNB's assigned error on appeal nor is it an exception to Section 8 of Rule 51.

Needless to stress, the Court of Appeals erred in resolving PNBs appeal on the basis of an issue which was not raised on appeal and whose resolution thereon by the trial court has long become firm and final against the party adversely affected by the resolution.

Even granting arguendo that the issue of personal notice may be raised, still we cannot agree with the Court of Appeals. In the first place, in extrajudicial foreclosure sales, personal notice to the mortgagor is not necessary.[25] Section 3 of Act No. 3135 reads:

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

Clearly personal notice to the mortgagor is not required. Second, the requirements of posting and publication in a newspaper of general circulation were duly complied with by the PNB as correctly found by the trial court, to which we accord great respect. A question of non-compliance with the notice and publication requirements of an extrajudicial foreclosure sale is a factual issue and the resolution thereof by the trial court is binding and conclusive upon us absent any showing of grave abuse of discretion.[26]

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals of 29 July 1998 in CA-G.R. CV No. 49800 is hereby SET ASIDE.  The

Court of Appeals is directed to DECIDE, with reasonable dispatch, CA-G.R. CV No. 49800 on the basis of the errors raised by petitioner Philippine National Bank in its Appellants Brief.

No pronouncement as to costs

G.R. No. L-30079 January 30, 1976

MATILDA GOROSPE and MARIANO GOROSPE, plaintiffs-appellees, vs.DOLORES M. SANTOS, defendant-appellant.

DOLORES M. SANTOS, counterclaimant- defendant, vs.CARIDAD J. TORRENTO, THE PROVINCIAL SHERIFF OF RIZAL, and THE REGISTER OF DEEDS OF QUEZON CITY, defendants-appellees.

Ruben L. Roxas for appellant.

Manuel A. Cammayo for appellees.

 

ANTONIO, J.:

This case was certified to this Court from the Court of Appeals on the ground that the appeal raises purely legal questions.

The legal questions posed by this appeal involve the propriety of the summary judgment rendered by the Court of First Instance of Quezon City in Civil Case No. Q-5794, 1 and the correctness of the trial court's resolution of the other substantive issues, such as on the right of plaintiffs-appellees as assignees of the mortgagor to redeem the property sold on foreclosure and the legal efficacy of the redemption thus made.

At bottom is the action filed by plaintiffs-appellees in the aforementioned Civil Case No. Q-5794, against defendant-appellant Dolores M. Santos, wherein said plaintiffs-appellees sought the confirmation of their rights of ownership over the parcel of land covered by Transfer Certificate of Title No. 43761, of the Quezon City land registry, redeemed by them as successors in interest, 2 and for the surrender to them of the afore-mentioned transfer certificate of title which is in the ion of the defendant-appellant, or in default thereof, its cancellation and the issuance to them of a new certificate of title.

In the afore-mentioned complaint, 3 the following facts are alleged: On October 19, 1958, Caridad J. Torrento in order to secure her indebtedness in the amount of P7,000, executed a deed of first mortgage over her parcel of land, covered by Transfer Certificate of Title No. 43761, of the Registry of -Deeds of Quezon City, in favor of defendant-appellant Dolores M. Santos. The deed was duly registered and the corresponding owner's duplicate of Transfer Certificate of Title No. 43761 was delivered to defendant-appellant.

On September 1, 1959, "with the consent of . the first mortgagee the mortgagor, Caridad J. Torrento executed a second mortgage (Annex "A") over the same property, in favor of plaintiffs-appellees, to secure a principal indebtedness in the amount of P6,000.00. This deed of second mortgage was not, however, registered. In the meantime, the first mortgage was extra-judicially foreclosure and the land sold at public auction on March 10, 1960 to Dolores M. Santos, the highest bidder, for the sum of P3,500.00. The corresponding Sheriffs Certificate of Sale was issued in her favor, which certificate was registered on October 20, 1960 and the same annotated in the original of Transfer Certificate of Title No. 43761.

On February 3, 1961, Dolores M. Santos filed a complaint against Caridad J. Torrento in Civil Case No. 6479, with the Court of First Instance of Rizal, for the recovery of the deficiency resulting between the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure. On February 9, 1961, the court issued, in the aforesaid case, a writ of preliminary attachment on the properties of Caridad J. Torrento and on February 24, 1961, the Sheriff of Rizal caused the attachment of the rights and interests of Caridad J. Torrento particularly her right of redemption over the parcel of land sold at public auction. In consideration of the discharge of the second mortgage, Caridad J. Torrento assigned to the second mortgagee (Matilda Gorospe, wife of Mariano Gorospe) all her rights, interests and title over said property, particularly her statutory right of redemption "subject to the

attachment in favor of the plaintiffs (second mortgagee) who took over the possession of the property as a consequence thereof." 4

The deed of assignment of Caridad J. Torrento in favor of Matilda Gorospe, which was made part of the complaint as Annex "B", contained the following stipulation:

4. That the ASSIGNEE shall, with the consent of her husband Mariano Gorospe, release the ASSIGNOR of her obligations on the Second Mortgage referred to above and that the said Second Mortgage indebtedness shall be considered paid by the execution of this instrument.

On March 10, 1961, Caridad J. Torrento filed, in Civil Case No. 6479, an ex parte motion to lift the preliminary attachment on her right of redemption upon the filing of a bond, which ex parte motion was granted by the court on the same date. Likewise on the same occasion, plaintiffs-appellees, as successors-in-interest of Caridad J. Torrento paid to the Sheriff the amount of P3,920.00, which represented the amount of the purchase, with one per centum (1%) interest per month thereon in addition, to effect the redemption of the foreclosed property. Upon the filing of the requisite bond by Caridad J. Torrento on March 11, 1961 and its approval by the court in Civil Case No. 6479, the corresponding order dissolving the attachment was issued.

On March 13, 1961, the Sheriff of Rizal, who conducted the sale of the foreclosed property, issued a Certificate of Redemption in favor of plaintiffs-appellees as successors in interest of Caridad J. Torrento over the foreclosed property. The Certificate of Redemption was registered a on March 13, 1961 with the Register of Deeds of Quezon City, and the corresponding entry and annotation made on the original of said certificate of title.

Alleging that they became owners in fee simple of the aforementioned property by virtue of the aforesaid ..redemption, plaintiffs-appellees demanded from Dolores M. Santos the surrender to them of the owner's duplicate of Transfer Certificate of Title No. 43761, but defendant-appellant "with malice aforethought and in wanton disregard of the plaintiffs' right to the possession of the title ... refused and still continue to refuse to recognize the right and ownership of the plaintiffs over the said property ... and to, deliver to the plaintiffs the' duplicate of the said certificate-of title." They, therefore, prayed that judgment be rendered 'confirming the rights of ownership of the plaintiffs" over said property, and ordering the defendant-appellant to deliver to them the said owner's duplicate of Transfer Certificate of title No. 43761, or declaring the same null and void and directing the Register of Deeds of Quezon City to issue a new certificate of title in favor of plaintiffs.

Defendant-appellant, in her answer, denied that Matilda J. Gorospe had validly redeemed the property because: (a) under Section 26, Rule 39, Rules of Court, if the purchaser at public auction is also a creditor having a prior lien (first mortgage and a levy on attachment) to that of the redemptioner, the redemptioner can redeem only if she pays the purchaser at public auction not only the amount of her purchase in the sum of P3,500.00 with one per centum per month interest thereon in addition, up to the time of redemption, but also the balance of the mortgage indebtedness (P5,910.00); (b) the order lifting the levy on attachment of the right of redemption of the debtor Caridad J. Torrento was issued only on March 11, 1961 one day after the expiration of the period of redemption and, therefore, the redemption made on March 13, 1961 was after the expiry of the period of redemption; (c) the so-called certificate of redemption, Annex "C" 6f the complaint, is not even acknowledged before any officer authorized to take acknowledgment of conveyances of real property, contrary to Section 27, Rule 39 of the Rules, and the same is, therefore, unregisterable; (d) the document of assignment of the debtor's right of redemption, Annex "B", does not show the amount then actually due on the lien of the supposed assignee, contrary to Section 28 (c), Rule 39 of the Rules of Court; (e) the same document, Annex "B' of the complaint, had never been registered with the Register of Deeds of Quezon City and hence the same cannot affect third persons like the herein defendant Dolores M. Santos. Besides, under the law, said document should, and ought to be subject to the prior lien of herein defendant Dolores M. Santos consisting of a levy on attachment of said right of redemption of the debtor Caridad J. Torrento. 5

As a first counterclaim, defendant Dolores M. Santos that the Deed of Assignment whereby Caridad J. Torrento transferred to Matilda Gorospe her right of redemption should be declared void and/or rescinded as in fraud of creditors, because (a) the alleged deed of assignment of Torrento's right to redeem dated March 1, 1961, was simulated and fictitious (b) the transfer was made after suit-Civil Case No. 6479-CFI-Rizal, entitled "Dolores M. Santos v. Caridad J. Torrento" had been begun and while the same was pending against the said debtor; and (e) the plaintiffs consented to the said assignment knowing that

Caridad J. Torrento's right to redeem the property was already subject to the levy on attachment under Civil Case No. 6479, Court of First Instance of Rizal. 6

As a second counterclaim, defendant-appellant alleged that plaintiffs- appellees' action is "clearly unfounded. and malicious as even previous to the present action, plaintiff Matilda J. Gorospe had already filed against the defendant a petition entitled "Caridad J. Torrento and Matilda J. Gorospe, petitioners, v. Dolores M. Santos, oppositor, G.L.R.O. Rec. No. 5975" before Branch IV wherein said Matilda J. Gorospe and the mortgage debtor Caridad J. Torrento sought-the surrender of the Owner's Duplicate of TCT No. 43761-Quezon City from the defendant, which case, as a result of defendant's opposition, was dismissed . 7

And in support of her third counterclaim, she averred that the defendant Provincial Sheriff of Rizal notwithstanding that his attention was called to the fact that no valid redemption was made, failed to issue the officer's Deed of Absolute Sale contrary to Section 31, Rule 39 of the Rules of Court and Section 78 of Act 496, as amended, and since no valid redemption was made before March 10, 1961, the Register of Deeds of Quezon City should be ordered to cancel the present TCT NO. 43761-Quezon City and a new certificate of title issued in her name. 8

On the same day that she filed her answer to the complaint, defendant-appellant filed a "Motion to Bring in New Parties", praying that Caridad J. Torrento the Provincial Sheriff of Rizal, in his official capacity as Sheriff -of Quezon City, and the Register of Deeds of Quezon City be brought in as parties defendants, 'in order that she may be granted complete and final determination" of her counterclaims.

On May 26, 1961, plaintiffs-appellees filed la "Manifestation and Countermotion" wherein they alleged that defendant's answer does not specify which of the paragraphs of the complaint "are specifically denied because of defendants claim of lack of knowledge" and which paragraphs are denied "because some of the allegations therein made are completely false and knowingly made false by the plaintiffs to suit their unlawful purpose." Plaintiffs-appellees, therefore, prayed that defendant-appellant be ordered to make the necessary specifications.

On May 27, 1961, defendant-appellant filed an opposition to the Manifestation and Countermotion of the plaintiffs-appellees. On May 31, 1961, plaintiffs-appellees filed their Answer to the counterclaims, 9 contending that the deed of assignment (Annex "B") may not be rescinded as in fraud of creditors, considering:

b) That defendant as alleged creditor could not have been defrauded nor could it have been possible to defraud said defendant because at the date the said deed of assignment, Annex 'B' of the complaint, was made and executed, the preliminary attachment, in defendant's favor was already effected on the right of redemption over the property herein in question early as February 24, 1961, particularly on the original of TCT No. 43761 in the office of the Register of Deeds of Quezon City;

c) That defendant should know or ought to know that whoever acquires the right of redemption of the said mortgagor-debtor-assignor Caridad J. Torrento subsiquent to the preliminary attachment is subject to the right of defendant as attaching creditor;

d) That, as clearly appearing in the deed of assignment of the right of redemption, Annex 'B' of the complaint the assignment is subject to the rights of defendant (Dolores M. Santos, ...

e) That the said preliminary attachment having been ordered lifted upon the filing of a bond which was approved by the court to guaranty the payment of defendant's claim Civil Case No. 6479- CFI, Rizal and that defendant is, in fact, secured from her claim against the mortgagor-debtor-assignor Caridad J. Torrento by virtue of the bond, defendant's right as attaching creditor over the subject property covered by T.C.T. No. 48761 is thereby extinguished;

and denying the averments contained in defendant-appellant's second counterclaim because their petition in G.L.R.O. Rec. No. 5795 was dismissed by the court on the ground "that there are. issues raised in the pleadings which are

outside of the jurisdiction of this court, acting as a Land Registration Court, to resolve." 10

On June 9, 1961, the court. a quo issued an order granting defendant-appellant's Motion to Bring in New Parties and ordering that summons be issued to Caridad J. Torrento the Provincial Sheriff of Rizal and the Register of Deeds of Quezon City, who were made parties defendants in the case.

On June 11, 1961, plaintiffs filed a "Motion for Summary Judgment", alleging:

I. That, from the complaint, the answer with counterclaims and the answer to counterclaims filed herein, including the exhibits attached hereto, there appears no genuine issue as to any 'material fact in this ease;

II. II That, other than the amounts of damages, attorney's fees, and costs, which are within the discretion of the court to fix, the determination of whether the plaintiffs are entitled to the relief sought in the complaint and, particularly, the questions of law raised by defendant's answer, can be made on the basis of those facts, together with supporting documents, alleged in pars. 1 to 14, inclusive, of the complaint; and that the said facts will likewise be the ultimate basis of this court in determining whether the defendant has a valid counterclaim against the plaintiffs and against the counterclaim-defendants Caridad J. Torrento the Register of Deeds of Quezon City, and the Provincial Sheriff of Rizal;

V. That, therefore, actually the only issues raised in the answer remaining are issues of law, which should be resolved in favor of the plaintiffs. more particularly as follows:

1. Has the period of redemption expired? If so, when? If the last day for redemption was on March 10, 1961, what was the effect of the attachment of the right of redemption?

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2. Is the payment of the amount of P3,920 made by the plaintiffs to the Sheriff on March 10,. 1961 covering the purchase price and interest, without including in the redemption price the payment of the amount of the lien by virtue of the preliminary attachment effected on the right of redemption in favor of the mortgagor purchaser and attaching creditor (herein defendant), in compliance with the requirements of Sec. 26, Rule 39, with respect to the amount to be paid as redemption price?

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3. Is it required under the provisions of Sec. 27, Rule 39 of the Rules of Court that the certificate of redemption issued by the sheriff be acknowledged or approved before a notary public or other officer authorized to take acknowledgment of conveyance of real property?

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4. Whether the certificate of redemption, Annex "C" of the complaint is registerable?

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5. Does the deed of assignment, of the mortgagor-debtor/s right of redemption, Annex '3' hereof, comply with the requirements of Section 28 (c), Rule 39?

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6. is the deed of assignment of the right of redemption of the mortgagor in favor of the plaintiffs, Annex '3' hereof, void and/or rescissible as in fraud of creditors, particularly with respect to the defendant herein as mortgagor-purchaser of the property and as attaching creditor of the right of redemption of the mortgagor-debtor-assignor?" 11

On June 16, 1961, defendant Dolores M. Santos filed an opposition to the Motion for Summary Judgment, 12 on the following grounds: (1) the issues as to all the parties in the case at bar have not as yet been joined, as plaintiffs' motion for a bill of particulars"(or specifications) directed against defendant's answer and dated May 25, 1961, is still pending resolution by the court, and the persons ordered by the court to be brought in as parties-defendants, namely, Caridad J. Torrento the Provincial Sheriff of Rizal and the Register of Deeds of Quezon City, have not yet filed their answers; and (2) a reading of the various allegations in the Complaint, Answer with Counterclaims and Answer to Counterclaims will show that there are numerous issues raised which should be tried and on which evidence should be taken, being incapable of proof by mere affidavits.

On June 30, 1961, the court a quo rendered a "Summary Judgment", 13 stating that:

... the Court finds no genuine issue as to any material fact and that the issues raised in defendants answer are purely questions of law which may be the property subject of a summary judgment, and this conclusion of the Court, becomes more patent by defendants failure to contest the truth and genuineness of the documents attached to the motion.

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In her answer with counterclaims, defendant Santos practically admits all the allegations of first in the complaint, and her allegations in her special and affirmative defenses are mere conclusions of law and are not material to the issues involved. The main issue in this case is whether or not the plaintiffs have substantially complied with the provisions of law. relative to the redemption of the real property in question, or whether or not the redemption made by the plaintiffs was valid.

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Of the issues of law raised in defendant's answer, the only material issue of law relative to the validity of the redemption is the defendant's contention that there has been no valid redemption in the sense that the amount that plaintiffs, as redemptioners, should have paid must not only consist of the purchase price and interest but also the amount due on the lien by virtue of the preliminary attachment in favor of the defendant. Under the liberal construction of the rule on redemption, however, the Court believes that the plaintiffs were not strictly bound to have included the amount of said lien in the redemption price that was to be paid, although they were bound to respect the existence of such lien, because certainly the attachment issued in the aforesaid Civil Case No. 6479 could not have been so issued to prevent or defeat the right of redemption but rather was issued merely to secure the satisfaction of a judgment that may be rendered in said case in favor of the mortgage creditor. The Court, therefore, holds that the amount of P3,920.00 paid on March 10, 1961 by the plaintiffs as redemption price of the property in question was in accordance with law, and the fact that the attachment was ordered lifted and dissolved upon the filing of a bond approved by the Court on March 11, 1961 after the right of redemption was exercised, the lien over the property was thereby extinguished.

Defendant Santos also raised other questions of law as to the alleged defect of the certificate of redemption which was not acknowledged before a Notary Public, and the failure of the deed of assignment of right to redeem to comply with the requirements of the Rule. The requirement that the certificate of redemption be acknowledged or ratified before a Notary Public is only for the purpose of registration, but failure to comply with the

same could not be a 'valid ground to invalidate the redemption. The validity of a redemption lies on the existence of the right to redeem, the amount to be paid, and the date of payment which must be made within the period provided for by law. As to the defendant's contention that the deed of assignment does not comply with the requirements of Sec. 28 (c), Rule 39, the fact remains that the plaintiffs have exercised the right of redemption as successors-in-interest by virtue of the assignment and, as such, it is enough for them to have presented the said deed as required by sub-paragraph (b), Sec. 28 of the Rule.

From the pleadings and the evidence as regards the first counterclaim relative to the validity of the deed of assignment, the Court is also convinced that there is no genuine issue as to any material fact. Taking the facts presented as a whole, the Court is inclined to uphold the validity of the deed of assignment, and this is more so considering the fact that the plaintiffs, 'as assignees, are creditors by themselves. Moreover, the deficiency claim of defendant Santos in the civil case referred to in the counterclaim is now secured by a bond which was duly approved by the Court where said case is pending. Consequently, there could be no possible damage or prejudice that the defendant Santos may suffer. Our Supreme Court, in the case of Enage v. Vda. de Hijos F. Escano, 38 Phil. 657 laid down the doctrine that a 'liberal construction will be given to statutes governing the redemption of property; that when a judgment creditor permits the debtor's land to be sold for less than it is worth, he exposes himself to the risk of the loss of the surplus value by the assignment of the right of redemption or its exercise by another creditor; that redemption are looked upon with favor, and, where no injury is to follow, a liberal construction will be given our redemption laws, to the end that the property of the debtor may pay as many of debtor's liabilities as possible.' Therefore, to uphold the validity of the redemption would not cause any injury to the defendant Santos because at any rate 'the deficiency claim of the latter against counterclaim defendant Torrento was secured by a bond approved by the Court.

IN VIEW OF ALL THE FOREGOING, summary judgment is hereby rendered in favor of the plaintiffs and against the defendant, as follows:

a) Confirming the rights and ownership of the plaintiffs, as successors-in-interest of the mortgage debtor Caridad J. Torrento, over the parcel of land covered by Transfer Certificate of title No. 43761 of the Register of Deeds of Quezon City by virtue of the legal exercise of the right of redemption by the plaintiffs, which redemption is hereby declared valid;

b) Ordering the defendant to deliver to the plaintiffs the ion and ownership of the duplicate of Transfer Certificate of Title No. 43761;

c) Dismissing the counterclaims of defendant; and,

d) Ordering the defendant to pay the costs.

On July 13, 1961, defendant-appellant Dolores M. Santos, after receipt of the above Summary Judgment, filed her Record on Appeal, Notice of Appeal and Appeal Bond. On August 2, 1961, plaintiffs filed a Motion for Immediate Execution of the Summary Judgment, which motion was op by defendant-appellant on August 5, 1961.

On August 16, 1961, defendant-appellant Dolores M. Santos filed a Motion for Reconsideration of the summary judgment, after leave of court therefor had been obtained. This was denied by the 'lower court in its order dated October 2, 1961. A second motion for reconsideration was likewise denied on October 14, 1961. On March 24, 1962, the court a quo approved defendant-appellant's Record on Appeal and ordered the transmittal of the records of the case to the Court of Appeals. As afore-mentioned, the Court of Appeals certified the case to the Court on the ground that it involves the purely legal question of whether or not summary judgment had been properly rendered by the court of origin.

I

The purpose of Rule 34 of the Revised Rules is to eliminate trial in those cases where there is no genuine issue of fact, since a trial under such circumstances is unnecessary and results in delay and expense which may operate to defeat in whole or in part the recovery of a just claim. As explained by Moore, 14 'The very object of a motion for summary judgment is to separate what is formal or pretended in denial or averment from what is genuine and substantial, so that only the latter may subject a suitor to the burden of a trial. To attain this end, the rule permits a party to pierce the allegations of fact in the pleadings and to obtain relief by summary judgment where facts set forth in detail in affidavits, depositions, and admissions on file show that there are no genuine issues of facts to be tried. The court is authorized to examine evidence, not for the purpose of trying an issue but to determine whether there is a genuine issue of fact proper for trial.'"

We have examined the pleadings and the affidavits as well as other documents attached thereto, and We find that there is no genuine issue of fact. It is true that appellant Dolores M. Santos asserted that the deed of assignment of the right to redeem of March 1, 1961 was simulated and fictitious, but said party was unable to serve upon the other party any affidavit or other proof to overcome the probative weight of the public documents submitted by appellees in support of the assignment. In any event, the transfer made by Caridad J. Torrento of her right of redemption could not, in any manner, legally affect appellant Dolores M. Santos, nor cause her damage. As We held in a previous case, if such transfer of the right of redemption "has not caused him any damage, it matters not to him whether same was, or was not, fraudulently executed." 15

Basically, the only issue then in the aforesaid Civil Case No. Q-5794 was whether or not plaintiff-appellee Matilda J. Gorospe had validly made the redemption of the aforesaid property on March 10, 1961. This is a question purely of law. In short, "there is no genuine issue as to any material fact and ... the moving party" was "entitled to a judgment as a matter of law," 16 so that the lower court properly rendered a summary judgment.

Appellant likewise contends that issues have not been joined in so far as Caridad J. Torrento, the Provincial Sheriff of Rizal and the Register of Deeds who were ordered to be brought in as parties defendant, are concerned, for the reason that they have not as yet filed their answers. Let it be noted that Caridad J. Torrento adopted plaintiffs-appellees' answer to defendant-appellant's counterclaim as her own. The claim against the Sheriff and Register of Deeds. of Quezon City is exclusively against them and any answer of said officials could not be relevant to the resolution of the basic issue which is the validity of the redemption. Indeed, plaintiffs-appellees are not bound to wait for these persons to file their answer which, anyway, are not material to their claim. Under the Rules, plaintiffs-appellees may file a motion for summary judgment "at any time after the pleading in answer" to their claim had been served.

II

Having disposed of this procedural point, We now turn to the basic legal issue-whether or not the plaintiffs-appellees have complied with the requirements of the law relative to the redemption of the real property in question.

There is no question that Caridad J. Torrento had a perfect right to redeem said property in view of the provisions of Section 6 of Act No. 3135, as amended by Act No. 4148, which provides as follows:

Section 6. In all cases in which an extra-judicial sale is made under the special power hereinbefore referred to, the debtor, his successors-in-interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale, and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.

The right of redemption provided for by the aforequoted provision, like any other property right, may be transferred or assigned by its owner. 17 The transferee of such right stands in the position of a successor-in-interest of the mortgagor within the purview of Section 29 of Rule 39 of the Rules of Court, which states:

SEC. 29. Who may redeem real property so sold. — Real property sold as provided in the last preceding section, or any part thereof sold separately, may be redeemed in the manner hereinafter provided by the following persons:

(a) The judgment debtor, or his successor in interest in the whole or any part of the property;

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This latter provision, which ordinarily refers to redemptions of real property sold on execution of judgments, is likewise applicable to redemption of real property sold on extra-judicial foreclosure of mortgage, by virtue of the afore-mentioned Section 6 of Act No. 3135, as amended, which states that "such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act." Sections 464, 465 and 466 of the Code of Civil Procedure are now embodied in Sections 29, 30 and 31 of Rule 39 of the Rules of Court.

We held in Magno v. Viola 18 that the term "successor-in-interest' includes one to whom the debtor has transferred his statutory right of redemption; or one to whom the debtor has conveyed his interest in the property for the purpose of redemption; or one who succeeds to the interest of the debtor by operation of law; or one or more joint debtors who were not owners of the property sold;. or the wife as regards her husband's homestead by reason of the fact that some portion of her husband's title passes to her. There is no question, therefore, that plaintiff-appellee Matilda J. Gorospe is a "successor-in-interest" of the debtor Caridad J. Torrento and as such could exercise the right to redeem the property at any time within the period provided by law.

Appellant, nevertheless, insists that the redemption was made "at a mere fraction of the mortgage debt, one day after the expiration of the right to redeem." Apparently, appellant is of the view that the redemption should have been made on or before March 10, 1961, or within one year from the date of the Sheriff's sale. Time and again, this Court has held that in cases of redemption of registered land, the period should be reckoned from the date the certificate of sale of the property involved was registered, since it is only from the date of its registration that a certificate of sale takes effect as a conveyance. 19 The purpose of the rule is to notify the delinquent registered owners or third parties interested in the redemption that the property had been sold, and that they have one year from the time of constructive notice by means of registration within which to redeem the property, if they wish to do so. 20

In the case at bar, registration of the certificate of sale in favor of the purchaser at public auction was e only on October 20, 1960. Appellee Matilda J. Gorospe had, therefore, a period of one year from that date within which to exercise the right of redemption assigned to her by Caridad J. Torrento. The redemption having been made on March 10, 1961, it is evident that the same had been timely made.

Equally without merit is appellant's contention that appellees should have paid not only the amount of the purchase price, with interest, but also the amount of the deficiency which is the subject matter of Civil Case No. 6479. In redeeming the property from the purchaser, the judgment debtor must pay the amount of the purchase with one per centum per month interest thereon, up to the time of redemption and the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on the- last named amount at the same rate. Appellee Matilda J. Gorospe cannot be required to pay a greater amount than that imposed upon the judgment debtor. The reason is that, this assignee of such right, the assignee is subrogated to the position of the debtor-mortgagor and is bound by exactly the same conditions that bound the assignor. If the mortgagor, Caridad J. Torrento herself, has offered to redeem the property sold on foreclosure, it would have been untenable for the purchaser at public auction to have refused to resell to her the property on the ground that the total amount of the debt had not been completely paid by her part from the fact that the matter of deficiency is the subject of another case (Civil Case No. 6479), it should be noted that the portion of Section 30 of Rule 39 invoked by appellant is not relevant to the case at bar. Certainly, defendant-appellant cannot be considered a "purchaser who is a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made ..." within the meaning and intendment of the Rule. It is not applicable to defendant-appellant because she claims a lien precisely arising from the extra-judicial foreclosure of the mortgage (which is equivalent to the judgment in case of execution of judgment) pursuant to which she purchased said properties. 21 Consequently, Matilda J. Gorospe, as successor-in-interest of the debtor, was bound to pay to the appellant only the amount of the purchase price with the corresponding interest. 22

The last issue to be disposed of is whether or not the preliminary attachment on the right of redemption, effected in favor of Dolores M. Santos in Civil Case No. 6479, adversely affected the redemption me by Matilda J. Gorospe. The preliminary attachment in question was lifted on March 11, 1961, on motion of Caridad J. Torrento, defendant in Civil Case No. 6479, and upon the filing of a bond. For all intents and purposes, the bond so filed takes the place of the property released from attachment, and secures to Dolores M. Santos the payment of whatever amount may be adjudged in her favor in said case. We do not decide herein the issue of whether or not a preliminary attachment of the right to redeem may be validly effected in favor of a mortgagee at whose instance the foreclosure sale was had, in order to secure the payment of a deficiency. 23 It would be unnecessary for Us to do so, considering that the preliminary attachment has been lifted. It is sufficient to say that appellant has no more, right, if she had any to begin with, over the right of redemption exercised by Matilda J. Gorospe.

In a last attempt to repudiate the redemption made by plaintiff-appellee Matilda J. Gorospe, appellant assails the validity of the certificate of redemption issued by the Sheriff on the ground that the same had not been acknowledged before a Notary Public or other officer authorized to take acknowledgments of conveyances of real property. On this point, We agree with the court a quo that this omission is not sufficient cause for the nullification of the redemption. This requirement is only necessary for purposes of registering the deed.

In passing, let it be noted that, notwithstanding that in the case at bar, the parties have, in their respective memoranda, primarily discussed only the issue with respect to the propriety of the rendition of the summary judgment, this Court has deemed it necessary to dispose of the substantive legal issues as well, in order to expeditiously and finally settle the rights of the parties herein. Those questions were raised in the court a quo and are of record, having some bearing on the issue submitted. 24 There is no question that this Court is empowered the review matters which are not specifically assigned as errors on appeal, when their consideration is necessary in arriving at a just decision of the case. 25

WHEREFORE, the decision of the court a quo is hereby affirmed, and defendant-appellant Dolores M. Santos is hereby ordered to deliver to plaintiffs-appellees the Owner's Duplicate of Transfer Certificate of Title No. 43761. Costs against defendant-appellant.

G.R. No. L-29130 August 8, 1975

DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellee, vs.DIONISIO MIRANG, defendant-appellant.

Jesus A. Avanceña and Lualhati Estrella-Hilario for plaintiff-appellee.

Roque V. Desquitado for defendant-appellant.

 

MAKALINTAL, C.J.:

This appeal was originally taken to the Court of Appeals, which certified it here because it involves purely legal questions. The appealed decision was rendered by the Court of First Instance of Davao on May 14, 1963 in its Civil Case No. 3762, and modified by its Order of July 1, 1963. It directed the defendant, now appellant, to pay the plaintiff Development Bank of the Philippines, now appellee, the sum of P16,013.13 plus 6% interest per annum from July 30, 1957 1 up to the date of payment, but deducting therefrom the sum of P360.00 representing the value of an engine, referred to in paragraph 11 of the stipulation of facts. The defendant was likewise ordered to pay P500.00 as attorney's fees, plus the costs of the suit.

From the stipulation submitted to the trial court it appears that on September 7, 1950 the appellant obtained approval of a loan of P14,000.00 from the Rehabilitation Finance Corporation, 2 secured by a first mortgage on defendant's homestead, for the following purposes:

P1,000 for purchase of work animals and farm implements; P1,500 for construction of farmhouse and laborers' quarters; and P11,500 for development and maintenance of 18.5 hectares of abaca land.

The loan was released gradually to the appellant up to a total of P13,000.00. Thereafter the appellee refused to make any further releases because the plantation which was being financed was attacked by mosaic disease, which destroyed the abaca plants. The appellant, on his part, failed to pay the yearly amortizations; so in accordance with the terms of the promissory notes he had signed and the mortgage contract itself, the provincial sheriff of Davao, upon request of the appellee, foreclosed the mortgage extrajudicially under the provisions of Act 3135, as amended, and sold the mortgaged property at public auction on July 30, 1957. By that time the appellant's indebtedness, including interest, had reached P19,714.35, besides the expenses of the auction sale and registration fees, which amounted to P101.00. The appellee, as the highest bidder for P2,010.00, acquired ownership of the mortgaged property. The appellant was duly advised of the sale, with the information that the same was subject to his right of redemption within one year from July 30, 1957. This right he had not exercised when the complaint was filed by the appellee on May 29, 1962.

In his brief the appellant assigns five (5) errors, which may be condensed into the following issues:

(1) Whether or not the creditor Development Bank of the Philippines has a right to recover the balance of the indebtedness after the mortgaged property was sold for less than the amount thereof under extrajudicial foreclosure pursuant to Act 3135, as amended:

(2) Whether or not the debtor, appellant Mirang, may be exempted from paying the loan on the ground that it had been granted to him for the purpose of developing his homestead by planting it to abaca, and that said abaca was destroyed by mosaic disease; or, failing that, whether or not his obligation may be reduced by this Court; and

(3) Whether or not the mortgage debtor who wishes to repurchase his homestead should pay therefor only the price paid by the purchaser at the auction sale, or the total obligation incurred by him and still outstanding.

On the first issue, the appellant contends that because the mortgage was extrajudicially foreclosed and sold at less than the mortgage debt under Act 3135 the appellee is not entitled to recover the deficiency because neither this Act, as amended, nor the mortgage contract itself, contains any provision giving such right to the mortgagee.

The same question has been settled by this Court in the case of Philippine Bank of Commerce vs. Tomas de Vera, 3 where We held:

The sole issue to be resolved in this case is whether the trial Court acted correctly in holding appellee Bank entitled to recover from appellant the sum of P99,033.20 as deficiency arising after the extrajudicial foreclosure, under Act No. 3135, as amended, of the mortgaged properties in question. It is urged, on appellant's part, that since Act No. 3135, as amended, is silent as to the mortgagee's right to recover deficiency arising after an extrajudicial foreclosure sale of mortgage, he (Mortgagee) may not recover the same.

A reading of the provisions of Act No. 3135, as amended, (re extrajudicial foreclosure) discloses nothing, it is true, as to mortgagee's right to recover such deficiency. But neither do we find any provision thereunder which expressly or impliedly prohibits such recovery.

Article 2131 of the new Civil Code, on the contrary, expressly provides that 'The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law.' Under the Mortgage Law, which is still in force, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings. (See Soriano vs. Enriquez, 24 Phil. 584; Banco de las Islas Filipinas vs. Concepcion e Hijos, 53 Phil. 806; Banco Nacional vs. Barreto, 53 Phil. 955.) Under the Rules of

Court (Section 6, Rule 70 * ), 'Upon the sale of property, under an order for a sale to satisfy a mortgage or other incumbrance thereon, if there be a balance due to the plaintiff after applying the proceeds of the sale, the Court, upon motion, should render a judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, ....' It is true that this refers to a judicial foreclosure, but the underlying principle is the same, that the mortgage is but a security and not a satisfaction of indebtedness.

Appellant invites the attention of this Court to the new provisions of the Civil Code on pledge, particularly Article 2115, which provides:

The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. ... If the price of the sale is less, neither shall the creditor be entitled to the deficiency, notwithstanding any stipulation to the contrary.

as well as to the fact that in chattel mortgage under Art. 1484, paragraph 3, the creditor shall have no further action to recover any unpaid balance if he has chosen to foreclose the chattel mortgage. These provisions, far from supporting the appellant's stand, militate against it, because they show that when the Legislature intends to bar or occlude a creditor from suing for any deficiency after foreclosing and selling the security given for the obligation, it makes express provision to that effect. In the same case of Philippine Bank of Commerce vs. De Vera, supra, this Court said apropos:

It is then clear that in the absence of a similar provision in Act 3135, as amended, it cannot be concluded that the creditor loses his right given him under the Mortgage Law and recognized in the Rules of Court, to take action for the recovery of any unpaid balance on the principal obligation, simply because he has chosen to foreclose his mortgage extra-judicially, pursuant to a special power of attorney given him by the mortgagor in the mortgage contract. As stated by this Court in Medina vs. Philippine National Bank (56 Phil. 651), a case analogous to the one at bar, the step taken by the mortgagee-bank in resorting to extra-judicial foreclosure under Act No. 3135, was 'merely to find a proceeding for the sale, and its action cannot be taken to mean a waiver of its right to demand the payment of the whole debt.'

On the second issue the appellant asks that if he cannot be completely absolved he should at least be given a reduction of his indebtedness because of his inability to realize any income from the abaca he planted. His predicament may evoke sympathy, but it does not justify a disregard of the terms of the contract he entered into. His obligation thereunder is neither conditional nor aleatory its terms are clear and subject to no exception.

The third issue has likewise been resolved by this Court in a similar case. 4 The issue posed there involved the price at which the mortgagor should redeem his property after the same had been sold at public auction whether the amount for which the property was sold, as contended by the mortgagor, or the balance of the loan obtained from the banking institution, as contended by the mortgagee RFC. Cited in that case was Section 31 of Com. Act No. 459, which was the special law applicable exclusively to properties mortgaged with the RFC, as follows:

The mortgagor or debtor to the Agricultural and Industrial Bank * , whose real property has been sold at public auction, judicially or extra-judicially, for the full or partial payment of an obligation to said Bank, shall, within one year from the date of the auction sale, have the right to redeem the real property by paying to the Bank all the amount he owed the latter on the date of the sale, with interest on the total indebtedness at the rate agreed upon in the obligation from said date, unless the bidder has taken material possession of the property or unless this has been delivered to him, in which case the proceeds of the property shall compensate the interest. ...

The same provision applies in the instant case. The unavoidable conclusion is that the appellant, in redeeming the foreclosed property, should pay the entire amount he owed to the Bank on the date of the sale, with interest thereon at the rate agreed upon.

WHEREFORE, the decision appealed from is affirmed, with costs.

Teehankee, Esguerra and Muñoz Palma, JJ., concur.

 

 

 

Separate Opinions

 

 

CASTRO, J., concurring:

If we go by conventional legal wisdom, there can be no debate on the three conclusions reached by Chief Justice Makalintal in his resolution of the main issues in the case at bar; they are clearly in accord with statutory law and jurisprudence.

These conclusions may be restated thus:

(a) The Development Bank of the Philippines as creditor can recover the balance of the defendant Mirang's indebtedness after the latter's real estate property was sold for very much less than the amount of his indebtedness by virtue of an extrajudicial foreclosure under the provisions of Act 3135, as amended;

(b) Mirang is not exempt from paying the balance of his indebtedness even if the proceeds of the loan he obtained from the DBP which he invested in the planting of abaca in his homestead went to waste because of the destruction of his abaca plants by mosaic disease; nor has this Court authority to reduce his net liability to the DBP; and

(c) To redeem his homestead Mirang must pay not merely the price paid for it by the DBP at the auction sale but the total of his obligation still due and owing to the DBP.

But even as I perforce concur in the above-stated conclusions, I cannot ignore — as in fact I here add my own emphasis to the cogent and pointed observations articulated by Justice Felix V. Makasiar in his dissenting opinion.

I find the following inescapably and at once particularly disturbing:

(a) The DBP, as the highest bidder at the auction sale, bought the property of the debtor Mirang, which has a quite sizeable area of 18-½ hectares, for the minuscule sum of only P2,010, or a miserable P110 per hectare;

(b) The DBP displayed not an ounce of sympathy for Mirang's inability to amortize his mortgage loan, occasioned by a fortuitous event of course beyond his control in the form of infestation of his abaca plantation by mosaic disease, a disease that the Government itself, with all its expertise and resources, has thus far been unable to eradicate;

(c) The DBP apparently did not attach the least bit of importance to the fact that the destruction of Mirang's abaca plantation by mosaic disease was not caused by his negligence nor by his failure to take necessary precautionary measures; and

(d) Created fundamentally to assist, by extending credit facilities, in the development and expansion of agriculture and industry and the broadening and diversification of the national economy, the DBP, in relation to Mirang, has actually, by the action it has taken, negated its basic mission.

Justice Makasiar makes the pertinent suggestion that the DBP restructure the account of Mirang. Like Justice Makasiar, I personally know that the DBP and similar Government financial institutions (the Philippine National Bank, the Government Service Insurance System, and the Social Security System) have

restructured accounts of debtors. Considering the inordinate appreciation of land values everywhere, there appears to be no insuperable obstacle to the DBP restructuring the account of Mirang, not only to enable him to pay his indebtedness in easy terms over a period of years but as well to make available additional funds to be utilized by him in the development of his 18-½-hectare land. It is not too late in the day — in this, our compassionate society — for the DBP to do so.

It is well to remember that uncompromising or mechanical application of the letter of the law has resulted, not infrequently, in the denial of moral justice.

 

MAKASIAR, J., dissenting:

The Courts of the Republic are courts of equity as well as of law.

While as a matter of strict law, the position of appellant is untenable; the admitted equities of the case should absolve appellant from further liability on the following grounds:

1. The abaca plantation mortgaged on September 7, 1950 for the original loan of P14,000.00 to the appellee DBP, has an area of 18.5 hectares. Out of the approved loan, only the amount of P13,000.00 was gradually released to the appellant, after which further releases were stopped because the abaca plantation was attacked by mosaic disease which destroyed the abaca plants. The outstanding indebtedness however of appellant later amounted to P19,714.35 including interest. As the highest bidder, the appellee DBP bought the said property for only P2,010.00 at the auction sale on July 30, 1967. Obviously, the market value of the plantation must have increased in 1957 after the lapse of about 7 years, and especially now after about 18 years. Its market value even in 1957 could not be less than the outstanding indebtedness of the appellant considering that it merited in 1950 a loan of P14,000.00; and its present market value must be a lot more.

2. The failure of the appellant to pay the yearly amortizations on the mortgage was neither malicious nor deliberate. His inability to meet the yearly amortization was due to the fact that his plantation was attacked by mosaic disease, which not even the government could successfully eradicate until this date. This is practically a fortuitous event like epidemic, pestilence, floods or locusts (Vol. IV, Tolentino, Civil Law, 1973 ed. p. 119, citing 3 Salvat 83-84; Vol. IV, Caguioa, Civil Law, 1968 ed. pp. 88-89, citing 3 Castan, 8th ed., p. 159). There is no showing that the disease infected his abaca plantation because of his negligence or omission to take precautions against it. Considering the unforeseen tragedy that befell appellant as well as the importance of abaca in the economy of the nation, the government should not merely view the sad plight of appellant with sympathy, but must give positive recognition to the appellant's right under the circumstances to be relieved of further liability. As above intimated, the present market value of the abaca plantation of about 18.5 hectares could amply cover the unpaid deficiency of P16,013.13 including interest.

3. As originally conceived on October 29, 1946 in its charter, Republic Act No. 85 as approved by Congress, the main purpose of the RFC was "to provide credit facilities for the rehabilitation and development of agriculture, commerce and industry, the reconstruction of property damaged by war, and broadening and diversification of the national economy ..." (Sec. 1, R.A. No. 85). As amended on June 15, 1958 by the passage of Republic Act No. 2081, the DBP, the successor to RFC, was primarily established "to provide credit facilities for rehabilitation and development and expansion of agriculture and industry, the reconstruction of property damaged by war and the broadening and diversification of the national economy ...." It is thus patent that the RFC now the DBP, was created principally to assist the agricultural producers and industrialists in developing their farms and industries to accelerate national progress, more than to realize profit for itself. Appellant is in great need of such assistance as he apparently is not a man of means. For the DBP to exact its "pound of flesh" would be to play the hated role of a Shylock, which is at war with the ideals of a compassionate society, to which the government is dedicated. It would be unjust enrichment on the part of DBP, which could breed disenchantment and discontent.

The dictum that "the letter of the law killeth; its spirit giveth life" has a special relevance to the instant case. And to appellant, if he is exempted from liability for any deficiency, social justice, which guarantees him together with the rest of the citizenry "dignity, welfare and security" (See. 6, Art. 11, 1973 Constitution), becomes a living reality, not a myth.

Further assistance could have been extended by the DBP to appellant by restructuring his account, as the DBP has done and is doing, in favor of some of its debtors.

 

 

Separate Opinions

 

CASTRO, J., concurring:

If we go by conventional legal wisdom, there can be no debate on the three conclusions reached by Chief Justice Makalintal in his resolution of the main issues in the case at bar; they are clearly in accord with statutory law and jurisprudence.

These conclusions may be restated thus:

(a) The Development Bank of the Philippines as creditor can recover the balance of the defendant Mirang's indebtedness after the latter's real estate property was sold for very much less than the amount of his indebtedness by virtue of an extrajudicial foreclosure under the provisions of Act 3135, as amended;

(b) Mirang is not exempt from paying the balance of his indebtedness even if the proceeds of the loan he obtained from the DBP which he invested in the planting of abaca in his homestead went to waste because of the destruction of his abaca plants by mosaic disease; nor has this Court authority to reduce his net liability to the DBP; and

(c) To redeem his homestead Mirang must pay not merely the price paid for it by the DBP at the auction sale but the total of his obligation still due and owing to the DBP.

But even as I perforce concur in the above-stated conclusions, I cannot ignore — as in fact I here add my own emphasis to the cogent and pointed observations articulated by Justice Felix V. Makasiar in his dissenting opinion.

I find the following inescapably and at once particularly disturbing:

(a) The DBP, as the highest bidder at the auction sale, bought the property of the debtor Mirang, which has a quite sizeable area of 18-½ hectares, for the minuscule sum of only P2,010, or a miserable P110 per hectare;

(b) The DBP displayed not an ounce of sympathy for Mirang's inability to amortize his mortgage loan, occasioned by a fortuitous event of course beyond his control in the form of infestation of his abaca plantation by mosaic disease, a disease that the Government itself, with all its expertise and resources, has thus far been unable to eradicate;

(c) The DBP apparently did not attach the least bit of importance to the fact that the destruction of Mirang's abaca plantation by mosaic disease was not caused by his negligence nor by his failure to take necessary precautionary measures; and

(d) Created fundamentally to assist, by extending credit facilities, in the development and expansion of agriculture and industry and the broadening and diversification of the national economy, the DBP, in relation to Mirang, has actually, by the action it has taken, negated its basic mission.

Justice Makasiar makes the pertinent suggestion that the DBP restructure the account of Mirang. Like Justice Makasiar, I personally know that the DBP and similar Government financial institutions (the Philippine National Bank, the Government Service Insurance System, and the Social Security System) have restructured accounts of debtors. Considering the inordinate appreciation of land values everywhere, there appears to be no insuperable obstacle to the DBP restructuring the account of Mirang, not only to enable him to pay his indebtedness in easy terms over a period of years but as well to make available additional funds to be utilized by him in the development of his 18-½-hectare

land. It is not too late in the day — in this, our compassionate society — for the DBP to do so.

It is well to remember that uncompromising or mechanical application of the letter of the law has resulted, not infrequently, in the denial of moral justice.

 

MAKASIAR, J., dissenting:

The Courts of the Republic are courts of equity as well as of law.

While as a matter of strict law, the position of appellant is untenable; the admitted equities of the case should absolve appellant from further liability on the following grounds:

1. The abaca plantation mortgaged on September 7, 1950 for the original loan of P14,000.00 to the appellee DBP, has an area of 18.5 hectares. Out of the approved loan, only the amount of P13,000.00 was gradually released to the appellant, after which further releases were stopped because the abaca plantation was attacked by mosaic disease which destroyed the abaca plants. The outstanding indebtedness however of appellant later amounted to P19,714.35 including interest. As the highest bidder, the appellee DBP bought the said property for only P2,010.00 at the auction sale on July 30, 1967. Obviously, the market value of the plantation must have increased in 1957 after the lapse of about 7 years, and especially now after about 18 years. Its market value even in 1957 could not be less than the outstanding indebtedness of the appellant considering that it merited in 1950 a loan of P14,000.00; and its present market value must be a lot more.

2. The failure of the appellant to pay the yearly amortizations on the mortgage was neither malicious nor deliberate. His inability to meet the yearly amortization was due to the fact that his plantation was attacked by mosaic disease, which not even the government could successfully eradicate until this date. This is practically a fortuitous event like epidemic, pestilence, floods or locusts (Vol. IV, Tolentino, Civil Law, 1973 ed. p. 119, citing 3 Salvat 83-84; Vol. IV, Caguioa, Civil Law, 1968 ed. pp. 88-89, citing 3 Castan, 8th ed., p. 159). There is no showing that the disease infected his abaca plantation because of his negligence or omission to take precautions against it. Considering the unforeseen tragedy that befell appellant as well as the importance of abaca in the economy of the nation, the government should not merely view the sad plight of appellant with sympathy, but must give positive recognition to the appellant's right under the circumstances to be relieved of further liability. As above intimated, the present market value of the abaca plantation of about 18.5 hectares could amply cover the unpaid deficiency of P16,013.13 including interest.

3. As originally conceived on October 29, 1946 in its charter, Republic Act No. 85 as approved by Congress, the main purpose of the RFC was "to provide credit facilities for the rehabilitation and development of agriculture, commerce and industry, the reconstruction of property damaged by war, and broadening and diversification of the national economy ..." (Sec. 1, R.A. No. 85). As amended on June 15, 1958 by the passage of Republic Act No. 2081, the DBP, the successor to RFC, was primarily established "to provide credit facilities for rehabilitation and development and expansion of agriculture and industry, the reconstruction of property damaged by war and the broadening and diversification of the national economy ...." It is thus patent that the RFC now the DBP, was created principally to assist the agricultural producers and industrialists in developing their farms and industries to accelerate national progress, more than to realize profit for itself. Appellant is in great need of such assistance as he apparently is not a man of means. For the DBP to exact its "pound of flesh" would be to play the hated role of a Shylock, which is at war with the ideals of a compassionate society, to which the government is dedicated. It would be unjust enrichment on the part of DBP, which could breed disenchantment and discontent.

The dictum that "the letter of the law killeth; its spirit giveth life" has a special relevance to the instant case. And to appellant, if he is exempted from liability for any deficiency, social justice, which guarantees him together with the rest of the citizenry "dignity, welfare and security" (See. 6, Art. 11, 1973 Constitution), becomes a living reality, not a myth.

Further assistance could have been extended by the DBP to appellant by restructuring his account, as the DBP has done and is doing, in favor of some of its debtors.

G.R. No. 119247 February 17, 1997

CESAR SULIT, petitioner, vs.COURT OF APPEALS and ILUMINADA CAYCO, respondents.

 

REGALADO, J.:

The primary issue posed before the Court, in this appeal by certiorari from a decision 1 of the Court of Appeals, is whether or not the mortgagee or purchaser in an extrajudicial foreclosure sale is entitled to the issuance of a writ of possession over the mortgaged property despite his failure to pay the surplus proceeds of the sale to the mortgagor or the person entitled thereto. Secondarily, it calls for a resolution of the further consequences of such non-payment of the full amount for which the property was sold to him pursuant to his bid.

The material facts, as found by respondent court, are not disputed:

It appears from the record that on 9 June 1992 petitioner (herein private respondent) Iluminada Cayco executed a Real Estate Mortgage (REM) over Lot 2630 which is located in Caloocan City and covered by TCT No. (23211) 11591 in favor of private respondent (herein petitioner) Cesar Sulit, to secure a loan of P4 Million. Upon petitioner's failure to pay said loan within the stipulated period, private respondent resorted to extrajudicial foreclosure of the mortgage as authorized in the contract. Hence, in a public auction conducted by Notary Public Felizardo M. Mercado on 28 September 1993 the lot was sold to the mortgagee, herein private respondent, who submitted a winning bid of P7 Million. As stated in the Certificate of Sale executed by the notary public (Annex B, petition), the mortgaged property was sold at public auction to satisfy the mortgage indebtedness of P4 Million. The Certificate further states as follows:

IT IS FURTHER CERTIFIED, that the aforementioned highest bidder/buyer, CESAR SULIT, being the petitioner/mortgagee thereupon did not pay to the undersigned Notary Public of Kalookan City the said sum of SEVEN MILLION PESOS (P7,000,000.00), Philippine Currency, the sale price of the above-described real estate property together with all improvements existing thereon, which amount was properly credited to the PARTIAL satisfaction of the mortgage debt mentioned in the said real estate mortgage, plus interests, attorney's fees and all other incidental expenses of foreclosure and sale (par. 2, Annex B, petition).

On 13 December 1993 private respondent petitioned the Regional Trial Court of Kalookan City for the issuance of a writ of possession in his favor. The petition was docketed as LRC Case No. C-3462 and assigned to Branch 131, presided over by public respondent.

On 17 January 1994 respondent Judge issued a decision (should have been denominated as order), the dispositive part of which reads:

WHEREFORE, finding the subject petition to be meritorious, the same is hereby GRANTED. As prayed for, let a Writ of Possession be issued in favor of herein petitioner, Cesar Sulit, upon his posting of an indemnity bond in the amount of One Hundred

Twenty Thousand (P120,000.00) Pesos (Annex C, petition).

On 28 March 1994 petitioner filed a Motion to have the auction sale of the mortgaged property set aside and to defer the issuance of the writ of possession. She invited the attention of the court a quoto some procedural infirmities in the said proceeding and further questioned the sufficiency of the amount of bond. In the same Motion petitioner prayed as an alternative relief that private respondent be directed to pay the sum of P3 Million which represents the balance of his winning bid of P7 Million less the mortgage indebtedness of P4 Million (Annex D, petition). This Motion was opposed by private respondent who contended that the issuance of a writ of possession upon his filing of a bond was a ministerial duty on the part of respondent Judge (Annex E), to which Opposition petitioner submitted a Reply (Annex F, petition).

On 11 May 1994 respondent Judge denied petitioner's Motion and directed the issuance of a writ of possession and its immediate enforcement by deputy sheriff Danilo Norberte (Annex G, petition)." 2(Emphasis words supplied for clarity).

From the aforesaid orders of the court a quo, herein private respondent Iluminada Cayco filed on May 26, 1994 a petition for certiorari with preliminary injunction and/or temporary restraining order before respondent Court of Appeals, which immediately issued a status quo order restraining the respondent judge therein from implementing his order of January 17, 1994 and the writ of possession issued pursuant thereto. Subsequently, respondent court rendered judgment on November 11, 1994, as follows:

IN JUDGMENT, We grant the writ of certiorari and the disputed order of 17 January 1994 which precipitately directed the issuance of a writ of possession in favor of private respondent and the subsequent order of 11 May 1994 which denied petitioner's Motion for Reconsideration are hereby SET ASIDE.

Accordingly, private respondent is ordered to pay unto petitioner, through the notary public, the balance or excess of his bid of P7 Million after deducting therefrom the sum of P4,365,280 which represents the mortgage debt and interest up to the date of the auction sale (September 23, 1993), as well as expenses of foreclosure based on receipts which must be presented to the notary public.

In the event that private respondent fails or refuses to pay such excess or balance, then the auction sale of 28 September 1993 is deemed CANCELLED and private respondent may foreclose the mortgage anew either in a judicial or extrajudicial proceeding as stipulated in the mortgage contract.

Corollary to the principal issue earlier stated, petitioner asserts that respondent Court of Appeals gravely erred when it failed to appreciate and consider the supposed legal significance of the bouncing checks which private respondent issued and delivered to petitioner as payment for the agreed or stipulated interest on the mortgage obligation. He likewise avers that a motion for reconsideration or an appeal, and not certiorari, is the proper remedy available to herein private respondent from an order denying her motion to defer issuance of the writ of possession. Moreover, it is claimed that any question regarding the propriety of the sale and the issuance of the writ of possession must be threshed out in a summary proceeding provided for in Section 8 of Act 3135.

There is no merit in petitioner's contention that the dishonored checks amounting to a total of P1,250,000.00, allegedly representing interest of 5% per month from June 9, 1992 to December 9, 1992, were correctly considered by the trial court as the written agreement between the parties. Instead, we find the explanation of respondent court in rejecting such postulate, on the basis of Article 1956 of the Civil Code, 3 to be more logical and plausible, to wit:

It is noteworthy that the Deed of Real Estate Mortgage executed by the parties on 9 June 1992 (Annex A, Petition) does not contain any stipulation for payment of interest. Private respondent who maintains that he had an

agreement with petitioner for the payment of 5% monthly interest did not produce any other writing or instrument embodying such a stipulation on interest. It appears then that if any such agreement was reached by the parties, it was merely a verbal one which does not conform to the aforequoted statutory provision. Certainly, the dishonored checks claimed to have been issued by petitioner in payment of interest could not have been the written stipulation contemplated in Article 1956 of the Code. Consequently, in the absence of a written stipulation for the imposition of interest on the loan obtained by petitioner, private respondent's assessment thereof has no legal basis. 4

It is elementary that in the absence of a stipulation as to interest, the loan due will now earn interest at the legal rate of 12% per annum 5 which, according to respondent court, is equivalent to P365,280.000.00 computed from December 10, 1992, after private respondent's obligation became due, until September 23, 1993, the date of the auction sale. It is this amount which should further be deducted from the purchase price of P7,000,000.00, together with any other expenses incurred in connection with the sale, such as the posting and publication of notices, notarial and documentary fees, and assessments or taxes due on the disputed property.

It baffles this Court, therefore, why petitioner has continually failed up to the present to submit documentary evidence of the alleged expenses of the foreclosure sale, and this in spite of the express requirement therefor in the certificate of sale 6 issued by the notary public for the purpose of computing the actual amount payable by the mortgagor or redemptioner in the event of redemption. It may thus be safely presumed that such evidence having been willfully suppressed, it would be adverse if produced. 7

Coming now to the main issue in this case, petitioner argues that it is ministerial upon the court to issue a writ of possession after the foreclosure sale and during the period of redemption, invoking in support thereof Sections 7 and 8 of Act 3135 which conjointly provide:

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.

Sec. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the Court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Number Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal.

The governing law thus explicitly authorizes the purchaser in a foreclosure sale to apply for a writ of possession during the redemption period by filing an ex parte motion under oath for that purpose in the corresponding registration or cadastral proceeding in the case of property with Torrens title. Upon the filing of such motion and the approval of the corresponding bond, the law also in express terms directs the court to issue the order for a writ of possession.

No discretion appears to be left to the court. Any question regarding the regularity and validity of the sale, as well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section 8, and it cannot be raised as a justification for opposing the issuance of the writ of possession since, under the Act, the proceeding for this is ex parte. 8 Such recourse is available to a mortgagee, who effects the extrajudicial foreclosure of the mortgage, even before the expiration of the period of redemption provided by law and the Rules of Court. 9

The rule is, however, not without exception. Under Section 35, Rule 39 of the Rules of Court, which is made applicable to the extrajudicial foreclosure of real estate mortgages by Section 6 of Act 3135, the possession of the mortgaged property may be awarded to a purchaser in the extrajudicial foreclosure "unless a third party is actually holding the property adversely to the judgment debtor." 10

Thus, in the case of Barican, et al. vs. Intermediate Appellate Court,et al., 11 this Court took into account the circumstances that long before the mortgagee bank had sold the disputed property to the respondent therein, it was no longer the judgment debtor who was in possession but the petitioner spouses who had assumed the mortgage, and that there was a pending civil case involving the rights of third parties. Hence, it was ruled therein that under the circumstances, the obligation of a court to issue a writ of possession in favor of the purchaser in a foreclosure of mortgage case ceases to be ministerial.

Now, in forced sales low prices are generally offered and the mere inadequacy of the price obtained at the sheriff's sale, unless shocking to the conscience, has been held insufficient to set aside a sale. This is because no disadvantage is caused to the mortgagor. On the contrary, a mortgagor stands to gain with a reduced price because he possesses the right of redemption. When there is the right to redeem, inadequacy of price becomes immaterial since the judgment debtor may reacquire the property or sell his right to redeem, and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale. 12

However, also by way of an exception, in Cometa, et al. vs. Intermediate Appellate Court, et al. 13 where the properties in question were found to have been sold at an unusually lower price than their true value, that is, properties worth at least P500,000.00 were sold for only P57,396.85, this Court, taking into consideration the factual milieu obtaining therein as well as the peculiar circumstances attendant thereto, decided to withhold the issuance of the writ of possession on the ground that it could work injustice because the petitioner might not be entitled to the same.

The case at bar is quite the reverse, in the sense that instead of an inadequacy in price, there is due in favor of private respondent, as mortgagor, a surplus from the proceeds of the sale equivalent to approximately 40% of the total mortgage debt, which excess is indisputably a substantial amount. Nevertheless, it is our considered opinion, and we so hold, that equitable considerations demand that a writ of possession should also not issue in this case.

Rule 68 of the Rules of Court provides:

Sec. 4. Disposition of proceeds of sale. — The money realized from the sale of mortgaged property under the regulations hereinbefore prescribed shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off such mortgage or other incumbrances, the same shall be paid to the junior incumbrancers in the order of their priority, to be ascertained by the court, or if there be no such incumbrancers or there be a balance or residue after payment of such incumbrancers, then to the mortgagor or his agent, or to the person entitled to it.

The application of the proceeds from the sale of the mortgaged property to the mortgagor's obligation is an act of payment, not payment by dation; hence, it is the mortgagee's duty to return any surplus in the selling price to themortgagor. 14 Perforce, a mortgagee who exercises the power of sale contained in a mortgage is considered a custodian of the fund, and, being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so. And even

though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as far as concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner of the equity of redemption. 15

Commenting on the theory that a mortgagee, when he sells under a power, cannot be considered otherwise than as a trustee, the vice-chancellor in Robertson vs. Norris (1 Giff . 421) observed: "That expression is to be understood in this sense: that with the power being given to enable him to recover the mortgage money, the court requires that he shall exercise the power of sale in a provident way, with a due regard to the rights and interests of the mortgagor in the surplus money to be produced by the sale." 16

The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is based on the theory that the lesser the price the easier it will be for the owner to effect the redemption. 17 The same thing cannot be said where the amount of the bid is in excess of the total mortgage debt. The reason is that in case the mortgagor decides to exercise his right of redemption, Section 30 of Rule 39 provides that the redemption price should be equivalent to the amount of the purchase price, plus one per cent monthly interest up to the time of the redemption, 18 together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last-named amount at the same rate. 19

Applying this provision to the present case would be highly iniquitous if the amount required for redemption is based on P7,000.000.00, because that would mean exacting payment at a price unjustifiably higher than the real amount of the mortgage obligation. We need not elucidate on the obvious. Simply put, such a construction will undeniably be prejudicial to the substantive rights of private respondent and it could even effectively prevent her from exercising the right of redemption.

Where the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than to defeat his right. It stands to reason, therefore, that redemption should be looked upon with favor and where no injury will follow, a liberal construction will be given to our redemption laws, specifically on the exercise of the right to redeem. Conformably hereto, and taking into consideration the facts obtaining in this case, it is more in keeping with the spirit of the rules, particularly Section 30 of Rule 39, that we adopt such interpretation as may be favorable to the private respondent.

Admittedly, no payment was made by herein petitioner, as the highest bidder, to the notary public who conducted the extrajudicial foreclosure sale. We are not unmindful of the rule that it is not necessary for the mortgagee to pay cash to the sheriff or, in this case, the notary public who conducted the sale. It would obviously serve no purpose for the sheriff or the notary public to go through the idle ceremony of receiving the money and paying it back to the creditor, under the truism that the lawmaking body did not contemplate such a pointless application of the law in requiring that the creditor must bid under the same conditions as any other bidder. 20 It bears stressing that the rule holds true only where the amount of the bid represents the total amount of the mortgage debt.

In case of a surplus in the purchase price, however, there is jurisprudence to the effect that while the mortgagee ordinarily is liable only for such surplus as actually comes into his hands, but he sells on credit instead of for cash, he must still account for the proceeds as if the price were paid in cash, and in an action against the mortgagee to recover the surplus, the latter cannot raise the defense that no actual cash was received. 21

We cannot simply ignore the importance of surplus proceeds because by their very nature, surplus money arising from a sale of land under a decree of foreclosure stands in the place of the land itself with respect to liens thereon or vested rights therein. They are constructively, at least, real property and belong to the mortgagor or his assigns. 22 Inevitably, the right of a mortgagor to the surplus proceeds is a substantial right which must prevail over rules of technicality.

Surplus money, in case of a foreclosure sale, gains much significance where there are junior encumbrancers on the mortgaged property. Jurisprudence has it that when there are several liens upon the premises, the surplus money must be applied to their discharge in the order of their priority. 23 A junior mortgagee may have his rights protected by an appropriate decree as to the application of the surplus, if there be any, after satisfying the prior mortgage. His lien on the land is transferred to the surplus fund. 24 And a senior mortgagee, realizing more than the amount of his debt on a foreclosure sale, is regarded as a trustee for the benefit of junior encumbrancers. 25

Upon the strength of the foregoing considerations, we cannot countenance the apparent paltriness that petitioner persistently accords the right of private

respondent over the surplus proceeds. It must be emphasized that petitioner failed to present the receipts or any other proof of the alleged costs or expenses incurred by him in the foreclosure sale. Even the trial court failed or refused to resolve this issue, notwithstanding the fact that this was one of the grounds raised in the motion filed by private respondent before it to set aside the sale. Since it has never been denied that the bid price greatly exceeded the mortgage debt, petitioner cannot be allowed to unjustly enrich himself at the expense of private respondent.

As regards the issue concerning the alleged defect in the publication of the notice of the sale, suffice it to state for purposes of this discussion that a question of non-compliance with the notice and publication requirements of an extrajudicial foreclosure sale is a factual issue and the resolution thereof by the lower courts is binding and conclusive upon this Court, 26 absent any showing of grave abuse of discretion. In the case at bar, both the trial court and respondent Court of Appeals have found that the sale was conducted in accordance with law. No compelling reason exists in this case to justify a rejection of their findings or a reversal of their conclusions.

There is likewise no merit in the argument that if private respondent had wanted to question the validity of the sale, she should have filed a petition to set the same aside and to cancel the writ of possession. These, it is argued, should have been disposed of in accordance with the summary procedure laid down in Section 112 of the Land Registration Act, provided the petition is filed not later than thirty days after the purchaser was given possession of the land. Considering, however, that private respondent has filed a motion to set aside the sale and to defer the issuance of a writ of possession before the court where the ex parte petition for issuance of such writ was then pending, we deem the same to be substantial compliance with the statutory prescription.

We, however, take exception to and reject the last paragraph in the dispositive portion of the questioned decision of respondent court, which we repeat:

In the event that private respondent fails or refuses to pay such excess or balance, then the auction sale of 28 September 1993 is deemed CANCELLED and private respondent (petitioner herein) may foreclose the mortgage anew either in a judicial or extrajudicial proceeding as stipulated in the mortgage contract.

for lack of statutory and jurisprudential bases. The quoted phrase "as stipulated in the mortgage contract" does not, of course, envision such contingency or warrant the suggested alternative procedure.

Section 4 of Rule 64, hereinbefore quoted, merely provides that where there is a balance or residue after payment of the mortgage, the same shall be paid to the mortgagor. While the expedient course desired by respondent court is commendable, there is nothing in the cited provision from which it can be inferred that a violation thereof will have the effect of nullifying the sale. The better rule is that if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of the sale but simply gives the mortgagor a cause of action to recover such surplus. 27 This is likewise in harmony with the decisional rule that in suing for the return of the surplus proceeds, the mortgagor is deemed to have affirmed the validity of the sale since nothing is due if no valid sale has been made. 28

In the early case of Caparas vs. Yatco, etc., et al., 29 it was also held that where the mortgagee has been ordered by the court to return the surplus to the mortgagor or the person entitled thereto, and the former fails to do so and flagrantly disobeys the order, the court can cite the mortgagee for contempt and mete out the corresponding penalty under Section 3(b) of the former Rule 64 (now Rule 71) of the Rules of Court.

WHEREFORE, the questioned decision of the Court of Appeals is MODIFIED by deleting the last paragraph of itsfallo, but its disposition of this case in all other respects is hereby AFFIRMED.

SO ORDERED.

G.R. No. 70623 June 30, 1987

ST. DOMINIC CORPORATION, petitioner, vs.THE INTERMEDIATE APPELLATE COURT, HON. RICARDO P. TENSUAN, RTC BRANCH LXXXIII, QUEZON CITY FRANCISCA B. BUSTAMANTE,

FLAVIANO BUSTAMANTE, CARLOS ROBES, ADALIA FRANCISCO and AURORA FRANCISCO, respondents.

No. L-48630 June 30, 1987

FLAVIANO BUSTAMANTE and FRANCISCA B. BUSTAMANTE, petitioners, vs.HON ULPIANO SARMIENTO, as Presiding Judge of the Court of First Instance of Rizal, Branch IX, sitting in Quezon City, RODOLFO ESPINELI, personally and as "Special Sheriff" appointed by respondent Judge Sarmiento, AURORA B. FRANCISCO, and ST. DOMINIC CORPORATION, respondents.

 

GUTIERREZ, JR., J.:

Arising from a common set of facts, these petitions are before us for concurrent disposition.

G.R. No. 70623 entitled "St. Dominic Corporation v. The Intermediate Appellate Court. et al." is a petition to review on certiorari the decision of the respondent appellate court, dated January 31, 1985 in AC-G. R. SP No. 00513 entitled "Francisca B. Bustamante, et al., v. Hon. Ricardo P. Tensuan, et al.," which set aside the orders of the then Court of First Instance of Rizal at Quezon City, in Civil Case No. Q-11895, as well as the resolution dated April 16, 1985 denying the petitioner's motion for reconsideration.

On the other hand, G.R. No. L-48630, is a petition for certiorari assailing the order of respondent Judge Ulpiano Sarmiento, dated April 27, 1976, directing the issuance of a writ of possession against the petitioners covering the same property involved in G.R. No. 70623.

The facts are not disputed.

On February 27, 1968, Civil Case No. Q-11895 entitled Ricardo Castulo and Juan V. Ebreo v. Carlos Robes and wife Adalia Francisco and People's Homesite and Housing Corporation" was filed seeking the cancellation of Transfer Certificate of Title No. 83783 in the name of the spouses Carlos Robes and Adaha Francisco, covering Lot No. 8, Block 101 of the Malaya Subdivision, People's Homesite and Housing Corporation (PHHC). The original complaint was superseded by an amended complaint filed on February 24, 1969.

It appears that sometime in 1961, the PHHC awarded the property in question to one Cristobal Santiago, Jr., in whose favor a final deed of sale was executed and Transfer Certificate of Title (TCT) No. 83783 was issued.

Subsequently, the Robes spouses mortgaged the realty to the Manufacturer's Bank and Trust Company. The mortgage lien was duly annotated on TCT 84387 on February 9, 1965.

Thereafter, on February 2, 1968, Civil Case No. Q- 1 1895 was filed.

Claiming legal interest in the property, the Bustamante spouses were allowed to intervene in the case.

On March 25, 1968, a notice of lis pendens was annotated on TCT 84387 at the instance of the Bustamante spouses.

For failure of the Robes' spouses to pay the mortgage obligation, the Manufacturer's Bank and Trust Company foreclosed the lot and caused the same to be sold at public auction on December 14, 1974.

The property was purchased by Aurora Francisco in whose favor a certificate of sale was issued. The levy on execution was annotated on TCT 84387 on March 16, 1974.

No redemption of said property was effected. Thus, on March 5, 1976, TCT 84387 in the name of the Robes spouseswas cancelled and in heu thereof, TCT 217192 was issued to Aurora Francisco on the same date. The notice of lis pendens on the title of the Robes spouses, however, was not carried over to TCT 217192.

On April 20, 1976, before the sale of the land to St. Dominic, Aurora Francisco applied for a writ of possession in LRC Case No. 851 (76) before Branch IX of the then Court of First Instance of Rizal in Quezon City.

On April 27, 1976, said court issued the writ of possession.

The lower court (Branch IX, Court of First Instance of Rizal) having stood firm in the grant of the writ of possession and having denied the motion to quash the same, the Bustamante spouses filed with this Court a petition for certiorari, docketed as G.R. No. L-48630 entitled "Flaviano Bustamante, et al., v. Hon. Sarmiento, etc., et al.", now before us for resolution.

On September 15, 1976, Aurora Francisco sold the property to petitioner, St. Dominic Corporation. Consequently, TCT 222337 was issued to petitioner corporation. As earlier stated, no notice of any lien or encumbrance appears on the title.

Meanwhile, Civil Case No. Q-11895 proceeded to judgment. The dispositive portion of the decision reads:

WHEREFORE, all the foregoing premises considered, judgment is hereby rendered as follows:

(a) declaring null and void the allocation and sale of PHHC (now NHA) to defendant Cristobal Santiago, Jr., of Lot 8, Block 101 of subdivision plan Psd-88807, and cancelling Transfer Certifirate of Title No. 83783 issued therefor in his name;

(b) declaring null and void and without force and effect the sale of said lot by Cristobal Santiago, Jr., to spouses Adalia Francisco and Carlos Robes, and cancelling Transfer Certificate of Title No. 84387 issued therefor in their names;

(c) directing defendant PHHC (now NHA), to prgcess the application to purchase said subject lot filed by intervenor Francisco Banzon Bustamante and to execute or cause to be executed the requisite documents for the award of said lot to her.

The complaint praying that an award of the subject lot be ordered made in Lavor of plaintiffs Ricardo S. Castulo and Juan V. Ebreo, is hereby dismissed for lack of showing that they or either of them ever filed the requisite application to purchase the same. All other counterclaims are hereby dismissed for lack of merit. (Annex "A". p. 26, Rollo — G.R. No. 70623).

When the judgment became final, the Bustamante spouses applied for a writ of execution.

On June 29, 1982, Presiding Judge Tensuan issued an order granting the application for a writ of execution with the qualification, however, that "said writ may not be enforced and/or implemented as against the St. Dominic Corporation."

The Bustamante spouses moved for a reconsideration, arguing that the order of the court dated June 29, 1982 in effect amended a final and executory judgment in violation of law. In an order dated November 26, 1982, Judge Tensuan denied the motion. Whereupon, the Bustamante spouses filed a petition for certiorari and mandamus docketed as AC-G.R. SP No. 00513, before the Intermediate Appellate Court. Herein petitioner, St. Dominic Corporation and Aurora Francisco who were not parties to Civil Case No. Q-11895, were made respondents in the petition questioning the orders of Judge Tensuan exempting the petitioner corporation from the enforcement of the trial court's judgment and denying reconsideration thereof.

On January 31, 1985, the Intermediate Appellate Court rendered judgment. The dispositive portion of the decision reads:

WHEREFORE, the writs of certiorari and mandamus prayed for are granted; the orders of September 24, 1982 and November 26, 1982 complained of are hereby set

aside; and the respondent Judge is hereby ordered to cause the issuance of a writ of execution in strict conformity with the dispositive portion of the final and executory decision in subject Civil Case No. Q-11895. Costs against the private respondents. (p. 55, Rollo-G.R. No. 70623)

On February 18, 1985, the petitioner filed its motion for reconsideration and on February 18, 1985, Aurora Francisco followed suit. In a minute resolution dated April 16, 1985, both motions were denied by the respondent appellate court. Thus, the petition filed by St. Dominic Corporation in G.R. No. 70623.

The appellate court's ruling in AC-G.R. SP No. 00513 is tainted with error.

The trial court's statement exempting from execution one not a party to the case nor privy to the interests of the parties therein, from the effects of its pronouncements, cannot be considered an amendment of its final and executory judgment in Civil Case No. Q- 1 1895.

Justice Lino M. Patajo's dissent in AC-G.R. SP No. 00513 is clear and to the point elucidating the correct doctrine thus:

I believe that respondent Court cannot be held as having abused its discretion or exceeded its jurisdiction in issuing the questioned orders. I find no merit in the contention of petitioners that in so providing in said orders that its decision should not be enforced or executed against St. Dominic, respondent Court had actually amended its decision which had already become final. Respondent Court was merely applying the provision of Rule 39, Section 49(b) which provides that the decision of the Court in cases other than those provided for in sub-paragraph (a) of said section (judgment against specific thing, probate of a will, administration of the estate of a deceased person, or in respect to the personal, political, or legal condition or status of a particular person or his relationship to another) is conclusive only between the parties and their successors-ininterest by title subsequent to the commencement of the action. .... (Annex "H". p. 58, Rollo-70323)

Indeed, a judgment cannot bind persons who are not parties to the action (Vda. de Sengbengco v. Arellano, 1 SCRA 711; Hanopol v. Pilapil, 7 SCRA 452; and Hollero v. Court of Appeals, 1 1 SCRA 3 1 0). It is elementary that strangers to a case are not bound by the judgment rendered by the court (Bien v. Sunga, 117 SCRA 249) and such judgment is not available as an adjurtication either against or in favor of such other person. A decision of a court will not operate to divest the rights of a person who has not and has never been a party to a litigation, either as plaintiff or defendant (Granados v. Monton, 86 Phil., 42). Verily, execution of a judgment can only be issued against one who is a party to the action, and not against one who, not being a party in the case, has not yet had his day in court (City of Bacolod, et al., v. Hon. Enriquez, et al., 101 Phil., 644; Tayson v. Angeles v. Icasiano, et al., 83 Phil., 921; Manza v. Hon. Vicente Santiago, etc., 96 Phil., 938; and Angara v. Gorospe, et al., 101 Phil., 79).

It is clear from the records that petitioner St. Dominic Corporation had never been impleaded as a party to Civil Case No. Q-11895 filed by Ricardo Castulo and Juan V. Ebreo. The complaint had for its purpose the nullification of the award to Cristobal Santiago, Jr., and the subsequent sale between Santiago and the spouses Adalia Francisco and Carlos Robes. Such proceedings neither involved nor affected St. Dominic Corporation. Judgment therein was directed only against the titles of Cristobal Santiago, Jr., and the Robes spouses. The trial court could not execute the same against the petitioner as to deprive it of its property without due process of law. This is what the trial court made explicit in its order of execution. Its decision could not reach the petitioner's rights. Yet, the respondent appellate court declined to pass upon this principal issue in a rather ambiguous ruling.

In its decision the Court of Appeals held:

Decidedly, the present certiorari and mandamus proceedings is not the appropriate forum for the determination of the legal effect, if any there be, of the aforesaid final and executory judgment nullifying or declaring the nullity of the sale of subject property in question by Cristobal Santiago, Jr., to spouses Adalia Francisco and Carlos Robes and cancelling TCT No. T-83783 in their names, on the alleged subsequent auction

sale to respondent Aurora Francisco and from the latter to St. Dominic Corporation over the same property involved in said judgment. ...Whether or not the foreclosure proceedings, auction sale and subsequent transactions had on subject property during the pendency of the litigation thereover in the court below are subject to the outcome of said case, need not be passed upon in this disposition. What We are concerned with here are the assailed orders of the respondent court. ... (Annex "H", p. 55, Rollo — 70623).

The determination of whether or not the foreclosure proceedings, auction sale, and subsequent transactions had on the subject property, during the pendency of the litigation are subject to the outcome of said case bears heavily on the issues at hand. The answer is determinative of whether or not the trial court's order of execution should affect or be issued against the petitioner.

Anent the effect of the trial court's judgment on the mortgagee bank's rights and on the foreclosure of the property in question, this Court has held that where a Torrens title was issued as a result of regular land registration proceedings and was in the name of the mortgagor when given as a security for a bank loan, the subsequent declaration of said title as null and void is not a ground for nullifying the mortgage rights of the bank which had acted in good faith (Philippine National Cooperative Bank v. Carandang-Villalon, 139 SCRA 570). As a matter of fact, there are instances when even a fraudulent and forged document of sale may become the root of a valid title if the certificate had already been transferred from the name of the true owner to the name indicated by the forger (Duran v. Intermediate Appellate Court, 138 SCRA 489). Here, there is no forgery or fraud involved.

A mortgagee has the right to rely on what appears on the face of the certificate of title. In the absence of anything to excite suspicion, it is under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate. There is no showing in the records that the mortgagee bank was aware of any shadow affecting the title of the mortgaged property when it was mortgaged. As will be explained later, the intervenors are only prospective awardees of the disputed lot. They are not the owners. They have no title to the land.

The main purpose of the Torrens System is to avoid possible conflicts of title to real estate, and to facilitate transactions relative thereto by giving the public the right to rely upon the face of a Torrens certificate of title and to dispense with the need of inquiring further, except when the party concerned had actual knowledge of facts and circumstances that should impel a reasonably cautious man to make such further inquiry (Pascua v. Capuyoc, 77 SCRA 78). Thus, where 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 (Director of Land v. Abache, et al., 73 Phil. 606). The lien of the petitioner, an innocent mortgagee for value must be respected and protected (Blanco v. Esquierdo, 110 Phil., 494).

The title to the property given as security to the Manufacturer's Bank and Trust Co., by the spouses Robes was valid, regular, and free from any lien or encumbrance. The mortgage was executed prior to the institution of Civil Case No. Q-11895, thus establishing it as a lien superior to whatever claims the plaintiffs therein may have as a result of the subsequent litigation. An inquiry beyond the face of the mortgagor's title would certainly have yielded no flaw at that time. This being so, the adverse claim in Civil Case No. Q-11895 could not affect the rights of the mortgagee. The fact that the foreclosure of the mortgage and the subsequent auction sale were effected after the annotation of the adverse claim is of no moment. The foreclosure sale retroacts to the date of registration of the mortgage (Bank of the Philippine Islands v. Noblejas, 105 Phil., 418).

A person who takes a mortgage in good faith and for a valuable consideration, the record showing a clear title in the mortgagor, will be protected against any equitable titles to the premises or equitable claims on the title, in favor of third persons, of which he had no notice, actual or constructive. The protection extends to a purchaser at a Sheriff's sale under proceedings on the mortgage although such purchaser had notice of the alleged equity (59 CJS, Sec. 233, pp. 303-304).

Any subsequent lien or encumbrance annotated at the back of the certificate of title cannot in any way prejudice the mortgage previously registered and the lots subject thereto pass to the purchaser at public auction free from any lien or encumbrance (Gonzalo Puyat & Sons, Inc., v. Philippine National Bank, 4 SCRA 1257). Otherwise, the value of the mortgage could be easily destroyed by a subsequent record of an adverse claim, for no one would purchase at a foreclosure sale if found by the posterior claim (Bank of the Philippine Island v.

Noblejas, supra). Aurora Francisco's title, as a purchaser at the auction sale of the property in question, cannot be bound by the adverse claims of the plaintiffs in Civil Case No. Q-11895. This is even more true with petitioner St. Dominic Corporation which had acquired title from Aurora Francisco without any notice or flaw.

Upon proper foreclosure of a first mortgage, all liens subordinate to the mortgage are likewise foreclosed. The foreclosure as well as the sale of the property were annotated on the title to the property, then still in the name of Adalia Francisco and Carlos Robes. Such annotation serves as constructive notice to the parties having any claim or nterest in the property to exercise their right of redemption or to participate in the foreclosure sale. Certainly, there was an opportunity for the claimants in Civil Case No. Q-1 1895 to acquire the property at issue. St. Dominic's rights can no longer be disturbed.

It should also be noted that the intervenors in Civil Case Q-11895 possess no enforceable lien over the property in question. They are merely prospective awardees of the realty. The right they assert is purely speculative. No vested rights exist in their favor. The award of the disputed lot to Cristobal Santiago, Jr. may have been declared improper. As to who should get the lot, according to law, still lies in the discretion of the PHHC. No assurance is given that the lot would be awarded to the claimants-intervenors. The decision in Civil Case Q-11895 may be deemed correct insofar as it called for a processing of the Bustamante claim but erroneous when it assumed that after processing, the award would be in the spouses' favor.

However, the PHHC is now estopped by circumstances from making any further award. As earlier stated, the lower court cannot order the execution of the decision as against the petitioner and, thereby, cancel St. Dominic's title in favor of a future unknown person. It cannot disregard the rights already vested in petitioner St. Dominic. To do so would impair confidence in certificates of titles and orderly processes of law. Among the guarantees of the Torrens system is that it renders title indefeasible. Section 31, Presidential Decree 1529, The Land Registration Act, provides: "The decree of registration shall bind the land and quiet title thereto, subject only to the exceptions or liens as may be provided by law. It shall be conclusive upon and against all persons, including the National Government and all branches thereof whether mentioned by name in the application or notice, the same being included in the general description "to all of whom it may concern". " This provision is applicable under the facts of this case.

In its petition in G.R. No. 70623, petitioner St. Dominic "prays most earnestly for such and any other relief as this Honorable Court, in its far greater wisdom, may deem just, equitable and proper in the premises, such as the dismissal of the petition in G.R. No. L-48630."

Petitioners Bustamante in G.R. No. L-48630, assail the grant ex parte by the trial court of the writ of possession over the property, likewise the subject of G.R. No. 70623, in favor of Aurora Francisco. It is alleged that a court has no jurisdiction, power, and authority to eject a third person who is not a party to the foreclosure proceedings or mortgage by a mere writ of possession summarily issued in a foreclosure suit.

Respondent St. Dominic Corporation moved and was allowed to intervene as successor-in-interest by purchase to all the rights, title, and interest of respondent Francisco over the lot in question.

Section 6 of Act No. 3135, as amended by Act 4118, the law that regulates the methods of affecting extrajudicial foreclosure of mortgage makes applicable Sections 464 to 466 of the Code of Civil Procedure, now sections 29 to 31 and 35 of Rule 39 of the Revised Rules which provide: "If no redemption be made within twelve (12) months after the sale, the purchaser, or his assignee, is entitled to a conveyance and possession of the property ..., " and "The possession of the property shall be given to the purchaser or last redemptioner by the officer unless a third person is actually holding the property adversely to the judgment debtor." Petitioners capitalize on this last proviso of the law.

On this point, the trial court held, and We quote with approval that:

The Court is aware of the limitation that writ of possession may not issue when the property is in the possession of a third party who holds the property adverse to the buyer in the foreclosure sale. But, by their express admission in their motion, movants are merely 'occupants-applicants' for the purchase of the land from the defunct PHHC. Under such claim which is, at best inchoate, we cannot refuse to grant the writ of possession prayed for; to do so, would be to becloud the integrity of the torrens title, and it would be in derogation of its indefeasibility.

xxx xxx xxx

In the instant case, the property involved is covered by a certificate of title. It has passed through different owners until it was bought by petitioner, Aurora Francisco, at a public auction sale by reason of the foreclosure of the mortgage in the property and subsequently sold by said Aurora Francisco to intervenor St. Dominic. And movants here, would like us to quash the writ of possession we issued, on the ground that the same was issued upon an ex parte petition is permitted and allowed by virtue of Act 3135, and on the allegation that movants "have been in possession of the subject property since 1962 as occupants-applicants for the purchase thereof from the defendant PHHC ... " (p. 3, Motion to Quash) which, as we said above is a matter of expectancy (inchoate) and should not be allowed to prevail over the clean title of the petitioner and/or intervenor herein. (pp. 73-74, Rollo-G.R. No. 48630).

Indeed, the rules contemplate a situation where a third party holds the property by adverse title or right such as a coowner, tenant or usufructuary. In such cases, a grant of a writ of possession, would be denial of such third person's rights without giving them their day in court. Especially, where question of title is involved, the matter would well be threshed out in a separate action and not in a motion for a writ of possession. But such is not the state of affairs in the case at bar.

The right of the respondent to the possession of the property is clearly unassailable. It is founded on the right of ownership. As the purchaser of the properties in the foreclosure sale, and to which the respective titles thereto have already been issued, the petitioner's rights over the property has become absolute, vesting upon it the right of possession of the property which the court must aid in affecting its delivery. After such delivery, the purchaser becomes the absolute owner of the property. As we said in Tan Soo Huat u. Ongwico (63 Phil., 746), the deed of conveyance entitled the purchaser to have and to hold the purchased property. This means, that the purchaser is entitled to go immediately upon the real property, and that it is the sheriff's inescapable duty to place him in such possession. (Philippine National Bank v. Adil, 118 SCRA 110). With more reason that the said writ of possession should be granted Aurora Francisco or, in her stead, St. Dominic Corporation in the light of our pronouncements in G.R. No. 70623. Ownership has been consolidated in St. Dominic's favor. There being no clear title or right enforceable by the Bustamante spouses, a writ of execution or a writ of possession, may issue in favor of Aurora Francisco and/or St. Dominic Corporation.

Be it noted that as the trial court had said "the writ of possession issued by us has been complied with and satisfied," meaning to say that the movants vacated the property. But in the hearing held in this case, it has been admitted by the parties that the movants retumed to the land in question and constructed again thereon their respective uses. This being so, the movants must vacate and remove from the disputed premises whatever they have built or constructed thereon. The writ of possession issued and enforced may no longer be quashed.

WHEREFORE, judgment is hereby rendered in G.R. No. 70623, GRANTING the petition of ST. DOMINIC CORPORATION. The decision of the Intermediate Appellate Court, now Court of Appeals, dated January 31, 1985 in ACG.R. SP No. 00513 and its resolution dated April 16, 1985, are REVERSED and SET ASIDE. The writ of execution issued by the trial court in Civil Case No. Q-11895, with the qualification excluding the petitioner, is in accord with the facts and the applicable law and is accordingly sustained as correct. However, the decision of the trial court directing the PHHC (now NHA) to process the application of Francisco Banzon Bustamante to purchase the property in question and to execute the requisite documents for the award of said lot to her having been rendered ineffective by circumstances supervening in Civil Case No. Q-11895, the writ of execution issued by the court a quo therefore is hereby declared without force and effect.

G.R. No. L-48630 is DISMISSED for lack of merit.

SO ORDERED.

G.R. No. 70987 January 30, 1987

GREGORIO Y. LIMPIN, JR. and ROGELIO SARMIENTO, petitioners, vs.INTERMEDIATE APPELLATE COURT and GUILLERMO PONCE, respondents.

Danilo A. Basa for petitioners.

Sycip, Salazar, Feliciano & Hernandez Law Office and Eugenio C. Lindo for private respondent.

 

NARVASA, J:

Assailed in this petition for review is the decision of the Intermediate Appellate Court in A.C.-G.R. No. 02516, entitled "Guillermo Ponce, versus Hon. Antonio P. Solano, etc., et al.," the dispositive portion of which reads —

WHEREFORE, the orders dated October 16, 1983 1 and December 19, 1983 of the respondent court, so far as they deny the confirmation of the sale of the lots formerly covered by TCT Nos. 92836 and 92837, are SET ASIDE and the respondent court is hereby ORDERED to confirm the sale and issue a writ of possession to the petitioner with respect to the aforesaid lots, subject to the equity of redemption of the respondent Rogelio V. Sarmiento. Without costs.

SO ORDERED.

The conflict in claims resulting from the mortgage and subsequent sale to different persons of the same real property, and the execution sale thereof at a still later date at the instance of yet another party, is what is chiefly involved in the case at bar, as well as the matter of the remedies available to correct errors in the execution of a final and executory judgment.

On February 28, 1973, four lots covered by TCTs Nos. 92836, 92837, 92839 and 92840 of the Register of Deeds of Quezon City were mortgaged by the spouses Jose and Marcelina Aquino to Guillermo Ponce and his wife Adela (since deceased) as security for a loan of P2,200,000.00. The mortgages were registered on March 1, 1973. Two of the lots, those covered by TCTs Nos. 92836 and 92837, were afterwards sold in 1978 by the Aquinos to the Butuan Bay Wood Export Corporation, which caused an adverse claim to be annotated on the certificates of title on February 24, 1978. 2

In 1979, Gregorio Y. Limpin, Jr. obtained a money Judgement against Butuan Bay Wood Export Corporation in Civil Case No. 10463 of the Court of First Instance of Davao. To satisfy the judgment, the lots covered by TCTs Nos. 92836 and 92837 were levied upon on September 3, 1980 and sold at public auction to Limpin as the highest bidder for the sum of P517,485.41 on October 6, 1980. On order of the trial court, the covering titles were cancelled and in their stead TCTs Nos. 285450 and 285451 were issued to Limpin. On November 21, 1981, Limpin sold the two lots to Rogelio M. Sarmiento. By virtue of said sale, TCTs Nos. 285450 and 285451 were cancelled on November 4, 1983, and replaced by TCTs Nos. 307100 and 397124 in Sarmiento's name. 3

On September 2, 1980 (a day before Limpin's levy on the two lots), Ponce filed suit against the Aquino spouses for judicial foreclosure of the mortgage over the Aquinos' four lots. The case was docketed as Civil Case No. Q-30726 of the former Court of First Instance of Quezon City. On June 8, 1982, judgment was rendered in favor of Ponce. After the judgment became final, the Trial Court, in an order dated September 13, 1983, directed the sale at public auction of the four (4) mortgaged lots to satisfy the judgment. On October 12, 1983, the four lots, including those formerly covered by TCTs Nos. 92836 and 92837, were sold to Ponce himself whose bid of P5,200,000.00 was the highest and exactly correspond to the judgment debt. On the same day, the sheriff's certificate of sale was registered. 4

Ponce then moved for the confirmation of the sale and the issuance of a writ of possession in his favor covering an the four lots. But the Trial Court, by order dated October 26, 1983, confirmed only the sale of the lots covered by TCTs Nos. 02839 and 92840, refusing to confirm the sale or issue a writ of possession in regard to the lots covered by TCTs Nos. 92836 and 92837 on the ground that those titles had already been cancelled and new ones issued to Gregorio F. Limpin, by order of February 16, 1982 of the Court of First Instance of Davao City in Civil Case No. 10463, already referred to.

Ponce filed a motion for reconsideration and notified Limpin. Limpin however refused to participate in the hearings contending that the Court had no jurisdiction over his person; but he did comment that the mortgage over the lots covered by TCTs Nos. 92836 and 92837 had been released by Ponce by virtue

of a "Partial Release of Real Estate Mortgage" dated July 20, 1977. The Trial Court denied Ponce's motion for reconsideration, whereupon he sought corrective relief by filing a special civil action for certiorari and mandamus in the Intermediate Appellate Court, impleading Limpin and Rogelio M. Sarmiento, Limpin's vendee, as private respondents. 5

After hearing and submission by the parties of extensive memoranda as well as documentary evidence, the respondent Appellate Court rendered the questioned decision on February 28, 1985, setting aside the judgment of the Trial Court which denied the confirmation of the sale of the lots formerly covered by TCTs Nos. 92836 and 92837, and ordering said Court to confirm the same and issue a writ of possession to Ponce with respect thereto, subject to Sarmiento's equity of redemption.

Hence, this petition for review, filed by Limpin and Sarmiento.

The petition should be denied.

The petitioners' contention that the action of certiorari and mandamus (instituted by Ponce in the Intermediate Appellate Court) was not the proper remedy is not well taken. The Appellate Court disposed of this preliminary issue as follows:

Nor is there any merit in the argument of the respondents that petitioner's remedy is to appeal from the orders denying the motion for confirmation of the sale. The respondents claim that these orders are final orders and cite in support of their contention the decision in Domalante vs. Martinez, 20 SCRA 1136 (1967), where it was held that "An order of confirmation in court foreclosure proceedings is a final order, not merely interlocutory. The right of appeal therefore, has long been recognized." The Court was there speaking of an order confirming the sale, as between the parties to a mortgage, not of an order, such as the ones herein in question, denying confirmation because a third party, not a party in the foreclosure proceedings, asserts a right to the properties sought to be foreclosed. Only a separate proceeding, such as the present case, could possibly determine mine the rights of such party. (See Rivero de Ortega v. Natividad, 71 Phil. 340 (1941).lwphl@itç 6

Certain it is that courts have plenary authority and control over the execution of their final and executory judgments and orders. 7 Indeed, once that authority i timely and properly in voked, it becomes the court's ministerial and mandatory function to direct execution. 8

That authority lasts until the judgments are fully satisfied, subject only to the time limitations prescribed therefor. 9With particular reference to the execution of a judgment hi a mortgage foreclosure action, the authority to direct and effect the same exists until the confirmation of the foreclosure sale (and issuance and implementation of the writ of possession), confirmation being the final act which disposes of the case. 10

Certain it is too, that execution of final and executory judgments may no longer be contested and prevented, and no appeal should lie therefrom; otherwise, cases would be interminable, and there would be negation of the overmastering need to end litigations. 11

There may, to be sure, be instances when an error may be committed in the course of execution proceedings prejudicial to the rights of a party. These instances, rare though they may be, do call for correction by a superior court, as where —

1) the writ of executio nvaries the judgment 12

2) there has been a change in the situation of the parties making execution inequitable or unjust; 13

3) execution is sought to be enforced against property exempt from execution; 14

4) it appears that the controversy has never been submitted to the judgment of the court; 15

5) the terms of the judgment are not clear enough and there remains room for interpretation thereof; 16 or,

6) it appears that the writ of execution has been improvidently issued, or that it is defective in substance, or is issued against the wrong party, or that the judgment debt has been paid or otherwise satisfied, or the writ was issued without authority;17

In these exceptional circumstances, considerations of justice and equity dictate that there be some mode available to the party aggrieved of elevating the question to a higher court, That mode of elevation may be either by appeal (writ of error or certiorari, 18 or by a special civil action of certiorari, prohibition, or mandamus.) 19

The petitioners also question the jurisdiction of the Intermediate Appellate Court over their persons, alleging that they were not original parties to the action for judicial foreclosure. It appears, however, that despite awareness of this ostensible defect, they fully participated without objection in the certiorari and mandamus proceedings before the respondent Appellate Court. Having thus voluntarily appeared and seen the case through its final resolution, they cannot now be permitted to turn about and repudiate the Appellate Court's jurisdiction over them.

This Court has ruled:

* * * * And as we have previously quoted approvingly "a party cannot invoke the jurisdiction of a court to secure affirmative relief against his opponent and, after obtaining or failing to obtain such relief, repudiate or question that same jurisdiction." While the jurisdiction of a tribunal may be challenged at any time, sound public policy bars the petitioners from so doing after having procured that jurisdiction themselves, speculating on the fortunes of litigation.

xxx xxx xxx

The petitioners, to borrow the language of Justice Bautista Angelo, "cannot adopt a posture of double-dealing without running afoul of the doctrine of estoppel." The principle of estoppel is in the interest of a sound administration of the laws. It should deter those who are disposed to trifle with the courts by taking inconsistent positions contrary to the elementary principles of right dealing and good faith. For this reason, this Court closes the door to the petitioners' challenge against the jurisdiction of the Court of Appellants' and will not even honor the question with a pronouncement. 20

Petitioner, however, is estopped, on ground of public policy, from invoking the plea of lack of jurisdiction after submitting itself to the jurisdiction of the Court of Appeals and assailing its jurisdiction only after an adverse judgment was rendered against the petitioner. ... 21

The petitioners further argue that the Appellate Court erred in according superiority to the mortgage rights of Ponce over the levy and sale in favor of petitioner Limpin and the subsequent sale of the property to petitioner Sarmiento.

The Appellate Court correctly ruled that the rights and interests of petitioners Limpin and Sarmiento to the property in question are subordinate to those of respondent Ponce, who holds a prior and senior lien. According to said Court:

* * * This case is controlled by the decision in Santiago v. Dionisio, 92 Phil. 495 (1935). In theSantiago case, Ramon San Diego mortgaged his land to Eulalia Resurreccion. Later he sold it to Apolonia Santiago. As the mortgage debt was not paid, Resurreccion had the mortgage foreclosed. The Supreme Court upheld the sale to Dionisio, subject, however, to the equity of redemption of Santiago. The Court stated:

... [T]he effect of the failure to implead a subordinate lienholder or subsequent purchaser or both is to render the foreclosure

ineffective as against them, with the result that there remains in their favor the "unforeclosed equity of redemption." But the foreclosure is valid as between the parties to the suit. (Ibid; 2 Moran's Rules of Court, 3rd ed., p. 239)

Applied to this case, this means that the sale to Ponce, as the highest bidder in the foreclosure sale of the two lots in question should have been confirmed, subject to Limpin's (and now Sarmiento's equity to redemption. As held in Santiago v. Dionisio supra, the registration of the lands, first in the name of Limpin and later of Sarmiento, was premature. At most what they were entitled to was the registration of their equity of redemption. 22

Moreover:

The superiority of the mortgagee's lien over that of a subsequent judgment creditor is now expressly provided in Rule 39, Section 16 of the Revised Rules of Court, which states with regard to the effect of levy on execution that it shall create a lien in favor of a judgment creditor over the right title and interest of the judgment debtor in such property at the time of the levy, subject to the liens or encumbrances then existing. 23

It is well settled that a recorded mortgage is a right in rem, a hen on the property whoever its owner may be. 24The recordation of the mortgage in this case put the whole world, petitioners included, on constructive notice of its existence and warned everyone who thereafter dealt with the property on which it was constituted that he would have to reckon with that encumbrance. Hence, Limpin's subsequent purchase of the "interests and participation" of Butuan Bay Wood Export Corporation in the lots covered by TCTs Nos. 92836 and 92837, as well as the sale of the same to Sarmiento on November 21, 1981, were both subject to said mortgage. On the other hand, Ponce's purchase of the lots mortgaged to him at the foreclosure sale on October 12, 1983, was subject to no prior lien or encumbrance, and could in no way be affected or prejudiced by a subsequent or junior lien, such as that of Limpin. 25 Petitioner Sarmiento having acquired no better right than his predecessor-in-interest, petitioner Limpin, his title must likewise fail.

The fact that at the time Ponce foreclosed the mortgage on October 21, 1983, the lots had already been bought by Limpin and subsequently sold to Sarmiento is of no consequence, since the settled doctrine is that the effects of the foreclosure sale retroact to the date of registration of the mortgage, i.e., March 1, 1973 in the present case.

* * * It is well to note that the mortgage in favor of the late Ramon Eugelio was annotated on November 13, 1952 at the back of the certificates of title in controversy, while the adverse claim was only annotated on the same certificate more than one year later, on December 21, 1953. Hence, the adverse claim could not effect the rights of the mortgagee; and the fact that the foreclosure of the mortgage and the consequent public auction sale have been effected long after the annotation of the adverse claim is of no moment, because the foreclosure sale retroacts to the date of registration of the mortgage. 26

Anent the claim that respondent Ponce executed a deed of partial release of his mortgage on July 20, 1977, the evidence discloses that Ponce and Jose Aquino, the mortgagor, thereafter executed separate affidavits dated December 1, 1983, stating that the said partial release was void, not only for want of consideration but also for lack of the signatures of Ponce's two sons who at the time of the execution of the document, were co-mortgagees as successors and heirs of Mrs. Adela Ponce. Moreover, the Deed of Partial Release was not registered but had simply been attached, together with the Deed of Sale of the lands to Butuan Bay Wood Export Corporation, to said corporation's affidavit of adverse claim, the last being the document which was actually registered, on February 4, 1978 as already stated. Thus the mortgage in favor of Ponce and his late wife was still subsisting, when the notice of levy in favor of Limpin was annotated on the original of OCTs Nos. 92836 and 92837, and even when the execution sale in favor of Limpin pursuant to the levy was registered. Said annotation was cancelled only on November 25, 1981, after the properties had been sold on execution to Limpin on October 6, 1981.

The petitioners finally assert that respondent Ponce did not have a right of action for foreclosure over the lots in question in the Trial Court, much less to pursue this case, first in the respondent Intermediate Appellate Court and now, before this Court, because as early as August 18, 1976, he and his wife had donated the lots to the Doña Josefa Edralin Marcos Foundation and the donation had been accepted on August 31, 1976. However, that donation was never registered, a fact that the petitioners admit. Even if this Court were inclined to take up that issue now, though raised only for the first time, it is obvious that no resolution thereof could possibly improve the petitioners' position as against that of the private respondent or the latter's transferee.

WHEREFORE, the petition is denied, with costs against petitioners.

SO ORDERED.

G.R. No. 71832 September 24, 1991

LEON BERNARDEZ and ANICETA BERNARDEZ, petitioners, vs.ARSENIO REYES, respondent.

Wenceslao S. Fajardo for petitioners.

Perfecto R. Bautista for private respondent.

 

PARAS, J.:p

This is a petition for review on certiorari seeking the annulment of the June 26, 1985 decision 1 of the then Intermediate Appellate Court in AC-G.R. CV No. 67344 entitled "Arsenio Reyes v. Leon Bernardez and Aniceta Bernardez"which affirmed the order 2 of the Court of First Instance of Rizal dated June 23, 1978 declaring that no valid tender of payment was made by petitioners who had lost their right to redeem the property and ordering the respondent to pay the petitioners the sum of P6,140.00.

The undisputed facts of the case are as follows:

Petitioner Leon Bernardez mortgaged a parcel of land to the Government Service Insurance System (GSIS for short) to secure a loan. The said land was, however, subsequently foreclosed upon. On April 17, 1962, it was sold at public auction to herein respondent Arsenio Reyes. Inscribed on the certificate of title was the date of the sale and the provision that the period of redemption expires one year after the date of the auction sale or on April 17, 1963. Thereafter, GSIS as attorney-in-fact of the Bernardez spouses, executed a Deed of Sale over the land in favor of Reyes on November 8, 1962. On April 18, 1963, both the certificate of foreclosure sale issued by the Provincial Sheriff and the said Deed of Sale were registered at the Office of the Register of Deeds of Rizal. On even date, a new Transfer Certificate of Title was likewise issued in the name of Arsenio Reyes. On October 26, 1963, believing that the period of redemption had already expired, Reyes, filed an action in the Court of First Instance of Rizal praying that he be declared the owner of the land and asking the court to order the Bernardez spouses to pay the attorney's fees as well as the back rentals from April 17, 1962 to April 17, 1963. With leave of court, GSIS intervened as third-party defendant (Rollo, p. 33). On August 23, 1967, after a trial on the merits, the court ruled as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendants and against the plaintiff and the third-party defendant Government Service Insurance System giving defendant Leon Bernardez 173 days from and after receipt of a copy of this decision within which to redeem the property from the plaintiff by paying P1,315.00, the balance of the redemption price to be furnished by third-party defendant Government Service Insurance System. However, defendant Leon Bernardez shall shoulder the legal interest of the redemption price from the date of registration of the Deed of Sale executed by the Provincial Sheriff, plus all the other expenses incidental to said redemption. The complaint is dismissed in so far as Ligaya Ramos and Dominador Vicente are concerned. The plaintiff is, likewise, ordered to pay the defendants Leon Bernardez and Aniceta Bernardez the sum of P5,000.00 representing moral damages due to anguish, anxiety

besmirched reputation caused the defendants by the filing of this case; to pay the further sum of P1,000.00 as attorney's fees; and to pay the costs.

SO ORDERED.

(Rollo, pp. 27-28).

Reyes appealed to the Court of Appeals which, in turn, rendered its decision dated June 20, 1977, in this wise:

WHEREFORE, the decision appealed from is affirmed in all respects with the modification that the third-party plaintiffs-appellees (Bernardez) should pay to appellant Arsenic Reyes as redemption price the amount of P6,510.00 with interest thereon at 1 per cent a month from the date of the auction sale on April 17, 1962 up to the time of redemption which the third-party plaintiffs-appellees should exercise within thirty (30) days from the time the present decision has become final and executory. The Government Service Insurance System must refund the amount of P704.99 to Bernardez which is the excess of the auction sale and the further amount of P851.46 which was the amount deducted from the salary of Bernardez after the foreclosure, with costs against the appellant, Arsenio Reyes.

SO ORDERED.

(Record on Appeal, pp. 27-28; Rollo, p. 33).

On January 31, 1978, the Bernardez spouses offered the sum of P18,000.00 to Reyes apparently to redeem the property, but the latter refused (Petition, Rollo p. 11). Such prompted the spouses to consign the sum to the same lower court which ruled in their favor and at the same time, they filed a manifestation and a motion for modification of judgment praying that the court fix the redemption price including interest in the amount of P18,944.10 and to allow deduction therefrom of the sum of P6,114.00 representing the award of damages due them by Reyes and finally to order Reyes to accept the balance of P12,831.00 (Rollo, pp. 55, 13). Reyes accordingly filed an opposition and a motion for clarification thereto. The court a quo on June 23, 1978, laid down the following verdict, presently in dispute:

WHEREFORE, in view of the foregoing, the court declares that there was no valid tender of payment on the part of the defendants who had lost their right to redeem the property upon the failure to exercise such right within the period provided in the Decision of the Court of Appeals. The plaintiff, on the other hand, is liable to the defendants in the amount of P6,140.00 as decided by this Court and affirmed by the Court of Appeals.

SO ORDERED.

(Record on Appeal, pp. 49-50; Rollo, p. 33).

The Bernardez spouses moved to reconsider but the motion was denied by the court in its order dated November 3, 1978 (Rollo, p. 33). The case was then elevated to the Intermediate Appellate Court (now renamed Court of Appeals) which simply affirmed the decision of the lower court in all respects. Hence, this petition.

The issue in this case is whether or not the right of redemption was exercised in time.

The petition is devoid of merit.

Well-settled is the rule that where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriffs certificate of foreclosure sale. (Eastman Chemical Industries, Inc. v. Court of Appeals, G.R. No. 76733, June 30, 1989, 174 SCRA 619; Gregorio Limpin v. Intermediate Appellate Court, et al., G.R. No. 70987, September 29, 1988, 166 SCRA 87; Philippine National Bank v. Court of Appeals, G.R. Nos. L-30831 & L-31176, November 21, 1979, 94 SCRA 357;

Matilde Gorospe v. Dolores Santos, G.R. No. L-30079, January 30, 1976, 69 SCRA 191; Ernesto Salazar v. Flor de Lis Meneses, G.R. No. L-15378 July 31, 1963, 8 SCRA 495; Leon Santos v. Rehabilitation Finance Corporation, et al., G.R. No. L-9796, July 31, 1957, 101 Phil. 980). Considering then that in the case at bar, the certificate of foreclosure sale issued by the Sheriff was registered on April 18, 1963, the right of redemption may be exercised only until April 18, 1964. The Bernardez spouses have clearly lost their right to redeem the property beyond the said date. Their much belated attempt to do so, notwithstanding their offer of considerable interest added to the redemption price, can no longer revive such right rendered inutile more than fourteen years before. The statutory period of redemption counted from the registration of the Certificate of Sale remains fixed at one year from the date of registration of the certificate of foreclosure sale (Eastman Chemical Industries, Inc. v. Court of Appeals, supra). Even the thirty-day 'grace period' to redeem the property granted by the Court of Appeals from the time its decision has become final and executory has no basis in law. In fact, this Court has ruled that if no redemption is made within the said period, the purchaser has the absolute right to a writ of possession which is the final process to carry out or consummate the extrajudicial foreclosure. Henceforth the debtors lose their right over the property (Malonzo, et al. v. Mariano, G.R. No. 53998, May 31, 1989, 173 SCRA 667).

Turning now to respondent Reyes claim for back rentals covering the period of redemption, Section 34, Rule 39 of the Rules of Court explicitly provides that a purchaser, from the time of the sale until a redemption is made, is entitled to receive the rents of the property if such property is in the possession of a tenant. (Quintin v. Espe, G.R. No. L-16777 April 20, 1961, 1 SCRA 1004) (Emphasis supplied). The Bernardez spouses, being judgment debtors and not tenants, may then possess the property without having to pay rents for the use thereof (Velasco v. Rosenberg's Inc., 32 Phil. 72 [1951]). Reyes, therefore, cannot claim back rentals from the spouses during the period of redemption.

PREMISES CONSIDERED, the decision appealed from is AFFIRMED with the modification that there was no valid tender of payment as the period of redemption had lapsed on April 18, 1964 as provided by law, and not because of the 30-day period given by the respondent Court of Appeals.

SO ORDERED.

[G.R. No. 121413. January 29, 2001]

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA), petitioner, vs. COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

[G.R. No. 121479. January 29, 2001]

FORD PHILIPPINES, INC., petitioner-plaintiff, vs. COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.

[G.R. No. 128604. January 29, 2001]

FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and THE COURT OF APPEALS, respondents.

D E C I S I O N

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndicate.

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision[1] of the Court of Appeals in CA-G.R. CV No. 25017, entitled Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philippine Commercial International Bank), and the August 8, 1995 Resolution,[2] ordering the collecting bank, Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision[3] of the Court of Appeals and its March 5, 1997 Resolution [4] in CA-G.R. No. 28430 entitled Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International Bank, affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the plaintiffs Citibank Check Numbers SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:

On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiffs percentage or manufacturers sales taxes for the third quarter of 1977.

The aforesaid check was deposited with the defendant IBAA (now PCIBank) and was subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers sales taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel lines and written in between said lines was the phrase Payees Account Only; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the defendant IBAA.

It has been duly established that for the payment of plaintiffs percentage tax for the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobank, Alabang Branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiffs Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central Clearing House for clearing on the same day, with the indorsement at the back all prior indorsements and/or lack of indorsements guaranteed. Thereafter, defendant IBAA presented the check for payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiffs account with the defendant Citibank and the check was returned to the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the same. Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed to be Exhibit D, the latter was officially informed, among others, that its check in the amount of P4,746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiffs lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of plaintiffs percentage tax for the third quarter of 1977.

As a consequence of defendants refusal to reimburse plaintiff of the payment it had made for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiffs Citibank Check No. SN-04867 in the amount of P4,746,114.41 was in due course; it merely relied on the clearing stamp of the depository/collecting bank, the defendant IBAA that all prior indorsements and/or lack of indorsements guaranteed; and the proximate cause of plaintiffs injury is the gross negligence of defendant IBAA in indorsing the plaintiffs Citibank check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiffs Citibank Check No. SN-04867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank.[5]

Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold back the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Riveras instruction, PCIBank replaced the check with two of its own Managers Checks (MCs).Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The court likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as the NBI declared him as a fugitive from justice.

On June 15, 1989, the trial court rendered its decision, as follows:

Premises considered, judgment is hereby rendered as follows:

1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiffs Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is fully paid, plus costs;

2. On defendant Citibanks cross-claim: ordering the cross-defendant IBAA (now PCI BANK) to reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with the next preceding paragraph;

3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-defendant against the cross-claimant are dismissed, for lack of merits; and

4. With costs against the defendants.

SO ORDERED.[6]

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on certiorari to the Court of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:

WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.

The court hereby renders judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing the face value of plaintiffs Citibank Check No. SN-04867, with interest thereon at the legal rate starting January 20, 1983. the date when the original complaint was filed until the amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the cross-defendant against the cross-claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED.[7]

PCIBank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a Motion for Partial Reconsideration. Both motions were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals contending that it merely acted on the instruction of Ford and such cause of action had already prescribed.

PCIBank sets forth the following issues for consideration:

I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the said respondents instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the petitioner.[8]

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was crossed and payable to Payees Account Only.

3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.[9]

II. PCIBank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBanks only obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue.[10]

2. PCIBank which affixed its indorsement on the subject check (All prior indorsement and/or lack of indorsement guaranteed), is liable as collecting bank.[11]

3. PCIBank is barred from raising issues of fact in the instant proceedings.[12]

4. Petitioner Fords cause of action had not prescribed.[13]

II. G.R. No. 128604

The same syndicate apparently embezzled the proceeds of checks intended, this time, to settle Fords percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.

Both checks were crossed checks and contain two diagonal lines on its upper left corner between which were written the words payable to the payees account only.

The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned.

As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were considered fake and spurious. This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR anew, while an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as follows:

A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he prepared the plaintiffs check marked Ex. A [Citibank Check No. SN-10597] for payment to the BIR. Instead, however, of delivering the same to the payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious person denominated as Reynaldo Reyes in the Meralco Branch of PCIBank where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly the same amount as the first FORD check (Exh. A, P5,851,706.37) while this worthless check was coursed through PCIBs main office enroute to the Central Bank for clearing, replaced this worthless check with FORDs Exhibit A and accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit A was cleared by defendant CITIBANK, and the fictitious deposit account of Reynaldo Reyes was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit A. The same method was again utilized by the syndicate in profiting from Exh. B [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Riveras Assistant at FORD.

From this Reynaldo Reyes account, Castro drew various checks distributing the shares of the other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORDs Godofredo Rivera and PCIBs Remberto Castro; (3) JUAN CASTILLO who assisted de Leon in the initial arrangements; (4)

GODOFREDO RIVERA, FORDs accountant who passed on the first check (Exhibit A) to Castro; (5) REMBERTO CASTRO, PCIBs pro-manager at San Andres who performed the switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIBs Assistant Manager at its Meralco Branch, who assisted Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo Reyes bank account; (7) ALEXIS MARINDO, Riveras Assistant at FORD, who gave the second check (Exh. B) to Castro; (8)ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts to make it appear that the BIR had received FORDs tax payments.

Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The manner by which the said funds were distributed among them are traceable from the record of checks drawn against the original Reynaldo Reyes account and indubitably identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so.[14]

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks while absolving PCIBank from any liability, disposing as follows:

WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full payment, plus P300,000.00 attorneys fees and expenses of litigation, and to pay the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorneys fees and costs of litigation, and pay the costs.

SO ORDERED.[15]

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a banking institution.

II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.

IV. Assuming arguendo that defendant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited to it in its Central Bank account.[16]

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue? Or has Fords cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not remitted to the payee. It was established that instead of paying the checks to the CIR, for the settlement of the appropriate quarterly percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the members of the syndicate. As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a fraud.

Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in breach of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who, through their own negligence, allowed the commission of the crime.

In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with the task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to the question of liability based on the degree of negligence among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the imputed contributory negligence that would defeat its claim for reimbursement, bearing in mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicates activities through the information given by the payee of the checks after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of funds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damage to Ford lies in its own officers and employees who carried out the fraudulent schemes and the transactions. These circumstances were not checked by other officers of the company, including its comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer negligence and stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,[17] Ford argues that even if there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.

Furthermore, Ford contends that Godofredo Rivera was not authorized to make any representation in its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a master may be held for his servants wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable.[18] The general rule is that if the master is injured by the negligence of a third person and by the concurring contributory negligence of his own servant or agent, the latters negligence is imputed to his superior and will defeat the superiors action against the third person, assuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.[19]

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Fords General Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. As defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury, and without which the result would not have occurred.[20]

It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Fords negligence, if any, could not be characterized as the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867. Riveras instruction to

replace the said check with PCIBanks Managers Check was not in the ordinary course of business which could have prompted PCIBank to validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the CIR. Both were crossed checks. These checks were apparently turned around by Fords employees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payors confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.[21] This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBanks share of negligence when the syndicate achieved its ultimate agenda of stealing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back all prior indorsements and/or lack of indorsements guaranteed, and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its Managers checks and enabled the syndicate to encash the same.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:

x x x. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a depository/collecting bank of the BIR, it has the responsibility to make sure that the check in question is deposited in Payees account only.

x x x x x x x x x

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and not from any other person especially so when that person is not known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely on the alleged telephone call of one Godofredo Rivera and in his signature to the authenticity of such signature considering that the plaintiff is not a client of the defendant IBAA.

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the absence of an agreement to the contrary, that of principal and agent. [22] A bank which receives such paper for collection is the agent of the payee or holder.[23]

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.

Citibank further argues that PCI Banks clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GUARANTEED should render PCIBank liable because it made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank asserts that the proximate cause of Fords injury is the gross negligence of PCIBank. Since the questioned crossed check was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make sure that the check in question is deposited in Payees account only.

Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payees account only. Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement all prior indorsements and/or lack of indorsement guaranteed.

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,[24] we ruled:

Anent petitioners liability on said instruments, this court is in full accord with the ruling of the PCHCs Board of Directors that:

In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of all prior endorsements. Thus, stamped at the back of the checks are the defendants clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.

No amount of legal jargon can reverse the clear meaning of defendants warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.[25]

Lastly, banking business requires that the one who first cashes and negotiates the check must take some precautions to learn whether or not it is genuine. And if the one cashing the check through indifference or other circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.[26]

Having established that the collecting banks negligence is the proximate cause of the loss, we conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all.  The trial court held, thus:

Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for clearing) were the clandestine or hidden actuations performed by the members of the syndicate in their own personal, covert and private capacity and done without the knowledge of the defendant PCIBank.[27]

In this case, there was no evidence presented confirming the conscious participation of PCIBank in the embezzlement.As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment.[28] A bank will be held liable for the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in which its own management employees had participated.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN 10597 and 16508. He passed the checks

to a co-conspirator, an Assistant Manager of PCIBanks Meralco Branch, who helped Castro open a Checking account of a fictitious person named Reynaldo Reyes. Castro deposited a worthless Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Pro-manager, Castro, and his co-conspirator Assistant Manager apparently performed their activities using facilities in their official capacity or authority but for their personal and private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to perpetrate in the apparent course of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and apparent scope of his employment or authority.[29] And if an officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of indebtedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum.[30]

Moreover, as correctly pointed out by Ford, Section 5 [31] of Central Bank Circular No. 580, Series of 1977 provides that any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBanks shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties.Citibank failed to establish that its payment of Fords checks were made in due course and legally in order.  In its defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any infirmity in the issuance of the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing Section 62[32] of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the acceptor which is Citibank engages that it will pay according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with annotation Payees Account Only.

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score, we agree with the respondent courts ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view, constitutes negligence in carrying out the banks duty to its depositors. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.[33]

Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 and 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be very high, if not the highest, degree of diligence.[34] A banks liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.[35]

Banks handle daily transactions involving millions of pesos. [36] By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary

clerks and employees.[37] Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.[38]

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account, [39] and an action upon a check is ordinarily governed by the statutory period applicable to instruments in writing.[40]

Our laws on the matter provide that the action upon a written contract must be brought within ten years from the time the right of action accrues.[41] Hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1983, barely six years had lapsed. Thus, we conclude that Fords cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law.

Finally, we also find that Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks liability by reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines, responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the damages that he may recover.[42]

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017, are AFFIRMED. PCIBank, known formerly as Insular Bank of Asia and America, is declared solely responsible for the loss of the proceeds of Citibank Check No. SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.

Costs against Philippine Commercial International Bank and Citibank, N.A.

SO ORDERED.

G.R. No. 74768 August 11, 1989

JUANA DE LOS REYES, petitioner, vs.HON. INTERMEDIATE APPELLATE COURT and SPOUSES CLARO C. YLAGAN and NATIVIDAD P. YLAGAN,respondents.

Raul A. Mora for petitioner.

Pelagia Abreu Suyo for respondents.

 

CRUZ, J.:

The petitioner obtained a loan in the amount of P3,000.00 from the Rural Bank of Bauan and secured the payment thereof with a real estate mortgage on a piece of land belonging to her. For her failure to pay the debt, the mortgage was extrajudicially foreclosed and the land was sold at public auction to the private

respondents for P4,925.00 on April 29, 1976. 1 The certificate of sale was registered with the Register of Deeds of Batangas on May 4,1977. 2

On August 26, 1977, the private respondents filed a complaint with the Court of First Instance of Batangas asking the petitioner to vacate the property and remove her improvements thereon. The petitioner countered that the auction sale was irregular and void and asked that the complaint be dismissed.

While this case was pending, the petitioner wrote a letter dated April , 1978, to the Provincial Sheriff of Batangas tendering the amount of P4,925.00 plus interest as the redemption price for the subject land. In a reply dated April 26, 1978, the said officer refused to accept the tender on the ground that the period of redemption had already expired. He added, though, that the petitioner's request was "being seriously considered."

The petitioner's letter 3 is reproduced as follows:

MENDOZA, PANGANIBAN & MACARANDANG LAW OFFICE

Cor. Rizal Avenue & P. Zamora St., Batangas City

Manghinao, Bauan Batangas

April , 1978

The Provincial Sheriff

Province of Batangas

Capitol Site, Batangas City

Dear Sir:

I hereby tender to your good office the redemption price of FOUR THOUSAND NINE HUNDRED TWENTY FIVE (P4,925.00) PESOS, plus the interest of 1 % per month for the said principal amount for the land your Office allegedly sold at auction sale on April 29, 1976 at Bauan, Batangas. The land subject of said sale is more particularly described as follows:

A residential and horticultural land under Tax Declaration No. 20729 in the names of plaintiffs, located at Manghinao, Bauan, Batangas with a total area of 1,608 square meters, more or less and a total assessed value of P 3,640.00 bounded on the North by Manghinao Bridge, on the East by Manghinao River, on the South by Basilia de los Reyes and on the West by Provincial Road.

I wish to inform your good office that while the alleged sale of afore-described property was made on April 29, 1976, the registration of the sale was made on May 4, 1977.

Please acknowledge receipt hereof.

Truly yours,

(Sgd.) JUANA DE LOS REYES

The reply 4 of the Provincial Sheriff ran thus:

REPUBLIC OF THE PHILIPPINES

OFFICE OF THE PROVINCIAL SHERIFF

BATANGAS CITY

April 26, 1978

Mrs. Juana de los Reyes

Manghinao, Bauan, Batangas

Madam:

Replying your letter dated April 1978, much to our desire to accommodate your request, we regret to inform you that we could not for the meantime accept the redemption amount you are tendering to this Office for as per Certificate of Sale dated April 29, 1976, the period of redemption of the property described in your said letter had already expired. Nevertheless, your request is being seriously considered by this office.

 

Very truly yours,

(Sgd.) EUSTACIO C. CUEVAS

Provincial Sheriff

On May 9, 1978, the trial court issued the following order: 5

It appearing from the pleadings that the question involved here is whether the redemption period, as alleged in the complaint, begins from the date of the extrajudicial sale of the property in question on April 29, 1976, and not on May 4, 1977, the date on which the sale was registered with the Register of Deeds as contended by the defendant, and that the defendant is ready to pay the redemption price but which was refused by the plaintiffs; that, in fact, the defendant tendered payment to the Provincial Sheriff of Batangas on April 25, 1978, which tender is still under consideration by said officer;

Wherefore, the defendant is hereby allowed to deposit the amount for the redemption of the property with this Court.

SO ORDERED.

On February 8, 1982, the trial court, after holding that there was no genuine issue on the material facts and that the only question of law to be resolved was the timeliness of the redemption, rendered a summary judgment in favor of the private respondents. 6 The petitioner appealed. Judge Romeo R. Silva's decision was affirmed in toto 7 by the respondent court, which is now sought to be reversed in this petition for review.

This petition was originally denied by the Court in a resolution dated October 6, 1986, for lack of merit. Thereafter, the petitioner filed a motion for reconsideration in which he complained that his reply to the private respondents' comment had not been taken into account when the said resolution was issued.

Filing of a reply is not a matter of right and may be done only if required or allowed by the Court; otherwise, it need not be considered at all (especially if, as in this case, it was hardly legible).lâwphî1.ñèt Even so, in view of the serious issues raised in the said motion, the Court resolved to direct the private respondents to comment thereon (to which a reply was submitted, followed by a rejoinder and then a sur-rejoinder all without being required or permitted by the Court). Finally, in our resolution dated September 22, 1987, we decided to give due course to this petition and to require the parties to submit simultaneous memoranda.

We find that several of the issue raised in this litigation can be resolved at the outset as they pose no serious controversy.

First, the private respondents argue that the tender of payment made by the petitioner was inefficacious because it was made to the sheriff and not the purchaser as required by Rule 39, Section 30, of the Rules of Court. However, while it is admittedly stated therein that the judgment debtor or redemptioner "may redeem the property from the purchaser," it is also provided in Section 31 of the same rule that:

... The payments mentioned in this and the last preceding sections may be made to the purchaser or redemptioner, or for him to the officer who made the sale.

And as observed by Chief Justice Moran in his definitive work on the Rules of Court:

... It is expressly provided that the tender of the redemption money may be made either to the purchaser or redemptioner, or to the sheriff who made the sale, and, in the last instance, it is the duty of the sheriff to accept the tender and execute the certificate of redemption. 8

x x x

The sheriff to whom payment may be made, is not necessarily the same sheriff who conducted the sale, if the latter is no longer in office, in which case payment may be made to his successor. And when the sale was made by a deputy sheriff, the redemption money may be paid to the provincial sheriff. 9

Second, on the sufficiency of the amount tendered, Section 30 clearly states that it should be equivalent to the amount of the purchase price plus one per cent monthly interest up to the time of the redemption. In the petitioner's letter to the provincial sheriff, she tendered the amount of P4,925.00 with interest. This was refused by the said officer on the ground that the redemption period had expired. The trial and respondent courts, for their part, later considered the tender insufficient.

It must be recalled that pursuant to the order of the trial judge on May 9, 1978, the petitioner deposited on that date the amount of P6,107.00. This was exactly equivalent to the purchase price plus the accrued 1% monthly interest thereon as of that date.

Finally, there is the question of the starting point of the redemption period which, the petitioner argues, started on May 4, 1977, and ended on May 4, 1978. This means that the tender she made to the Provincial Sheriff on April 26,1978, was within the one-year period prescribed by the Rules of Court.

While agreeing that the period did end on May 4, 1978, the trial and respondent courts held nevertheless that this was exceeded by the petitioner because the original amount tendered on April 26, 1978 was insufficient. As the discrepancy was corrected only on May 9, 1978, the redemption was in their view made four days late.

We have already observed that the amount tendered on April 26, 1978, was not insufficient as the petitioner offered the sum of P 4,925.00 "plus the interest of 1% per month for the said principal amount." In fact, the deposit made on May 9, 1978, was merely an affirmation of the earlier offer and was not even necessary at all. According to Chief Justice Moran again:

Where the judgment debtor or a redemptioner validly tenders the necessary payment for the redemption and the tender is refused, it is not necessary that it be followed by the deposit of the money in court or elsewhere, and no interest after such tender is demandable on the redemption money. 10

The basic question in this case is whether or not the petitioner's letter tendering the redemption price to the sheriff and the latter's reply thereto may be taken into account in determining the timeliness of the redemption.

The private respondents question the admissibility of these documents, stressing that they have not at any time been formally offered. The petitioner contends otherwise. She maintains that they were part of the record of the case and that the trial judge had a right and duty to consider them in arriving at his summary judgment.

The private respondents insist that the two letters had never been offered in evidence as required by Section 35, Rule 132 of the Rules of Court. This provides that:

Offer of evidence. — The court shall consider no evidence which has not been formally offered. The purpose for which the evidence is offered must be specified.

We find, however, that the letters were formally submitted during the hearing of the petitioner's motion to dismiss on May 9,1978, at which counsel for both parties were present. 11 Judge Benjamin Relova took cognizance of the correspondence and even noted in his order of the same date that "the defendant tendered payment to the Provincial Sheriff of Batangas on April 25, 1978, which tender is still under consideration by said officer. 12 The same posture was taken by the respondent court, which observed from the petitioner's letter that "what was tendered to the sheriff was only the amount of the bid, P4, 925, 13 and held this to be insufficient.

In other words, both courts found as established facts the tender made by the petitioner and the rejection thereof by the sheriff as manifested in their respective letters.

While the above-cited provision must be strictly interpreted in ordinary trials, such a policy is hardly applicable in summary proceedings where no full-blown trial is held in the interest of a speedy administration of justice. It is noted that when the two letters were presented at the hearing on May 9, 1978, the private respondents did not object to their admission. They did so only when the case was already on appeal. Furthermore, the rule on summary judgments is that the judge must base his decision on the pleadings, depositions, admissions affidavits and documents on file with the court. This is what the trial judge did, presumably after examining the authenticity and credibility of the evidence before him.

We hold therefore that the lower court did not err when it took into account Exhibits A and A-1, without objection from the private respondents, as evidence of the petitioner's timely offer of redemption and its erroneous rejection by the sheriff.

At this point, it is well to recall the following pronouncements from this Court:

Finally, the appellant bank objects to the redemption on the ground that the amount tendered is inadequate to meet the redemption price. Considering, however, that the sum tendered was the amount of the purchase price paid at the auction sale and that the tender was timely made and in good faith, we believe that the ends of justice would be better served by affording the appellees the opportunity to redeem the property by paying the bank the auction purchase price plus 1% interest per month thereon up to the time of redemption. 14

x x x

Considering that appellee tendered payment only of the sum of P317.44, whereas the three parcels of land she was seeking to redeem were sold for the sums of Pl,240.00, P21,000.00, and P30,000.00, respectively, the aforementioned amount of P 317.44 is insufficient to effectively release the properties. However, the tender of payment was timely made and in good faith; in the interest of justice we incline to give the appellee opportunity to complete the redemption purchase of the three parcels, as provided in Section 26, Rule 39 of the Rules of Court, within fifteen (15) days from the time this decision becomes final and executory. In this wise, justice is done to the appellee who had been made to pay more than her share in the judgment, without doing all injustice to the purchaser who shall get the corresponding interest of 1 % per month on the amount of as purchase up to the time of redemption. 15

The rule on redemption is liberally interpreted in favor of the original owner of the property. The fact alone that he is allowed the right to redeem clearly demonstrates the tenderness of the law toward him in giving him another opportunity, should his fortunes improve, to recover his lost property. This benign motivation would be frustrated by a too literal reading that would subordinate the warm spirit of the rule to its cold language.

WHEREFORE, the decision of the trial court dated February 8, 1982, is SET ASIDE. The decision of the respondent court dated April 3,1986, is also REVERSED insofar as it denies the petitioner the right of redemption. The private respondents are hereby directed to allow the petitioner to redeem the

disputed property for the amount of P6,107.00, now on deposit with the Regional Trial Court of Batangas. It is so ordered.

G.R. No. 114418 September 21, 1995

ESTANISLAO BODIONGAN, petitioner, vs.COURT OF APPEALS and LEA SIMEON, respondents.

 

PUNO, J.:

This petition for review on certiorari seeks to annul and set aside the Decision dated October 25, 1993 and the Resolution dated March 3, 1994 of the Court of Appeals in CA-G.R. CV No. 36314.

The antecedent facts are as follows:

On October 4, 1982, respondent Lea Simeon obtained from petitioner Estanislao Bodiongan and his wife a loan of P219,117·39 secured by a mortgage on three (3) parcels of land with a four-storey hotel building and personal properties located at Gango, Ozamiz City. The three (3) lots were covered by Transfer Certificates of Title Nos. T-6530, T-6531 and T-6532 in the name of private respondent.

Private respondent failed to pay the loan. Petitioner thus instituted against her Civil Case No. OZ-1177 with the Regional Trial Court, Branch 15, Ozamiz City for collection of sum of money or foreclosure of mortgage. Judgment was rendered by the trial court on October 11, 1984 ordering private respondent to pay petitioner, P220,459.71, at the legal rate of interest and P5,000.00 as attorney's fees, and in case of non-payment, to foreclose the mortgage on the properties. The dispositive portion of the decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against defendant LEA SIMEON ordering the defendant LEA SIMEON to pay the plaintiff the following:

1. P220,459.71 with legal rate of interest starting March 30, 1983, until fully paid;

2. P5,000.00 as reimbursement of plaintiff's attorney's fees;

3. In case of non-payment of the above amounts, the equitable mortgage (Exhibit "C") be ordered foreclosed and sold at public auction to settle the obligation; and

4. To pay the costs. 1

This decision was affirmed on March 21, 1986 by the Court of Appeals in AC-G.R. CV No. 05367 and later became final and executory.

Private respondent again failed to pay the judgment debt, hence, the mortgaged properties were foreclosed and sold on execution on January 12, 1987. At the auction sale, petitioner submitted to the sheriff a written bid of P309,000.00 and at the same time reserved in said bid a deficiency claim of P439,710.57. 2 The properties were awarded to petitioner as sole bidder and a certificate of sale was issued in his name and registered with the Register of Deeds of Ozamiz City.

Petitioner then took possession of the properties after filing, per order of the trial court, a guaranty bond of P350,000.00 to answer for any damage thereon during the redemption period.

On January 8, 1988, private respondent offered to redeem her properties and tendered to the Provincial Sheriff a check in the amount of P337,580.00. This amount was based on a tentative computation by the sheriff. 3 The check was received by petitioner on the same day after which the sheriff issued a certificate of redemption to private respondent also on the same day. 4

On January 11, 1988, petitioner, claiming additional interest at 38% per annum, moved to correct the computation of the redemption price and to suspend the issuance of a writ of possession pending computation. The motion was denied by the trial court. On July 8, 1988, the trial court issued the said writ and private respondent took possession of her properties.

On October 4, 1988, petitioner instituted against private respondent Civil Case No. OZ-1480-R with the Regional Trial Court, Branch 15, Ozamiz City for annulment of redemption and confirmation of the foreclosure sale on the ground of insufficiency of the redemption price. On October 7, 1988, petitioner consigned the redemption money with the court. 5

On November 25, 1991, the trial court dismissed the complaint but reduced the 12% interest rate on the purchase price to 6%, and thus, on the counterclaim, ordered petitioner to refund private respondent the excess 6% plus P10,000.00 and P5,000.00 for moral damages and attorney's fees, as follows:

WHEREFORE, premises considered, plaintiff's complaint is hereby dismissed, with costs against him.

On the counterclaim, plaintiff Engr. Estanislao Bodiongan is ordered to refund the 6% interest in excess of the 12% granted him in the computation which is not the legal rate allowed in the Civil Code, to pay defendant Lea Simeon the further sum of P10,000.00 as moral damages and the sum of P5,000.00 as attorney's fees. 6

The Court of Appeals in CA-G.R. CV No. 36314 affirmed the trial court's decision except for the refund of the 6% interest, to wit:

WHEREFORE premises considered, the judgment appealed from is hereby AFFIRMED subject to the modification on the amount of interest due, such that, the legal rate of interest due is 1% per month or 12% for 12 months in the case at bar and not 6% as ruled by the trial court. Costs against appellant. 7

Hence, this petition.

Petitioner claims before us that under the Revised Rules of Court, the redemption price for the mortgaged properties should be P351,080.00. Since private respondent actually tendered P337,580.00 which is short by P13,500.00, this price was inadequate thereby rendering redemption ineffectual.

The price for the redemption of properties at an extrajudicial foreclosure sale 8 is, according to Section 6 of Act 3135, fixed by Section 30 of Rule 39 of the Revised Rules of Court 9 which reads as follows:

Sec. 30. Time and manner of, and amounts payable on, successive redemptions. Notice to be given and filed. — The judgment debtor, or redemptioner, may redeem the property from the purchaser, at any time within twelve (12) months after the sale, on paying the purchaser the amount of his purchase, with one per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last-named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. Property so redeemed may again be redeemed within sixty (60) days after the last redemption upon payment of the sum paid on the last redemption, with two per centum thereon in addition, and the amount of any assessments or taxes which the last redemptioner may have paid thereon after redemption by him, with interest on such last-named amount, and in addition, the amount of any liens held by said last redemptioner prior to his own, with interest. The property may be again, and as often as a redemptioner is so disposed, redeemed from any previous redemptioner within sixty (60) days after the last redemption, on paying the sum paid on the last previous redemption, with two per centum thereon in addition, and the amounts of any assessments or taxes which the last previous redemptioner paid after the redemption thereon, interest

thereon, and the amount of any liens held by the last redemptioner prior to his own, with interest.

Written notice of any redemption must be given to the officer who made the sale and a duplicate filed with the registrar of deeds of the province, and if any assessments or taxes are paid by the redemptioner or if he has or acquires any lien other than that upon which the redemption was made, notice thereof must in like manner be given to the officer and filed with the registrar of deeds; if such notice be not filed, the property may be redeemed without paying such assessments, taxes, or liens.

In order to effect a redemption, the judgment debtor must pay the purchaser the redemption price composed of the following: (1) the price which the purchaser paid for the property; (2) interest of 1% per month on the purchase price; (3) the amount of any assessments or taxes which the purchaser may have paid on the property after the purchase; and (4) interest of 1% per month on such assessments and taxes. The redemption price must be for the full amount, otherwise the offer to redeem will be ineffectual. 10 And if the tender is for less than the entire amount, the purchaser may justly refuse acceptance thereof. 11 In the instant case, the redemption price covers the purchase price of P309,000.00 plus 1% interest thereon per month for twelve months at P37,080.00. Petitioner does not claim any taxes or assessments he may have paid on the property after his purchase. He, however, adds P5,000.00 to the price to cover the attorney's fees awarded him by the trial court in Civil Case No. OZ-1177.

In the redemption of property sold at an extrajudicial foreclosure sale, the amount payable is no longer the judgment debt but the purchase price at the auction sale. 12 In other words, the attorney's fees awarded by the trial court should not have been added to the redemption price because the amount payable is no longer the judgment debt, but that which is stated in Section 30 of Rule 39. The redemption price for the mortgaged properties in this case should therefore be P346,080.00, not P351,080.00.

Private respondent's tender was P337,580.00 which is still short by P8,500.00. The Provincial Sheriff declared that private respondent ordered him to deduct from the redemption price the value of certain personal properties in the hotel. During petitioner's possession of the lots, he sold some of the furniture, water pump and electrical installations in the hotel and appropriated the proceeds to himself without private respondent's knowledge and approval.

Petitioner does not deny the fact that he sold the personal properties and appropriated the proceeds of P13,500.00 to himself. He has expressly admitted this in his written bid to the sheriff. He, however, cannot be considered in estoppel because the deduction for the loss of the personal properties was not authorized under Section 30 of Rule 39. In the first place, the sheriff should not have issued the certificate of redemption without a final determination of the amount of the redemption price. 13 This unauthorized deduction of the value of private respondent's personal properties and the sheriff's overzealousness in issuing the certificate of redemption are aggravated by the fact that private respondent later sought for and was actually compensated for the said loss.

After taking possession of the lots and hotel, private respondent moved in Civil Case No. OZ-1177 to charge the loss of her personal properties to the guaranty bond posted by petitioner. The trial court awarded her P108,246.00 — with P23,246.00 for the "loss of her properties" and P85,000.00 for "unrealized income of the hotel." 14 The order of the trial court was affirmed by the Court of Appeals in CA-G.R. CV No. 31384 and this became final and executory after the Supreme Court dismissed petitioner's petition for review in G.R. No. 112344. 15

Indeed, if we were to allow the deduction of the value of private respondent's personal properties from the redemption price, this will amount to double compensation and unjust enrichment at the expense of petitioner. 16On the other hand, it would be highly unjust to deprive private respondent of her right to redeem by a strict application of the Rules of Court. It must be remembered that the policy of the law is to aid rather than defeat the right of redemption. 17Inasmuch as in the instant case tender of the redemption price was timely made and in good faith, and the deficiency in said price is not substantial, we incline to give private respondent the opportunity to complete the redemption of her properties within fifteen days from the time this decision becomes final. It is well to recall our earlier pronouncements on this matter:

Considering that appellee tendered payment only of the sum of P317.44, whereas the three parcels of land she was seeking to redeem were sold for the sums of P1,240.00, P21,000.00 and P30,000.00, respectively, the aforementioned amount of P317.44 is insufficient to effectively release the properties. However, the tender of

payment was timely made and in good faith, in the interest of justice we incline to give the appellee opportunity to complete the redemption purchase of the three parcels, as provided in Section 26, Rule 39 of the Rules of court, within fifteen (15) days from the time this decision becomes final and executory. In this wise, justice is done to the appellee who had been made to pay more than her share in the judgment, without doing an injustice to the purchaser who shall get the corresponding interest of 1% per month on the amount of his purchase up to the time of redemption. 18

The rule on redemption is liberally interpreted in favor of the original owner of the property. The fact alone that he is allowed the right to redeem clearly demonstrates the tenderness of the law toward him in giving him another opportunity, should his fortunes improve, to recover his lost property. This benign motivation would be frustrated by a too-literal reading that would subordinate the warm spirit of the rule to its cold language. 19

IN VIEW WHEREOF, the petition is DENIED and the Decision in CA-G.R. CV No. 36314 is affirmed with the modification that private respondent be allowed to complete the redemption price by paying to petitioner the difference of P8,500.00 at 1% interest per month 20 from January 8, 1988 until full payment thereof within fifteen (15) days from the time this decision becomes final and executory.

SO ORDERED.

G.R. No. L-59952 August 31, 1984

RUBY H. GARDNER and FRANK GARDNER, JR., petitioners, vs.COURT OF APPEALS, DEOGRACIAS R. NATIVIDAD and JUANITA A. SANCHEZ, respondents.

Mayor, Manalang, Reyes & Associates for petitioners.

Joanes Caacbay for private respondents.

 

MELENCIO-HERRERA, J.:

This is a Petition for the review of the Resolutions, dated April 24, 1980 and December 24, 1980, respectively, of the then Court of Appeals in CA-G.R. No. 52729-R entitled "Ruby H. Gardner, et al. versus Deogracias R. Natividad, et al," whereby the original Decision of said Court, promulgated on January 11, 1979, affirming in toto the judgment of the Court of First Instance of Laguna, Branch I, Biñan in Civil Case No. B-774, was reconsidered and the appealed judgment reversed in so far as private respondents herein are concerned.

A chain of successive transfers of real property, five in all, is involved.

Petitioner Ruby H. GARDNER, married to Frank Gardner, Jr. an American (the GARDNERS, for short), was the registered owner of two adjoining parcels of agricultural land situated at Calamba, Laguna, designated as Lot No. 1426-new and Lot No. 4748- new, with an aggregate area of 93,688 square meters more or less, and covered by TCT Nos. T-20571 and T-20573, respectively, of the Registry of Property of Laguna (Exhibits "A" & "B", Folio of Exhibits).

On November 27, 1961, the GARDNERS and the spouses Ariosto C. SANTOS and Cirila Serrano (the SANTOSES) entered into an agreement for the subdivision of the two parcels, with the SANTOSES binding themselves to advance to the GARDNERS the amount of P93,000.00 in installments. For the protection of both parties they executed the following documents all on the same date and referring to the same parcels of land: (1) Absolute Deed of Sale in favor of the SANTOSES (the First Transfer, considering the nature of the document); (2) Subdivision Joint Venture Agreement; and (3) Supplemental Agreement (Exhibits "C", "D" and "E", Ibid.). Despite the "sale,", the GARDNERS were still denominated in the Subdivision Joint Venture Agreement and in the Supplemental Agreement as "owners" and Ariosto SANTOS merely as "broker". It appears from the evidence that the sale to the SANTOSES was one "in trust" for the protection of the SANTOSES who had obligated themselves to give cash advances to the GARDNERS from time to time (Exhibits "E-2" to "E-88" incl.) On

December 5, 1961, new titles were issued in favor of the SANTOSES ( Exhibits " F " & " G ", Ibid.).

Unknown to the GARDNERS, on June 10, 1964, the SANTOSES transferred Lot No. 1426-New to Jose Cuenca, married to Amanda Relova (the JOSE CUENCAS) (Exhibit "H", Ibid.), and on June 15, 1964, Lot No. 4748-New to Juan Cuenca, married to Soledad Advincula (the JUAN CUENCAS) (Exhibit "I", Ibid.) (jointly, the Second Transfer). Titles were thereafter issued in their respective names (Exhibits "L" & "M", Ibid.).

Upon learning of the Transfer of the properties to the CUENCAS, petitioner 'Ruby GARDNER, caused the inscription of an Adverse Claim on the titles of the CUENCAS with the Register of Deeds of Laguna on December 2, 1965, Her Affidavit stated in part:

2. My adverse claim arose from the facts that sometime in the middle part of 1961, I and Mr. Ariosto Santos of 2162 Apolinario, Bangkal St., Makati, Rizal had an understanding and have agreed that we would subdivide my aforedescribed properties then covered by TCT Nos. T-20571 and T-20573 for Lot No. 1426-New and 4748-New, respectively, under the condition that he would advance to me a total amount of P93,000.00, which I could withdraw little by little and from time to time; that he would improve the aforesaid land by constructing paved roads sewers, water, other facilities that may be required by the authorities concerned and other requirements of the subdivision laws until he shall have invested for these purposes the sum of P234,220.00; that he assured me that the construction of these paved roads, etc. would commence immediately;

3. We (I and Mr. Ariosto Santos) have agreed that in order to protect his (Mr. Santos) interest to the sum of P93,000.00, to be withdrawn by me little by little and from time to time, I would transfer to his name my aforementioned titles in trust;

xxx xxx xxx

5. In the absolute Deed of Sale it was stated that I received from Mr. Santos the sum of P70,266.00 and in consideration of said amount, I have sold, transferred and conveyed my aforedescribed parcels of land to Mr. Santos; but these statements were and are not true, that is why we have the other two more documents the Subdivision Joint Venture Agreement and the Supplemental Agreement. It is stated in the Subdivision Joint Venture Agreement, which contains our true agreement that Mr. Ariosto Santos is only my Broker, so far as the aforedescribed parcels of land are concerned, as can be gleaned from Page 2, paragraphs 2 and 3 of the said Subdivision Joint Venture Agreement, ...

On October 19, 1966 and November 4, 1966, the JUAN CUENCAS and the JOSE CUENCAS, respectively, transferred the lots to Michael C. VERROYA (Exhibits "P" & Ibid.) an office assistant of Ariosto SANTOS (the Third transfer). Titles were issued in VERROYA's name with the adverse Claim carried over.

On March 29, 1967, VERROYA constituted a mortgage on both lots in favor of Anita Nolasco and Rosario Dalina, which encumbrance was registered on the existing titles.

On June 29, 1967, VERROYA ARROYA executed a deed of transfer of the properties to respondent Deogracias Natividad, married to Juanita Sanchez (the NATIVIDADS) (Exhibits "V", "V-4", Ibid.) (the Fourth Transfer).

On September 30, 1967, the NATIVIDADS transferred the lots to Ignacio Bautista and Encarnacion de los Santos (the BAUTISTAS) (Exhibits "14", "15" [Natividad], "JJ-2", Ibid.) (the Fifth Transfer). No titles were issued to the BAUTISTAS.

It should be noted that from the titles of the CUENCAS (the Second Transferees) to the titles of the NATIVIDADS (the Fourth Transferee), the Adverse Claim of the GARDNERS continued to be carried, and that throughout the successive

transfers, or over a span of approximately six years, the GARDNERS continued to remain in possession, cultivation and occupation of the disputed properties.

Aggrieved by the series of transfers, the GARDNERS filed suit on July 8, 1969 for "Declaration of Nullity, Rescission and Damages" against the Five Transferees, including the mortgagees, Anita Nolasco and Rosario Dalina, before the Court of First Instance of Laguna, Branch I (Civil Case No. B-774), praying for the declaration of nullity of all the Five Transfers and the cancellation of all titles issued pursuant thereto on the ground that they were all simulated, fictitious, and without consideration.

In their Answer, the SANTOSES claimed, in brief, that the sale to them was conditional in the sense that the properties were to be considered as the investment of the GARDNERS in the subdivision venture and that in the event that this did not materialize they were to reconvey the lots to the GARDNERS upon reimbursement by the latter of all sums advanced to them; and that the deed of sale was to be registered for the protection of the SANTOSES considering the moneys that the latter would be advancing.

For their part, respondents NATIVIDADS contended that they were purchasers in good faith notwithstanding the adverse claim as the titles were not shown to them by VERROYA at the time of the sale, and that they had paid good and valuable consideration.

The mortgagees, Anita Nolasco and Rosario Dalima, denied the allegations in the Complaint and counterclaimed for damages, which the GARDNERS answered.

After the lifting of the Order of default against them, the CUENCAS filed their Answer contending that their transfer to VERROYA of the properties in question was not simulated and was supported by valuable consideration.

VERROYA, Juanita Sanchez (wife of Deogracias Natividad), and the BAUTISTAS were declared in default for their failure to seasonably file their responsive pleadings. 1

The GARDNERS, aside from their documentary evidence, adduced in their favor the testimonies of Ruby GARDNER herself, Jose Infante, an employee of the Register of Deeds of Laguna, and defendant Ariosto SANTOS who was presented as an adverse witness.

Of the eight answering defendants, only respondent Deogracias NATIVIDAD testified on his behalf. Defendant Ariosto SANTOS merely adopted as his own evidence the declaration he had given as an adverse witness. The JOSE CUENCAS and the JUAN CUENCAS neither presented any testimonial evidence but just adopted the testimony of Ariosto SANTOS. Defendants Anita Nolasco and Rosario Dalima, the mortgagees, submitted their case after the genuineness of the deed of mortgage executed in their favor by VERROYA was admitted by the parties. 2

On January 15, 1972, the Trial Court rendered judgment in favor of the GARDNERS declaring as null and void the five Transfers; rescinding the Subdivision Joint Venture Agreement (Exhibit "D") as well as the Supplemental Agreement (Exhibits "E"; ordering the GARDNERS to reimburse the SANTOSES the total cash advances of P36,712.80 which theGARDNERS had received; authorizing the cancellation of the corresponding titles issued pursuant to the deeds of sale and the issuance of new ones in favor of the GARDNERS; ordering the deletion from the titles of the mortgage executed by VERROYA; and requiring the Five Transferees but not mortgagees, Anita Nolasco and Rosario Dalima, to pay the GARDNERS P90,000.00 actual damages, P5,000.00 exemplary damages, and to pay the costs.

The respondents NATIVIDADS appealed (notwithstanding that the wife was declared in default) to the then Court of Appeals, which, on January 11, 1979 affirmed in toto the judgment of the Trial Court. 3 The NATIVIDADS received the Decision of affirmance on January 16, 1979. On January 29, 1979, the NATIVIDADS asked for a 30-day extension from January 31, 1979 or up to March 2, 1979, within which to file a Motion for Reconsideration, which was granted by respondent Court. 4 On March 2, 1979, the NATIVIDADS filed their Motion for Reconsideration but the same was denied on November 7, 1979. 5

On December 4, 1979, a "Very Urgent Manifestation and Motion for Leave to File a Second Motion for Reconsideration" was filed by the NATIVIDADS. The pleading was signed by Deogracias NATIVIDAD himself. Respondent Court denied leave on December 28, 1979. 6 However, on the same date of December 28, 1979, the NATIVIDADS filed their Second Motion for Reconsideration.

On April 24, 1980, respondent Court reconsidered its Resolution of "January 7, 1980" denying respondents' "Motion for Leave to File Second Motion for Reconsideration', and admitted said second Motion 7 (The resolution of January 7,1980 refers to the resolution of December 28, 1979 which was released on January 7, 1980). On December 24, 1980, respondent Court 8 issued the questioned Resolution reversing its Decision of January 11, 1979 insofar as the NATIVIDADS are concerned, declaring as valid the sale of the land to them as well as the titles issued pursuant thereto. On January 20, 1981, the GARDNERS sought to set aside the questioned Resolution and moved for entry of judgment averring that said Resolution was null and void for having been issued without jurisdiction as the Decision of January 11, 1979 had already become final and executory. The Motion was denied for lack of merit on March 4, 1982. 9

Petitioners now seek to set aside the Appellate Court's Resolutions of April 24, 1980 (granting leave to file a 2nd Motion for Reconsideration) and December 24, 1980 (reversing the original judgment), and assigning to respondent Court the following errors:

I

The Court of Appeals erred in promulgating its resolution of April 24, 1980, because it has already lost jurisdiction to act on the case since the decision of January 11, 1979 had already become then final and executory.

II

The Court of Appeals erred in promulgating its resolution of December 24, 1980, because it had already then lost jurisdiction to act on the case, much more so, to reverse through its resolution of December 24, 1980 its decision of January 11, 1979 that has already become final and executory.

III

Assuming arguendo that it has still jurisdiction to promulgate its resolution of December 24, 1980, the Court of Appeals erred in not holding that the defendant-appellant Deogracias Natividad's second motion for reconsideration, just like the first motion for reconsideration, is unquestionably pro-forma, hence did not suspend the running of the reglementary period of time.

IV

Assuming arguendo that it has still jurisdiction to promulgate its resolution of December 24, 1980, the Court of Appeals erred in holding that the testimonies of Ariosto Santos under oath on the witness stand cannot prevail over the allegations in Santos' answer (not verified and only signed by Ariosto Santos' counsel) and, regarding which there is no substantial conflict or variance.

V

Assuming arguendo, it has still jurisdiction to promulgate its resolution of December 24, 1980, the Court of Appeals erred in reversing absolutely without valid justification, its findings in its decision of January 11, 1979 and resolution of November 7, 1979, both holding that defendant-appellant Deogracias Natividad was not a buyer in good faith and for value.

VI

Assuming arguendo that it has still jurisdiction to promulgate its resolution of December 24, 1980, the Court of Appeals erred in reversing, absolutely without valid justification, its findings in its decision of January 11, 1979 and resolution of November 7, 1979 both holding that the sales of the questioned properties from Ruby Gardner and spouse Frank Gardner, Jr., to Ariosto

Santos and spouse Cirila Serrano, to Jose Cuenca and Juan Cuenca and their spouses Amanda Relova and Soledad Advincula, respectively, to Michael Verroya, to Deogracias Natividad and spouse Juanita Sanchez, to Ignacio Bautista and spouse Encarnacion delos Santos are null and void ab initio.

VII

The Court of Appeals erred in holding that it will not hesitate to consider and hear defendant-appellant Deogracias Natividad's second motion for reconsideration (even if it was received when the decision of January 11, 1979 was already final and executory) upon the groundless claim that Deogracias Natividad was abandoned by his counsel, who received the resolution denying Natividad's first motion for reconsideration.

Upon the facts and the evidence, we rule that respondent Court had lost jurisdiction to entertain the second Motion for Reconsideration because its Decision of January 11, 1979 had already become final and executory as the following chronological data before respondent Court will show:

Jan 16, 1979 Receipt by respondents of CA Decision dated Jan. 11, 1979.

Jan. 29, 1979 Private respondents filed motion for extension of 30 days from Jan, 31, 1979 to file motion for reconsideration.

This was granted.

Due — Mar. 2, 1979.

Mar. 2, 1979 Motion for Reconsideration filed (on the last day).

Nov. 7, 1979 Reconsideration was denied.

Nov. 19, 1979 Receipt by private respondents of above resolution.

Dec. 28, 1979 Motion for Leave to file Second Motion for Reconsideration denied.

Dec. 28, 1979 Second Motion for Reconsideration filed by private respondent.

Jan. 8, 1980 Motion for Reconsideration of Resolution of Dec. 28, 1979 filed by private respondents.

April 24, 1980 Resolution reconsidering denial of Motion for Leave, and Second Motion for Reconsideration admitted. This is one of the admitted. This is one of the disputed Resolutions.

Dec. 24, 1980 Resolution reversing Decision of January 11, 1979. This is other Resolution assailed.

Section 1, Rule 52 of the Rules of Court, provides:

Section 1. Motion for re-hearing. A motion for re- hearing or reconsideration shall be made ex-parteand filed within fifteen (15) days from notice of final order or judgment. No more than one motion for re-hearing or reconsideration shall be filed without express leave of court. A second motion for reconsideration may be presented within fifteen (15) days from notice of the order or judgment deducting the time in which the first motion has been pending.

Evidently, the Second Motion for Reconsideration was filed beyond the reglementary, period. The NATIVIDADS erroneously thought that they had another 15-day period from the date of receipt of denial of the first Motion for Reconsideration on November 7, 1979 within which to file a second Motion for Reconsideration. That would be the rule for appeals by certiorari to the Supreme Court from an Appellate Court judgment pursuant to Section 1 of Rule 45.10 However, under the aforequoted provision, which is the applicable rule, the time in which the first Motion has been pending has to be deducted. As it was, all of the fifteen days had been used up when the first Motion for Reconsideration was filed on March 2, 1979. The Decision of January 11, 1979, therefore, had already attained finality on March 3, 1979 so that respondent Court no longer had jurisdiction to act on the "Very Urgent Motion for Leave to File Second Motion for Reconsideration" submitted by the NATIVIDADS on November 28, 1979, much less to grant the same.

It is well settled that once a Decision has become final and executory, it is removed from the power and jurisdiction of the Court which rendered it to further alter or amend it, much less to revoke it. The subsequent filing of a motion for reconsideration cannot disturb the finality of the judgment, nor restore jurisdiction to the court. 11

Although the granting or denial of a motion for reconsideration involves the exercise of discretion, 12 the same should not be exercise whimsically, capriciously or arbitrarily, but prudently in conformity with law, justice, reason and equity.

We likewise find reversible error in the reversal of respondent Court's original Decision of January 11, 1979. In its Resolution of reversal, dated December 24, 1980, respondent Court had stated in part:

The presence of the adverse claim in appellant's (Deogracias Natividad) title does not make him a buyer in bad faith The validity of the adverse claim has to be determined by the Court. Until the validity of such claim is determined judicially, the same cannot be considered as a flaw in his vendor's title. The adverse claim first appearance in the titles of the Cuencas, the second buyers. It was carried on to the titles of subsequent transferees. The title of Santos appeared clean This makes the title of Santos' vendee clean. The subsequent annotation of the adverse claim therein would not make the Cuencas buyers in bad faith. If the Cuencas were buyers in good faith, we do not see any reason why subsequent buyers could not enjoy the same status. Good faith is presumed while bad faith must be proved. ... 13

However, as set forth in the original Decision of the Appellate Court, upholding the findings of the Trial Court, the evidence preponderantly shows that all Five Transfer were null and void for having been simulated and fictitious.

The First Transfer in favor of the SANTOSES was "indubitably established" to have been without consideration and is, therefore, void and inexistent. 14 That sale was executed merely as a means of protection to the SANTOSES for their promised cash advances to the GARDNERS in one year in the sum of P93,000.00. Added to this is the admission against his own interest by Ariosto SANTOS that the GARDNERS did not receive from him any consideration, 15 thereby corroborating the declarations of the GARDNERS. The Subdivision Joint Venture Agreement (Exhibit "D") and the Supplemental Agreement (Exhibit "E") eloquently express that the true and real nature of the agreement between the GARDNERS and the SANTOSES was for a subdivision and not a sale transaction.

The evidence also establishes that the Second Transfer to the CUENCAS was fictitious and simulated for not having been supported with any consideration. By his own admission, Ariosto SANTOS transferred to the CUENCAS, who are his "compadres", the disputed properties, together with others that he owned, merely to conceal his ownership and "to protect them from persons who had filed suits against him and were running after the properties registered in his name." It was SANTOS who had caused the execution of those deeds of sale (Exhibits "H" & "I") and had them notarized by his own counsel. 16 No wonder then that the CUENCAS did not even dispute the validity of the adverse claim pursuant to Section 110 of the Land Registration Act, and during the trial they merely adopted SANTOS' testimony. Under the circumstances surrounding their transaction they knew that their title was flawed and they were not, and cannot be considered, buyers in good faith, having paid no consideration for the sale. The subsequent registration of the adverse claim on their titles, therefore, could not but serve as notice and warning to all subsequent buyers that someone was claiming an interest in the properties or a better right than the registered owners.

The Third Transfer in favor of VERROYA was similarly without consideration and, therefore, void ab initio. The evidence on record shows that Ariosto SANTOS himself caused the execution of the deeds of sale (Exhibits "P" & "Q") in favor of VERROYA, who is SANTOS' office manager in his brokerage business. The only purpose of the transfer was to enable VERROYA to secure for SANTOS a loan with the Veterans Bank so much so that when the documents of sale were signed by the CUENCAS in their respective houses in favor of VERROYA, the latter was not even present. 17 Also significant is the ' fact that Verroya was declared in default and had not even bothered to resist the suit, which he would have done if the sale transaction were genuine.

On equal footing is the Fourth Transfer from VERROYA VERROYA to private respondents NATIVIDADS. It was SANTOS who had caused the preparation of the deed of sale in favor of the NATIVIDADS after sensing that VERROYA was not inclined to return the title to the properties. Deogracias NATIVIDAD was SANTOS' close and trusted I 6 compadre who agreed to put the titles in his (NATIVIDAD's) name because of the pending cases against SANTOS. The amount of P 80,000.00 stated in the document of sale was not actually paid by the NATIVIDADS to VERROYA, according to SANTOS' own testimony. The latter further declared that VERROYA was only coerced to sign the deeds (Exhibits "V" & ("V-4") after he was boxed by NATIVIDAD in SANTOS' office at the Escolta. That coercion did exist is shown by VERROYA's telegram to the Register of Deeds of Laguna to dishonor any transaction involving the subject properties. 18

The Fifth Transfer to the BAUTISTAS partook of the same nature a simulated and fictitious transaction, for being without consideration, as shown by the evidence. They too, were declared in default and made no attempt to answer or dispute the allegations in the Complaint against them.

The mortgage of the properties by VERROYA in favor of Anita Nolasco and Rosario Dalima was executed after the inscription of the adverse claim on the titles so that they can neither be considered as innocent mortgagees for value.

Added proof of the fictitiousness of the chain of transfers is that fact that, notwithstanding the same, the GARDNERS remained in actual possession, cultivation and occupation of the disputed lots throughout the entire series of transactions.

As concluded in the original Decision of respondent Court, all Five Transfers starting from that of the SANTOSES down to the NATIVIDADS, were absolutely simulated and fictitious and were, therefore, void ab initio and inexistent. 19 Contracts of sale are void and produce no effect whatsoever where the price, which appears therein as paid, has, in fact, never been paid by the purchaser to the vendor. 20 Such sales are inexistent and cannot be considered consummated. 21

In its Resolution reversing the original Decision, respondent Court discredited the testimony of Ariosto SANTOS for being at variance with the allegations in his Answer. The fact, however, that the allegations made by Ariosto SANTOS in his pleadings and in his declarations in open Court differed win not militate against the findings herein made nor support the reversal by respondent Court. As a general rule, facts alleged in a party's pleading are deemed admissions of that party and binding upon it, but this is not an absolute and inflexible rule. 22 An Answer is a mere statement of fact which the party filing it expects to prove, but it is not evidence. 23 As Ariosto SANTOS himself, in open Court, had repudiated the defenses he had raised in his Answer and against his own interest, his testimony is deserving of weight and credence. Both the Trial Court and the Appellate Court believed in his credibility and we find no reason to overturn their findings thereon.

Lastly, the statement of respondent Court in its Resolution of reversal that "until the validity of an adverse claim is determined judicially it cannot be considered a flaw in the vendor's title, contradicts the very essence of adverse claims. The annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property, and serves as a notice and warning to third parties dealing with said property that someone is claiming an interest on the same or has a better right than the registered owner thereof.24 A subsequent sale of the property cannot prevail over the adverse claim which was previously annotated in the certificate of title of the property. 25

While one who buys from the registered owner need not have to look behind the certificate of title, 26 he is nevertheless bound by the liens and encumbrances annotated thereon. 27 One who buys without checking the vendor's title takes all the risks and losses consequent to such failure. 28

WHEREFORE, the assailed Resolutions of respondent Court of Appeals (now the Intermediate Appellate Court), dated April 24, 1980 and December 24, 1980, respectively, are hereby REVERSED and SET ASIDE, and its Decision of January 11, 1979 affirming in toto the judgment of the then Court of First

Instance of Laguna, Branch 1, in Civil Case No. B-774, is hereby reinstated. Costs against private respondents.

SO ORDERED.

G.R. No. 80739 August 20, 1992

GRACIA R. JOVEN, petitioner, vs.COURT OF APPEALS, HON. MANUEL A. PATRON, in his capacity as Presiding Judge of the RTC, Branch 59, Lucena City, Roberto Paguia & Fernando Lasala, respondents.

De Castro & Cagampang Law Offices for petitioner.

Castillo, Laman, Tan & Pantaleon for private respondents.

 

CRUZ, J.:

The petitioner was the registered owner of three parcels of land which she mortgaged in favor of the Development Bank of the Philippines. Upon the extrajudicial foreclosure of the mortgage due to her failure to pay her loan, the properties were sold at public auction to DBP as the biggest bidder. A certificate of sale was issued and annotated on the certificate of title on November 17, 1982.

After the expiration of the redemption period, no redemption having been made by the petitioner, DBP sold the subject properties to Roberto Paguia, one of the herein private respondents, through a deed of sale executed on December 17, 1985. On January 30, 1986, Paguia took possession of the properties through his representative, Fernando Lasala, the other private respondent.

Earlier, the petitioner had filed on December 3, 1985, an action before the Regional Trial Court of Lucena City (raffled later to Branch 55) for the annulment of the mortgage and its foreclosure. Named as defendants were DBP and the private respondents. Later, when her application for preliminary injunction and restraining order was denied, she lodged with the Municipal Circuit Trial Court of Lucban-Sampaloc complaint against the private respondents for forcible entry with a prayer for writ of mandatory injunction. This was docketed as Civil Case No. 155.

In a decision dated May 14, 1986, the case was dismissed for lack of jurisdiction. But on May 29, 1986, the petitioner filed a motion for reconsideration, which was granted. In a resolution dated July 11, 1986, 1 the private respondents were ordered to: 1) immediately restore and deliver possession of the subject properties to the petitioner; 2) render to the petitioner an accounting of all the fruits and products gathered from said property from the time they took possession thereof until they vacate the same; and 3) reimburse the petitioner the total cost of such accounting.

This resolution was reversed on appeal by the Regional Trial Court of Lucena City, Branch 59, 2 which held that the court a quo had no jurisdiction over the ejectment case because of the issue of ownership raised therein and that, assuming such jurisdiction, the decision had already become final and executory when the resolution dated July 11, 1986, was rendered. The petitioner elevated the case to the respondent Court of Appeals, which sustained the assailed decision in toto. 3

She is now before us in this petition for review on certiorari, contending that the Municipal Circuit Trial Court had jurisdiction over the ejectment case and that the private respondents were guilty of forcible entry on the subject premises for occupying the same without judicial authorization.

The petition has merit:

The respondents argue that the Municipal Circuit Trial Court had no jurisdiction over the action for forcible entry on the principal ground that a question of ownership was involved therein. This view does not jibe with the following observations from Chief Justice Moran based on a consistent line of decisions from this Court: 4

It would be a mistake to suppose that an action involves a question of title merely because the plaintiff may allege in his complaint that he is the owner of the land. Just as the plaintiff may introduce proof of his title in order to show the character of his (sic) prior possession, so be may allege ownership in himself as a material and relevant fact in the case, and the insertion of such an allegation in the complaint cannot by any possibility place the cause beyond the jurisdiction of the magistrate's court, provided it otherwise sufficiently appears that what the plaintiff really seeks is the restoration of possession as against an intruder who has seized the property within the period of one year. Much less can the defendant in such an action defeat the jurisdiction of the magistrate's court by setting up title in himself. In this connection it should be borne in mind that the factor which defeats the jurisdiction of the court of the justice of the peace is the necessity to adjudicate the question of title. The circumstance that proof of title is introduced at the hearing or that a claim of ownership is made by either or both of the parties is not material

This ruling is embodied in Sec. 33, (2), Batas Pambansa Blg. 129, which vests municipal courts with:

Exclusive original jurisdiction over cases of forcible entry and unlawful detainer; Provided, that when, in such cases, the defendant raises the question of ownership in his pleadings and the question of possession cannot be resolved without deciding the issue of ownership, the issue of ownership should be resolved only to determine the issue of possession.

It is true that before the petitioner instituted the action for forcible entry in the Municipal Circuit Trial Court of Lucban-Sampaloc, the case for annulment of the mortgage and foreclosure sale, which necessarily involves recovery of ownership, was already being litigated in the Regional Trial Court of Lucena City. Even so, the municipal court could, pending final adjudication of that case, exercise its jurisdiction to determine the right of possession (only) over the subject properties in the ejectment case.

The private respondents also contend that the Municipal Circuit Trial Court had no jurisdiction over the complaint for forcible entry because; a) under Section 19 par. (2) of BP 129, as amended, the Regional Trial Court has exclusive original jurisdiction over all civil actions which involve the title to, or possession of, real property or any interest therein; and b) under Section 1, par. A (1) of the Rule on Summary Procedure, cases of forcible entry and detainer involving the question of ownership are expressly excluded from the summary jurisdiction of the municipal court.

Curiously, however, they also insist that an action for forcible entry and unlawful detainer shall be governed by the Rule on Summary Procedure pursuant to Section 36 of BP 129 and that the petitioner is now estopped from assailing the applicability of that Rule.

There is no question that under Section 1, par. A (1), of the said Rule, the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts have jurisdiction over cases of forcible entry and unlawful detainer except where the question of ownership is involved or where the damages or unpaid rentals sought to be recovered by the plaintiff exceed P20,000.00 at the time of the filing of the complaint. *

However, it is incorrect to say that the question of ownership was involved in the ejectment case filed by the petitioner simply because she alleged in her complaint that she was the original owner of the subject properties. That the petitioner instituted a separate action for the annulment of the mortgage is not a valid reason either for defeating the summary remedy of ejectment. On the contrary, it only bolsters the conclusion that the ejectment case did not involve the question of title as this was the subject of the annulment case before the Regional Trial Court of Lucena City. The Rule on Summary Procedure was clearly applicable because the ejectment case involved only the restoration of possession of the subject land and not its ownership.

The respondent court also sustained the ruling of the Regional Trial Court that the motion for reconsideration filed by the petitioner with the Municipal Circuit Trial Court did not stop the running of the reglementary period to appeal because such motion was a prohibited pleading under Section 15 (c) ** of the Rule on Summary Procedure. Its conclusion was that the Municipal Circuit Trial Court had already lost jurisdiction to issue the resolution dated July 11, 1986, because the

decision sought to be reconsidered had then become already final and executory.

We do not agree. The Municipal Circuit Trial Court did not err in holding that the motion for reconsideration was not covered by the prohibition under Section 15 (c). The motion prohibited by this section is that which seeks reconsideration of the judgment rendered by the court after trial on the merits of the case. 5 The decision dismissing the petitioner's ejectment case for lack of jurisdiction was not an adjudication on the merits. Review thereof could therefore be sought by the petitioner through her motion for reconsideration and this motion, which was not pro forma, had the effect of suspending the running of the period to appeal.

Now, on the issue of possession:

Section 7 of Act No. 3135, as amended by Act No. 4118, provides that in case of extrajudicial foreclosure of mortgage, the court *** may issue as a matter of course a writ of possession in favor of the purchaser even during the redemption period, provided that a proper motion has been filed, a bond is approved, and no third person is involved.

Section 6 of the Act provides that where an extrajudicial sale is made, "redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act."

Sections 464-466 of the Code of Civil Procedure were superseded by Sections 25-27 and Section 31 of Rule 39 of the Rules of Court, which in turn were replaced by Sections 29 to 31 and Section 35 of Rule 39 of the Revised Rules of Court.

Section 35 provides that "if no redemption be made within twelve (12) months after the sale, the purchaser, or his assignee, is entitled to a conveyance and the possession of property, . . . The possession of the property shall be given to the purchaser or last redemptioner by the same officer unless a third party is actually holding the property adversely to the judgment debtor."

To give effect to his right of possession, the purchaser must invoke the aid of the courts and ask for a writ of possession. He cannot simply take the law into his own hands and enter the property without judicial authorization. 6 We have consistently held that he need not bring a separate and independent suit for this purpose. 7Nevertheless, it is essential that he ask for and be granted a writ of possession in order that he may be legally installed in the property he has bought.

Section 63 (b) of P.D. 1529, otherwise known as the Property Registration Decree, requires that in case of non-redemption, the purchaser at a foreclosure sale shall file with the Register of Deeds either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage or his sworn statement attesting to the fact of non-redemption. The Register of Deeds shall thereupon issue a new certificate in favor of the purchaser after the owner's duplicate certificate shall have been previously delivered and canceled.

In F. David Enterprises vs. Insular Bank of Asia and America, 8 this Court held:

It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can demand it at any time following the consolidation ownership in his name and the issuance to him of a new transfer certificate of title. The buyer can in fact demand possession of the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No. 3135 as amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court. (Emphasis supplied).

In the case at bar, there is no showing that after the lapse of the redemption period without the petitioner having redeemed the lands, DBP executed an affidavit of consolidation of ownership of the subject properties. Neither has it

filed with the Register of deeds a final deed of sale or a sworn statement attesting to the fact of non-redemption. The circumstance that the properties are still in the name of the petitioner shows that DBP has also not yet obtained a new certificate of title in its name. And neither does it appear that DBP, on the basis of its purchase of the lands at the foreclosure sale, ever secured a writ of possession to authorize its entry into the said lands.

Not having done any of these, DBP had as yet not acquired any perfected right of possession that it could transfer to the private respondents. And as the petitioner continued in actual possession of the subject premises, she could undoubtedly maintain an action for forcible entry against the private respondents when, not being armed with a court order or a writ of possession, they simply entered and took possession of the subject lands.

The only issue in an action for forcible entry is the physical or material possession of real property, that is, possession de facto and not possession de jure. The philosophy underlying this remedy is that irrespective of the actual condition of the title to the property, the party in peaceable quiet possession shall not be turned out by strong hand, violence or terror. In affording this remedy of restitution, the statute seeks to prevent breaches of the peace and criminal disorder which might ensue from the withdrawal of the remedy. Another purpose is to discourage those persons who, believing themselves entitled to the possession of the property, resort to force rather than to some appropriate action in the courts to assert their claims. 9

Under Section 1, Rule 70, of the Rules of Court, there is forcible entry when one in physical possession of a land or building is deprived of that possession by another through force, intimidation, threat, strategy or stealth. The words "by force, intimidation, threat, strategy or stealth" include every situation or condition under which one person can wrongfully enter upon real property and exclude another, who has had prior possession thereof. To constitute the use of "force" as contemplated in the above-mentioned provision, the trespasser does not have to institute a state of war. Nor is it even necessary that he use violence against the person of the party in possession. The act of going on the property and excluding the lawful possessor therefrom necessarily implies the exertion of force over the property, and this is all that is necessary. 10

It is noted that the petitioner instituted the action for annulment of mortgage on December 3, 1985, while the deed of sale in favor of the private respondent was executed on December 17, 1985. Paguia cannot say that when he took possession of the subject land on January 30, 1986, he was acting in good faith. Neither can be claim that he had no knowledge of the pendency of that litigation because he was in fact one of the defendants in that case. In any event, the fact that the titles were still in the name of the petitioner should have warned him of the need to ascertain the status of the properties before he took possession of them.

The private respondents also assert that the institution of the ejectment case resulted in the splitting of a single cause of action into two, one for the recovery of ownership and possession and the other for recovery of possession de facto.

In Drilon vs. Gaurana, 11 this Court held:

It is true that a party may not institute more than one suit for a single cause of action (Rule 2, Sec. 3, Revised Rules of Court) and if two or more complaints are brought for different parts of a single cause of action, the filing of the first may be pleaded in abatement of the other (Rule 2, Sec. 4 Revised Rules of Court). However, a forcible entry or unlawful detainer action has an entirely different subject from that of an action for reconveyance of title. What is involved in a forcible entry case is merely the issue of material possession or possession de facto; whereas in an action for reconveyance, ownership is the issue. So much so that the pendency of an action for reconveyance of title over the same property does not divest the city or municipal court of its jurisdiction to try the forcible entry or unlawful detainer case, nor will it preclude or bar execution of judgment in the ejectment case where the only issue involved is material possession or possession de facto (De la Cruz v. Court of Appeals, 133 SCRA 520 [1984]).

While there may be identity of parties and subject matter in the two actions, the issues involved and the reliefs prayed for are not the same. In the annulment suit, the issue is the validity of the mortgage and the subsequent foreclosure sale whereas the issue in the ejectment case is whether, assuming the mortgage and foreclosure sale to be valid, the private respondents have the right to take possession of the property. In the former case, the relief prayed for is recovery of

ownership of the subject land while in the latter it is restoration of possession thereof to the petitioner. Hence, the municipal court had jurisdiction to try the ejectment case while the annulment suit was being litigated in the regional trial court.

The contention that the petitioner was forum-shopping must also be rejected. As an injunction cannot be a substitute for the other suits for recovery of possession, 12 such as an action for forcible entry or unlawful detainer andaccion publiciana, denial of the injunction did not bar the petitioner from availing herself of the more appropriate remedy, to wit, the action for forcible entry. 13

In sum, the respondent court erred when it affirmed the decision of the Regional Trial Court declaring that the Municipal Circuit Trial Court had no jurisdiction over the ejectment case filed by the petitioner. We find that it had.

ACCORDINGLY, the petition is GRANTED and the resolution of the Municipal Circuit Trial Court of Lucban, Sampaloc dated July 11, 1986, in Civil Case No. 155 is REINSTATED. Costs against the private respondents.

SO ORDERED.

ACT NO.

1956

ACT NO. 1956 * - AN ACT PROVIDING FOR THE SUSPENSION OF PAYMENTS, THE RELIEF OF INSOLVENT DEBTORS, THE PROTECTION OF CREDITORS, AND THE PUNISHMENT OF FRAUDULENT DEBTORS

 

CHAPTER ITITLE AND GENERAL SUBJECT OF THE ACT

Section 1. This Act shall be known and may be cited as The Insolvency Law, and in accordance with its provisions every insolvent debtor may be permitted to suspend payments or be discharged from his debts and liabilities.

CHAPTER IISUSPENSION OF PAYMENTS

Sec. 2. Petition. — The debtor who, possessing sufficient property to cover all his debts, be it an individual person, be it a sociedad or corporation, foresees the impossibility of meeting them when they respectively fall due, may petition that he be declared in the state of suspension of payments by the court, or the judge thereof in vacation, of the province or of the city in which he has resided for six months next preceding the filing of his petition.

He shall necessarily annex to his petition a schedule and inventory in the form provided in sections fifteen, sixteen, and seventeen of this Act, in addition to the statement of his assets and liabilities and the proposed agreement he requests of his creditors.

Sec. 3. Meeting of Creditors; Injunction. — Upon receiving and filing the petition with the schedule and documents mentioned in the next preceding section, the court, or the judge thereof in vacation, shall make an order calling a meeting of creditors to take place in not less than two weeks nor more than eight weeks from the date of such order. Said order shall designate the day, hour, and place of meeting of said creditors as well as a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the judgment of the judge, will best give notice to the creditors of the said debtor, and in the newspaper so designated said order shall be published as often as may be prescribed by the court or the judge thereof.

Said order shall further contain an absolute injunction forbidding the petitioning debtor from disposing in any manner of his property, except in so far as concerns the ordinary operations of commerce or of industry in which the petitioner is engaged, and, furthermore, from making any payments outside of the necessary or legitimate expenses of his business or industry, so long as the proceedings relative to the suspension of payments are pending, and said proceedings for the purposes of this Act shall be considered to have been instituted from the date of the filing of the petition.

Sec. 4. Publication order; Deposit. — A copy of said order shall immediately be published 1 by the clerk of said court, in the newspaper designated therein, for the number of times and in the form prescribed by the court or the judge thereof, and the clerk of said court shall cause a copy of said order to be delivered personally or to be sent forthwith by registered mail, postage prepaid, to all creditors named in the schedule. There shall be deposited in addition to the sum of twenty-four Philippine pesos, which shall be paid to the clerk for the filing and registration of the petition, including all proceedings until the expediente is completed, an amount sufficient to defray all expense of publication ordered by the court, necessary postage, and ten centavos for each copy, to be delivered personally or mailed to the creditors, which last-named sum is hereby constituted the legal fee of the clerk for the personal delivery or mailing required by this section.

Sec. 5. Creditors cited to appear. — Only creditors included in the schedule filed by the debtor shall be cited to appear and take part in the meeting mentioned in section three, and they shall be notified upon delivery or transmission to them of a copy of the order calling the meeting to appear at same with the written evidences of their respective claims, without which they shall not be admitted.

Sec. 6. Pending Execution. — If any execution be pending against the debtor it shall not be consolidated with this proceeding, but the course thereof shall be suspended before sale of property is made thereunder, provided the debtor makes a request therefor to the court before which the proceeding for suspension of payments is pending, unless the execution be against property especially mortgaged which is hereby exempted from the least the provisions of this section. The suspension ordered by virtue of this section shall lapse when three months shall have passed without the proposed agreement being accepted by the creditors or as soon as it is denied. No creditor and the other than those mentioned in section nine shall sue or institute proceedings to collect his claim

from the debtor from the moment that suspension of payments is applied for and while the proceedings are pending.

Sec. 7. Creditors may be represented at the meeting by one or more lawyers or by any person authorized by power of attorney, which document shall be presented and be attached to the record.

Persons appearing for more than one creditor shall have only one personal vote, but the claims presented by them shall be taken into consideration for the purpose of arriving at the majority of the amount represented.

Sec. 8. Creditors necessary to hold a meeting; Meeting; Minutes of the meeting. — The presence of the creditors representing at least three-fifths the liabilities shall be necessary for holding a meeting. The meeting shall be held on the day and at the hour and place designated, the judge, or commissioner deputized by him when he is absent from the province where the meeting is held, acting as president and the clerk as secretary thereof, subject to the following rules:

(a) The clerk shall prepare for insertion in the minutes of the meeting a statement of the persons present and their claims; the judge, or, in default thereof, the commissioner, shall examine the written evidences of the claims and the powers of attorney, if any. If the persons present who have complied with the foregoing rules represent at least three-fifths of the liabilities, the judge or commissioner shall declare the meeting open for business.

(b) The petition of the debtor, the schedule of debts and of property, the statement of assets and liabilities, and the proposed agreement filed there- with shall be read forthwith by the clerk, and the discussion shall be opened. 

(c) The debtor may modify his proposition or propositions in view of the result of the debate, or insist upon the ones already made, and the judge or commissioner, without further discussion, shall clearly and succinctly place  these several propositions before the meeting for a vote thereupon. 

(d) The vote shall be taken by a call of names and shall be inserted in and the minutes; a majority vote shall rule.

(e) To form a majority it is necessary —

1. That two-thirds of the creditors voting unite upon the same position.

2. That the claims represented by said majority vote amount to at least three-fifths of the total liabilities of the debtor mentioned in the petition.

(f) After the result of the voting has been announced, all protests made against the majority vote shall be drawn up, and there shall be inserted therein the proposition or propositions voted upon, which, after having been read and approved, shall be signed by the judge or commissioner together with all persons taking part in the voting; if any such persons shall be unable to write, any person present shall sign, at their request, and the clerk shall certify to all of the above.

Sec. 9. Persons who may refrain from voting. — Persons having claims for personal labor, maintenance, expenses of last illness and funeral of the wife or children of the debtor, incurred in the sixty days immediately preceding the filing of the petition, and persons having legal or contractual mortgages, may refrain from attending the meeting and from voting therein. Such persons shall not be bound by any agreement determined upon at such meeting, but if they should join in the voting they shall be bound in the same manner as are the other creditors.

Sec. 10. Rejection of agreement. — The proposed agreement shall be deemed rejected if the number of creditors required for holding a meeting do not attend thereat, or if the two majorities mentioned in rule (e) of section eight are not in favor thereof, even if the negative vote itself does not receive such majorities.

Sec. 11. Termination of proceedings without recourse; Court hearing. — If the decision of the meeting be negative as regards the proposed agreement or if no decision is had in default of such number or of  such majorities, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to enforce the rights which may correspond to them. If the decision is favorable to the debtor it may be objected to within ten days following the date of the meeting by any creditor who attended the meeting and who dissented from and protested against the vote of the majority. The opposition or objection to the decision of the majority favorable to the debtor shall be proceeded with as in any other incidental motion, the debtor and the creditors who shall appear declaring their purpose to sustain the decision of the meeting being the defendants. The court shall hear and pass  upon such objection as soon as possible in a summary manner, and in its order, which shall be final, it shall declare whether or not the

decision of the meeting is valid. In case that the decision of the meeting is held to be null, the court shall declare the proceeding terminated and the parties concerned at liberty to exercise the rights which may correspond to them; and in case the decision of the meeting is declared valid, or when no opposition or objection to said decision has been presented, the court shall order that the agreement be carried out and the persons concerned shall be bound by the decision of the meeting. The court may also issue all orders which may be proper to enforce the agreement on motion of any of the parties litigant. The order directing the agreement to be made effective shall be binding upon all creditors included in the schedule of the debtor who may have been properly summoned, but not upon creditors mentioned in section nine who failed to attend the meeting or refrained from voting therein, and their rights shall not be affected by the agreement unless they may have expressly or impliedly consented thereto.

Sec. 12. The causes for which objection may be made to the decision of the meeting shall be —

(a) Defects in the call for the meeting, in the holding thereof, and in and the deliberations had thereat which prejudice the rights of the creditors;

(b) Fraudulent connivance between one or more creditors and in debtor to vote in favor of the proposed agreement;

(c) Fraudulent conveyance of claims for the purpose of obtaining a majority.

Sec. 13. Failure of debtor to perform agreement. — If the debtor fails wholly or in part to perform the agreement decided upon at the meeting of the creditors, all the rights which the creditors had against the debtor before the agreement shall revest in them. In such case the debtor may be made subject to the bankruptcy and insolvency proceedings in the manner established by the following chapters of this Act:

CHAPTER IIIVOLUNTARY INSOLVENCY

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

Sec. 15. Statement of debts and liabilities. — Said schedule must contain a full and true statement of all his debts and liabilities, together with a list of all those to whom, to the best of his knowledge and belief, said debts or liabilities are due, the place of residence of his creditors and the sum due each the nature of the indebtedness or liability and whether founded on written security, obligation, contract or otherwise, the true cause and consideration thereof, the time and place when and where such indebtedness or liability accrued, a declaration of any existing pledge, lien, mortgage, judgment, or other security for the payment of the debt or liability, and an outline of the facts giving rise or which might give rise to a cause of action  against such insolvent debtor.

Sec. 16. Description of real and personal property. — Said inventory must contain, besides the creditors, an accurate description of all the real and personal property, estate, and effects of the petitioner, including his homestead, if any, together with a statement of the value of each item of said property, estate, and effects and its location, and a statement of the incumbrances thereon. All property exempt by law from execution 2 shall be set out in said inventory with a statement of its valuation, location, and the incumbrances thereon, if any. The inventory shall contain an outline of the facts giving rise, or which might give rise, to a right of action in favor of the insolvent debtor.

Sec. 17. Verification, form of . — The petition, schedule, and inventory must be verified by the affidavit of the petitioner, annexed thereto, and shall be in form substantially as follows: "I, _______________., do solemnly swear that the schedule and inventory now delivered by me contain a full, correct, and true discovery of all my debts and liabilities and of all goods, effects, estate, and property of whatever kind or class to me in any way belonging. The inventory also contains a full, true and correct statement of all debts owing or due to me, or to any person or persons in trust for me and of all securities and contracts whereby any money may hereafter become due or payable to me or by or through which any benefit or advantage whatever may accrue to me or to my use, or to any other

person or persons in trust for me. The schedule contains a clear outline of the facts giving rise, or which might give rise, to a cause of action against me, and the inventory contains an outline of the facts giving rise, or which might give rise, to any cause of action in my favor. I had no lands, money, stock, or estate, reversion, or expectancy, or property of any kind, except that set forth in said inventory. I have no instance created or acknowledged a debt for a greater sum than I honestly and truly owe. I have not, directly or indirectly, concealed, fraudulently sold, or otherwise fraudulently disposed of, any part of my real or personal property, estate, effects, or rights of action, and I have not in any way compounded with any of my creditors in order to secure such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to whom I am indebted. So help me God."

Sec. 18. Order of court declaring petitioner insolvent; Publication notice. — Upon receiving and filing said petition, schedule, and inventory, the court, or the judge thereof in vacation, shall make an order declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to take possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds, vouchers, books of account, papers, notes, bonds, bills, and securities of the debtor, and all his real and personal property, estate, and effects, except such as may be by law exempt from execution. 3 Said order shall further forbid the payment to the debtor of any debts due to him and the delivery to the debtor, or to any person for him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall designate a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent, and in the newspaper so designated said order shall be published 4 as often as may be prescribed by the court or the judge The time appointed for the election of an assignee shall not be less than two, nor more than eight, weeks from the date of the order of adjudication. Upon the granting of said order all civil proceedings pending against said insolvent shall be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the case may be, all the property, assets, and belongings of the insolvent which have come into his possession, and he shall be allowed and paid as compensation for his services the same expenses and fees as would by law be collectible if the property had been levied upon and safely kept under attachment.

Sec. 19. Publication of order. — A copy of said order shall immediately be published 5 by the clerk of said court, in the newspaper designated therein, for the number of times and as prescribed by the court or the judge thereof, and a copy of said order shall be delivered personally or sent by the clerk forthwith by registered mail, postage prepaid, to all creditors named in the schedule. There shall be deposited, in addition to twenty-four pesos, which shall be received by the clerk on commencing such proceedings, a sum of money sufficient to defray the expense of the publication ordered by the court, necessary postage, and ten centavos for each copy, to be delivered personally or mailed to the creditors, which last-named sum is hereby constituted the legal fee of the clerk for the personal delivery or mailing required by this section.

CHAPTER IVINVOLUNTARY INSOLVENCY

Sec. 20. Petition; Acts of insolvency. — An adjudication of insolvency may be made on the petition of three or more creditors, residents of the Philippine Islands whose credits or demands accrued in the Philippine Islands, and the amount of which credits or demands are in the aggregate not less than one thousand pesos: Provided, That none of said creditors has become a creditor by assignments, however made, within thirty days prior to the filing of said petition. Such petition must be filed in the Court of First Instance of the province or city in which the debtor resides or has his principal place of business, and must be verified by at least three of the petitioners. The following shall be considered acts of insolvency, and the petition for insolvency shall set forth one or more of insolvency such acts: (1) That such person is about to depart or has departed from the Philippine Islands, with intent to defraud his creditors; (2) that being absent from the Philippine Islands, with intent to defraud his creditors, he remains absent; (3) that he conceals himself to avoid the service of legal process for purpose of hindering or delaying or defrauding his creditors; (4) that he conceals, or is removing, any of his property to avoid its being attached or taken on legal process; (5) that he has suffered his property to remain under attachment or legal process for three days for the purpose of hindering or delaying or defrauding his creditors; (6) that he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying or defrauding any creditor or claimant; (7) that he has willfully suffered judgment to

be taken against him by default for the purpose of hindering or delaying or defrauding his creditors; (8) that he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder, delay, or defraud any one of his creditors; (9) that he has made any assignment, gift, sale, conveyance, or transfer of his estate, property, rights, or credits with intent to delay, defraud, or hinder his creditors; (10) that he has, in contemplation of insolvency, made any payment, gift, grant, sale conveyance, or transfer of his estate, property, rights, or credits; (11) that being a merchant or tradesman he has generally defaulted in the payment of his current obligations for a period of thirty days; (12) that for a period of thirty days he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary capacity; and (13) that an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment. The petitioners may, from time to time, by leave of the court, amend and or amendments to relate back to and be received as embraced in the original petition. The said petition shall be accompanied by a bond, 6 approved by the court, with at least two sureties, in such penal sum as the court shall direct, conditioned that if the petition in insolvency be dismissed by the court, or withdrawn by the petitioner, or if the debtor shall not be declared an insolvent, the petitioners will pay to the debtor alleged in the petition to be insolvent all costs, expenses, and damages occasioned by the proceedings dent, the in insolvency, together with a reasonable counsel fee to be fixed by the court. The court may, upon motion, direct the filing of an additional bond, with different sureties, when deemed necessary.

Sec. 21. Order to debtor to show cause. — Upon the filing of such creditors' petition, the court or a judge shall issue an order requiring such debtor to show cause, at a time and place to be fixed by said court or judge, why he should not be adjudged an insolvent debtor; and at the same time, or thereafter, upon good cause shown therefor, said court or judge may make an order forbidding the payment of any debts, and the delivery of any the court property belonging to such debtor to him or to any other person for his benefit or the transfer of any property by him.

Sec. 22. Copies served on debtor. — A copy of said petition, with a copy of the order to show shall be served on the debtor, in the same manner as is provided by law for the service of summons in civil actions, 7 but such shall be made at least five days before the time fixed for the hearing: Provided, That if, for any reason, the service is not made, the order may be renewed, and the time and place of hearing changed by supplemental order of the court. Whenever the debtor on whom service is to be made resides out of the Philippine Islands; or has departed from the Philippine Islands; or can not, after due diligence, be found within the Philippine Islands; or conceals himself to avoid the service of the order to show cause, or any other process or orders in the matter; or is a foreign corporation having no managing or business agent, cashier, or secretary within the Philippine Islands upon whom service can be made, and such facts are shown to the court or a judge thereof, shall make an order that the service of such order, or other process, be made by publication, in the same manner, and with the same effect, as service of summons by publication in ordinary civil actions. 

Sec. 23. Answer to petition. — At the time fixed for the hearing of said order to show cause, or at another time to which such hearing may be adjourned, the debtor must answer the petition, or may demur for the same causes as are provided for demurrer in other cases by the Code of Civil Procedure. 9 If he demur and the demurrer be overruled, the debtor shall immediately answer the petition. Such answer shall contain a specific denial of the material allegations of the petition controverter by him, and shall be sworn to; and the issues raised thereon shall be promptly tried and disposed of. If, upon such trial, the issues are found in favor of the respondent, the proceedings shall be dismissed, and the respondent shall be allowed all costs, counsel fees, expenses, and damages sustained by reason of the proceedings therein. Counsel fees, costs, expenses, and damages shall be fixed and allowed by the court.

Sec. 24. Default; Payments to debtor. — If the respondent shall make default, or if, after trial, the issues are found in favor of the petitioners, the court shall make an order adjudging that said respondent is and was, at the time of filing the petition, an insolvent debtor and that the debtor was guilty of the acts and things charged in the petition, or such of them as the court may find to be true; and shall require said debtor, within such time as the court may designate, not to exceed three days, to file in court the schedule and inventory provided for in sections fifteen and sixteen of this Act, duly verified as required of a petitioning debtor: 10 Provided, That in the affidavit of the insolvent, touching his property and its disposition, he shall not be required to swear that he has not made any fraudulent preference or committed any other act in conflict with the provisions of this Act; but he may do so if he desires. Said order shall further direct the sheriff of the province or city where the insolvency petition is filed, or the receiver, if one has been theretofore appointed, to take possession of and safely keep, until the

appointment of an assignee, all the deeds, vouchers, books of account, papers, notes, bills, bonds and securities of the debtor, and all his real and personal property, estate and effects, except such as may be by law exempt from execution. 11 Said order shall further forbid the payment to the debtor of any debts due to him, and the delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall designate a newspaper of general circulation published in the province or city in which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent, and in the newspaper so designated said order shall be published 12 as often as may be prescribed by the court or the judge thereof. The time appointed for the election of an assignee shall not be less than two nor more than eight weeks from the date of the order of adjudication. Upon the granting of said order, all civil proceedings pending against the said insolvent shall be stayed. When an assignee is chosen as provided in this Act, the sheriff or receiver, if there be one, shall thereupon deliver to such assignee all the property, estate, and belongings of the insolvent, which have come into his possession, and he shall be allowed and paid as compensation for his services the same expenses and fees as would by law be collectible if the property had been levied upon and safely kept under attachment.

Sec. 25. Publication and service of order. — A copy of the order provided for in the last preceding section of this Act shall immediately be published by the clerk of said court in the newspaper designated therein for the number of times and as prescribed by the court or the judge thereof, and upon the filing, at any time before the date set for such meeting, of the schedule required by said last preceding section, a copy of said order shall be delivered personally or sent by the clerk forthwith by registered mail, postage prepaid, to all creditors named in said schedule. If said schedule is not filed prior to the day fixed for the election of an assignee, publication of said order as herein required shall be of itself sufficient notice to the creditors of the time and place appointed for the election of an assignee. No order of adjudication upon creditor's petition shall be entered unless there be first deposited, in addition to the cost of commencing said proceedings, a sum of money sufficient to defray the expense of the publication ordered by the court, necessary postage, and ten centavos for each copy to be delivered personally or mailed to the creditors, which last-named sum is hereby constituted the legal fee of the clerk for the personal delivery or mailing required by this section.

Sec. 26. Absentee debtors; Sheriff to take possession. — In all cases where the debtor resides out of the Philippine Islands; or has departed from the Philippine Islands; or can not, after due diligence, be found within the Philippine Islands; or conceals himself to avoid service of the order to show cause, or any other preliminary process or orders in the matter; or is a foreign corporation having no managing or business agent, cashier, or secretary within the Philippine Islands upon whom service or orders and process can be made, and it therefore becomes necessary to obtain service of process and order to show cause, as provided in section twenty-two of this Act, then the petitioning creditors, upon submitting the affidavits requisite to procure an order of publication, and presenting a bond in double the amount of the aggregate sum of their claims against the debtor, shall be entitled to an order of the court directing the sheriff of the province or city in which the matter is pending to take into his custody a sufficient amount of property of the debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings. Upon receiving such order of the court to take into custody property of the debtor, it shall be the duty of the sheriff to take possession of the property and effects of the debtor, not exempt from execution, 13 to an extent sufficient to cover the amount provided for, and to prepare, within three days from the time of taking such possession, a complete inventory of all the property so taken, and to return it to the court as soon as completed. The time for taking the inventory and making return thereof may be extended for good cause shown to the court or a judge thereof. The sheriff shall also prepare a schedule of the names and residences of the creditors, and the amount due each, from the books of the debtor, or from such other papers or data of the debtor available as may come to his possession, and shall file such schedule list of creditors and inventory with the clerk of the court.

Sec. 27. All property taken to be held for all creditors; Appeal bonds; Exceptions to sureties. — In all cases where property is taken into custody by the sheriff, as provided in the preceding section, if it does not embrace all the property and effects of the debtor not exempt from execution, 14 any other creditor or creditors of the debtor, upon giving bond to be approved by the court in double the amount of their claims, singly or jointly, shall be entitled to similar orders, and to like action, by the sheriff, until all claims be provided for, if there be sufficient property or effects. All property taken into custody by the sheriff by virtue of the giving of any such bonds shall be held by him for the benefit of all creditors of the debtor whose claims shall be duly proved, and as provided, in this Act. The bonds provided for in this and the preceding section to procure the order for

custody of the property and effects of the debtor, shall be conditioned that if, upon final hearing of the petition in insolvency, the court shall find in favor of the petitioners, such bonds and all of them shall be void; if the decision be in favor of the debtor, the proceedings shall be dismissed, and the debtor, his heirs, administrators, executors, or assigns, shall be entitled to recover such sum of money as shall be sufficient to cover the damages sustained by him, not to exceed the amount of the respective bonds. Such damages shall be fixed and allowed by the court. If either the petitioners or the debtor shall appeal from the decision of the court, upon final hearing of the petition the appellant shall be required to give bond to the successful party in a sum double the amount of the value of the property in controversy, and for the costs of the proceedings. Such bond shall be approved by the court.

Any person interested in the estate may except to the sufficiency of the sureties on such bond or bonds. When excepted to, the petitioner's sureties, upon notice to the person excepting of not less than two nor more than five days, must justify as to their sufficiency; and upon failure to justify, or if others in their place fail to justify at the time and place appointed, the judge shall issue an order vacating the order to take the property of the debtor into the custody of the sheriff, or denying the appeal, as the case may be.

Sec. 28. Sale under execution. — If, in any case, proper affidavits and bonds are presented to the court or a judge thereof, asking for and obtaining an order of publication and an order for the custody of the property of the debtor, as provided in sections twenty-six and twenty-seven of this Act, and thereafter the petitioners shall make it appear satisfactorily to the court or a judge thereof that the interest of the parties to the proceedings will be subserved by a sale thereof, the court may order such property to be sold in the same manner as property is sold under execution, 15 the proceeds to be deposited in the court to abide the result of the proceedings.

CHAPTER VASSIGNEES

Sec. 29. Election; Creditors holding security. — No creditor shall be entitled to vote for the election of an assignee unless he shall have filed his claim in the office of the clerk of the court in which the proceedings are pending at least two days prior to the time appointed for such election. All claims shall contain a statement showing the amount and nature of the claim and security, if any. The claim shall be verified by the claimant, or his duly authorized agent or attorney. No claim barred by the statute of limitations 16 shall be proved or allowed against the estate of an insolvent debtor for any purpose. Any person interested in the estate of the insolvent may file exceptions to the legality of good faith of any claim, by setting forth specifically in writing his interest in the estate, and the grounds of his objection to such claim. Such exceptions shall be verified by the affidavit of the party objecting, or his duly authorized agent or attorney, and the affidavit shall set out that such exceptions are not made for the purpose of delay and are made in good faith in the best interests of said estate. Exceptions to any claim must be filed with the clerk of the court at least one day before the time appointed for the election of an assignee, and such exceptions shall be heard and disposed of by the court, on affidavit or other evidence, in a summary manner, before the election of an assignee. No creditor or claimant who holds any mortgage, pledge, or lien of any kind whatever as security for the payment of his claim or attachment or execution on property of the debtor duly recorded and not dissolved under this Act shall be permitted to vote at the election of the assignee any part of his secured claim unless he shall first have the value of such security fixed as provided section fifty-nine of this Act, or shall surrender to the sheriff or receiver of the estate of the insolvent, if there be a receiver, all such property, or assign such lien to such sheriff or receiver. The surrender or assignment of such security or lien shall be for the benefit of all creditors of the estate of the insolvent. The value of such security, if fixed by the court, shall be so fixed at least one day before the day appointed for the election of an assignee, in which event the claimant may prove his demand as provided in this section for any unsecured balance, subject to the filing of exceptions as in all other claims.

Sec. 30. Election of assignee in open court. — At a meeting of the creditors in open court or, if the court is not in session, in the presence of the judge or the clerk of the court, those being entitled to vote, as provided by section twenty-nine, shall proceed to the election of an assignee. The majority of the creditors who have proven their claims, such majority being both in number and amount, must concur for the election of an assignee. The clerk of the court shall keep a minute of the deliberations of said creditors, and of the election and appointment of the assignee, and enter the same upon the records of the court, and, in the absence of the judge, shall send a copy of such record to him at the place where he may be found. The assignee shall file, within five days, unless the time be extended by the court, with the clerk, a bond, in an amount to be fixed by the court, to the Government of the Philippine Islands, with two or more sufficient

sureties, approved by the court, and conditioned upon the faithful performance of the duties devolving upon him. The bond shall not be void upon the first recovery, but may be sued upon from time to time by any person aggrieved, in his own name, until the whole penalty be exhausted. The sureties on such bond may be required to justify as to their sufficiency upon the application of any party interested.

Sec. 31. Appointment of assignee by court. — If, on the day appointed for the meeting, creditors do not attend, or fail or refuse to elect an assignee, or if, after election, the assignee shall fail to qualify within the proper time, or if a vacancy occurs by death or otherwise, the court shall appoint an assignee and fix the amount of his bond.

Sec. 32. Transfer of property to assignee. — As soon as an assignee is elected or appointed and qualified, the clerk of the court shall, by an instrument under his hand and seal of the court, assign and convey to the assignee all the real and personal property, estate, and effects of the debtor with all his deeds, books, and papers relating thereto, and such assignment shall relate back to the commencement of the proceedings in insolvency, and shall relate back to the acts upon which the adjudication was founded, and by operation of law shall vest the title to all such property, estate, and effects in the assignee, although the same is then attached on mesne process, as the property of the debtor. Such assignment shall operate to vest in the assignee all of the estate of the insolvent debtor not exempt by law from execution. 17 It shall also dissolve any attachment levied within one month next preceding the commencement of the insolvency proceedings and vacate and set aside any judgment entered in any action commenced within thirty days immediately prior to the commencement of insolvency proceedings and shall vacate and set aside any execution issued thereon and shall vacate and set aside any judgment entered by default or consent of the debtor within thirty days immediately prior to the commencement of the insolvency proceedings.

Sec. 33. Recovery and action of assignee. — The assignee shall have the right to recover all the state debts, and effects of said insolvent. If, at the time of the commencement of proceedings in insolvency, an action is pending in the name of the debtor, for the recovery of a debtor other thing which might or ought to pass to the assignee by the assignment, the assignee shall be allowed and admitted to prosecute the action, in like manner and with like effect as if it had been originally commenced by him. If there are any rights of action in favor of the insolvent for damages, on any account, for which an action is not pending, the assignee shall have the right to prosecute the same with the same effect as the insolvent might have done himself if no proceedings in insolvency had been instituted. If any action or proceeding in which the insolvent is defendant is pending at the time of the adjudication, the assignee may defend the same in the same manner and with like effect as it might have been defended by the insolvent. In a suit prosecuted or defended by the assignee, a certified copy of the assignment made to him shall be conclusive evidence of his authority to sue or defend.

Sec. 34. Registration of assignment to assignee. — The assignee shall, within one month after the making of the assignment to him, cause the same to be recorded in every province or city within the Philippine Islands where any real estate owned by the debtor is situated, and the record of such assignment, or a duly certified copy thereof, shall be conclusive evidence thereof in all courts. If the schedule and inventory required by this Act have not been filed by the debtor the assignee shall, within one month after his election, prepare and file such schedule and inventory from the best information he can obtain, and shall thereupon personally deliver notice or send same by registered mail, postage prepaid, to all creditors named in such schedule, whose claims have not been filed, to forthwith prove their demands.

Sec. 35. Resignation of assignee. — Any assignee may at any time, by writing filed in court, resign his appointment, having first settled his accounts and delivered up all the deeds, vouchers, books of account, notes, bills, bonds, and securities of the debtor and all his real and personal property, estate, and effects to such successor as the court shall appoint: Provided, That if, in the discretion of the court, the circumstances of the case require it, upon good cause being shown, the court may, at any time before such settlement of account and delivery of the estate shall have been completed, revoke the appointment of such assignee and appoint another in his stead. The liability of the outgoing assignee, or of the sureties on his bond, shall not be in any manner discharged, released, or affected by such appointment of another in his stead.

Sec. 36. The said assignee shall have power:

1. To sue and recover all the estate, assets, debts, and claims, belonging to or due to such debtor; and no set-off or counterclaim shall be allowed in any such for debts contracted by the insolvent within thirty days immediately preceding the filing of the petition of insolvency except in case of creditors specified in section

fifty of this Act.

2. To take in to his possession all the estate of such debtor except property exempt by law from execution, 18 whether attached or delivered to him, or afterwards discovered, and all books, vouchers, evidence of indebtedness, and securities belonging to the same.

3. In case of a nonresident or absconding or concealed debtor, to demand and receive of every sheriff who shall have attached any of the property of such debtor, or who shall have in his possession any moneys arising from the sale of such property, all such property and moneys, on paying him his lawful costs and charges for attaching and keeping the same.

4. From time to time to sell at public auction after advertisement in the manner provided by subsections (1), (2), and (3) of section four hundred and fifty-four of the Code of Civil Procedure, 19 upon order of the court, any of the estate, real and personal, which has come into his possession, and which is vested in him as such assignee, and on such sales to execute the necessary conveyances and bills of sale.

5. To redeem all valid mortgages and conditional contracts, and all valid pledges of personal property, and to satisfy any judgments which may be an incumbrance on any property sold by him; or to sell such property, subject to such mortgage, contracts, pledges, judgments, or liens.

6. To settle all matters and accounts between such debtor and his creditors subject to the approval of the court.

7. Under the order of the court or judge appointing him, to compound with any person indebted to such debtor, and thereupon discharge all demands against such person.

8. To recover from any person receiving a conveyance, gift transfer, payment, or assignment, made contrary to any provision of this Act, the property thereby transferred or assigned; or in case a redelivery of the property can not be had, to recover the value thereof with damages for the detention.

Sec. 37. Embezzlement, etc. — If any person, before the assignment is made, having notice of the commencement of the proceedings in insolvency, or having reason to believe that insolvency proceedings are about to be commenced, embezzles or disposes of any of the moneys, goods, chattels, or effects of the insolvent, he is chargeable therewith, and liable to an action by the assignee for double the value of the property so embezzled or disposed of, to be recovered for the benefit of the insolvent's estate.

Sec. 38. Penalties and forfeitures. — The same penalties, forfeitures, and proceedings by citation, examination, and commitment shall apply on behalf of an assignee against persons suspected of having concealed, embezzled, conveyed away, or disposed of any property of the debtor, or of having possession or knowledge of any deeds, conveyances, bonds, contracts, or other writings which relate to any interest of the debtor in any real or personal estate as provided in the case of estates of deceased persons in sections seven hundred and nine to seven hundred and thirteen, inclusive, of the Code of Civil Procedure. 20

Sec. 39. Conversion of property into money. — The assignee shall as speedily as possible convert the estate, real and personal, into money. He shall keep a regular account of all moneys received by him as assignee, to which every creditor or other person interested therein may, at all reasonable times, have access. No private sale of any property of the estate of an insolvent debtor shall be valid unless made under the order of the court, upon a petition in writing, which shall set forth the facts showing the sale to be necessary. Upon filing the petition, notice of the hearing thereof of at least ten days shall be given by publication and mailing, in the same manner as is provided in section nineteen of this Act. If it appears that a private sale is for the best interests of the estate, the court shall order it to be made.

Sec. 40. Perishable property. — In all cases when it appears to the satisfaction of the court that the estate of the debtor, or any part thereof, is of a perishable nature, or is liable to deteriorate in value, or is disproportionately expensive to keep, and that the insolvent's estate will suffer if sufficient time elapses for the giving of notice, the court may order the same to be sold in such manner and at such time as may be deemed most expedient, under the direction of the sheriff, receiver, or assignee, as the case may be, who shall hold the funds received in place of the property sold until further order of the court.

Sec. 41. Outstanding debts, etc. due estate. — Outstanding debts, or other property due or belonging to the estate, which can not be collected and received by the assignee without unreasonable or inconvenient delay or expense, may be

sold and assigned in like manner as the remainder of the estate. If there are any rights of action for damages in favor of the insolvent prior to the commencement of the insolvency proceedings, the same may, with the approval of the court, be compromised.

Sec. 42. Expenses and commissions; Division of compensation. — Assignees shall be allowed all necessary expenses in the care, management, and settlement of the estate, and shall be entitled to charge and receive for their services commissions upon all sums of money coming to their hands and accounted for by them, as follows: For the first thousand pesos, at the rate of seven per centum; for all above that sum and not exceeding ten thousand pesos, at the rate of five per centum; and for all above that sum, at the rate of four per centum: Provided, however, That if the person acting as assignee was receiver of the property of the estate pending the election of an assignee, any compensation allowed him as such receiver shall be deducted from the compensation to which he otherwise would be entitled as such assignee: And provided further, further That if there should be two or more assignees the court shall order an equitable division of the compensation herein provided, and if for any reason an assignee's term is completed before the final settlement of the estate and a successor is appointed the court shall not allow to any such assignee prior to the settlement of the estate an amount exceeding four per centum of the sums of money coming into his hands. Upon the final settlement of the estate an equitable distribution of the compensation of the assignees shall be made.

Sec. 43. Filing of accounts with vouchers, statements, etc.; Decisions of court upon claims; Additional accounts. — At the expiration of three months from the appointment of the assignee in any case, or as much earlier as the court may direct, a time and place shall be fixed by the court at which the assignee shall file just and true accounts of all his receipts and payments with proper vouchers, verified by his oath and a statement of the property outstanding, specifying the causes of its outstanding, also what debts or claims are yet undetermined, and stating what sum remains in his possession, and shall accompany the same with an affidavit that notice by registered mail has been given to all creditors named in the schedule filed by the debtor or the assignee that said accounts will be heard at a time specified in such notice, which time shall not be less than two nor more than eight weeks from the filing of such accounts. At the hearing the court shall audit the accounts of the assignee, and any person interested may appear and file exceptions thereto and contest the same. The court shall thereupon confirm said accounts if they shall be found to be correct, or order the same corrected if errors shall be found therein. The court shall also, in such hearing, determine the property which must be deducted from the estate as another's, under the provisions of section forty-eight of this Act, and the right of the claimants to participate in the dividend, and may order a dividend paid to those creditors whose claims have been proven and allowed. The decision of the court theretofore rendered as to whether any claimant was entitled to vote for an assignee shall not be conclusive upon the right of the claimant to share in such dividend; but all claimants who were so allowed to vote shall participate in such dividend unless objections were filed to the same prior to such hearing. If any such objections have been filed against any claim, or if any claimant was refused the right to vote, the court shall determine said objections and the rights of all such claimants in such hearing and refuse or allow the same before the declaration of a dividend. Thereafter, further accounts, statements, and dividends shall be made in like manner as often as occasion requires: Provided, however, That it shall be the duty of the assignee to file his final account within one year from the date of the order of adjudication, unless the court, after notice to creditors, shall grant further time, upon a satisfactory showing that great loss and waste would result to the estate by reason of the conversion of the property into money within said time, or that it has been impossible to do so by reason of litigation.

Sec. 44. Motion to require accounts, filing of . — The court may at any time, upon the motion of any two or more creditors, require the assignee to file his account in the manner and upon giving the notice specified in the preceding section, and if he has funds subject to distribution he may be required to distribute them without delay.

Sec. 45. Rights of creditors late in proving claims. — Whenever any dividend has been duly declared, the distribution of it shall not be stayed or affected by reason of debts being subsequently proved, but any creditor proving such a debt shall be entitled to a dividend equal to those already received by the other creditors before any further dividend is made to the latter, if the failure to prove such claim shall not have resulted from his own neglect.

Sec. 46. Failure, neglect or refusal by assignee. — Should the assignee refuse or neglect to render his accounts as required by sections forty-three and forty-four of this Act, or refuse or neglect to pay over a dividend when he shall have, in the opinion of the court, sufficient funds for that purpose, or shall neglect or mismanage the estate in any manner whatever or violate any of the provisions of

this Act, the court shall immediately discharge such assignee from his trust, and shall appoint another in his place. The assignee so discharged shall forthwith deliver over to the assignee appointed by the court all the funds, property, books, vouchers, or securities belonging to the insolvent, and he shall not be entitled for his services to the compensation provided in section forty-two.

Sec. 47. Final account. — Preparatory to the settlement of the estate, the assignee shall file his final account in the court, accompanying the same with an affidavit that a notice by registered mail has been given to all creditors who have proved their claims, that he will apply for a settlement of his account and for a discharge from all liability as assignee at a time specified in such notice, which time shall not be less than two nor more than eight weeks from such filing. At the hearing the court shall audit the account, and any person interested may appear and file exceptions in writing and contest the same. The court thereupon shall settle the account, and order a dividend of any portion of the estate, if any, remaining undistributed, and shall discharge the assignee, subject to compliance with the order of the court, from all liability as assignee to any creditor of the insolvent.

CHAPTER VICLASSIFICATION AND PREFERENCE OF CREDITORS

Sec. 48. Property not belonging to insolvent; Dowry; Paraphernalia property. — Merchandise, effects, and any other kind of property found among the property of the insolvent, the ownership of which has not been conveyed to him by a legal and irrevocable title, shall be considered to be the property of other persons and shall be placed at the disposal of its lawful owners on order of the court made at the hearing mentioned in section forty-three or at any ordinary hearing, if the assignee or any creditor whose right in the estate of the insolvent has been established shall petition in writing for such hearing and the court in its discretion shall so order, the creditors, however, retaining such rights in said property as belong to the insolvent, and subrogating him whenever they shall have complied with all obligations concerning said property.

The following shall be included in this section:

1. Dowry property 21 inestimado and such property estimado which may remain in the possession of the husband where the receipt thereof is a matter of record in a public instrument registered under the provisions of sections twenty-one and twenty-seven of the Code of Commerce in force.

2. Paraphernalia property which the wife may have acquired by inheritance, legacy, or donation whether remaining in the form in which it was received or subrogated or invested in other property, provided that such investment or subrogation has been registered in the registro mercantile in accordance with the provisions of the sections of the Code of Commerce mentioned in the next preceding paragraph.

3. Property and effects deposited with the bankrupt, or administered, leased, rented, or held in usufruct by him.

4. Merchandise in the possession of the bankrupt, on commission, for purchase, sale, forwarding, or delivery. 

5. Bills of exchange or promissory notes without endorsement or other expression transferring ownership remitted to the insolvent for collection 

6. Money remitted to the insolvent, otherwise than on current account, and which is in his possession for delivery to a definite person in the name and for the account of the remitter or for the settlement of claims which are to be met at the unsolvent's domicile.

7. Amounts due the insolvent for sales of merchandise on commission, and bills of exchange and promissory notes derived therefrom in his possession, even when the same are not made payable to the owner of the merchandise sold, provided it is proven that for the obligation to the insolvent is derived therefrom and that said bills of exchange and promissory notes were in the possession of the insolvent for account of the owner of the merchandise to be cashed and remitted, in due time, to the said owner; all of which shall be a legal presumption when the amount involved in any such sale shall not have been credited on the books of both the owner of the merchandise and of the insolvent.

8. Merchandise bought on credit by the insolvent so long as the actual delivery thereof has not been made to him at his store or at any other place stipulated for such delivery, and merchandise the bills of lading or shipping receipts of which have been sent him after the same has been loaded by order of the purchaser and for his account and risk.

In all cases arising under this paragraph assignees may retain the merchandise so purchased or claim it for the creditors by paying the price thereof to the vendor.

9. Goods or chattels wrongfully taken, converted, or withheld by the insolvent if still existing in his possession or the amount of the value thereof.

Sec. 49. Creditors sharing pro rata. — All creditors, except those whose claims are mentioned in the next following section, whose debts are duly proved and allowed shall be entitled to share in the property and estate pro rata, after the property belonging to other persons referred to in the last in preceding section has been deducted therefrom, without priority or preference whatever: Provided, That any debt proved by any person liable as bail, surety, guarantor, or otherwise, for the debtor, shall not be paid to the person so proving the same until satisfactory evidence shall be produced of the payment of such debt by such person so liable, and the share to which such debt would be entitled may be paid into court, or otherwise held, for the benefit of the party entitled thereto, as the court may direct.

Sec. 50. The following are the preferred claims which shall be paid in the order named:

(a) Necessary funeral expenses of the debtor, or of his wife, or children who are under their parental authority and have no property of their own, when approved by the court;

(b) Debts due for personal services rendered the insolvent by employees, laborers, or domestic servants immediately preceding the commencement of proceedings in insolvency;

(c) Compensation due the laborers or their dependents under the provisions of Act Numbered Thirty-four hundred and twenty-eight, known as the Workmen's Compensation Act, 22 as amended by Act Numbered Thirty-eight hundred and twelve, and under the provisions of Act Numbered Eighteen hundred and seventy-four, known as the Employees' Liability Act 23 and of other laws providing for payment of indemnity for damages in cases of labor accidents;

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

(e) Debts, taxes, and assessments due the Insular Government; 24

(f) Debts, taxes, and assessments due to any province or provinces of the Philippine Islands;

(g) Debts, taxes, and assessments due to any municipality or municipalities of the Philippine Islands;

All other creditors shall be paid pro rata 25

CHAPTER VIIPARTNERSHIPS & CORPORATIONS

Sec. 51. Partnerships. — A partnership, during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged insolvent, either on the petition of the partners or any one of them, or on the petition of three or more creditors of the partnership, qualified as provided in section twenty of this Act, in either of which cases the court shall issue an order in the manner provided by this Act, upon which all the property of the partnership, and also all the separate property of each of the partners, if they are liable, shall be taken, excepting such parts thereof as may be exempt by law; and all creditors of the partnership, and the separate creditors of each partner, shall be allowed to prove their respective claims; and the assignee shall be chosen by the creditors of the partnership, and shall also keep separate accounts of the property of the partnership, and of the separate estate of each member thereof. The expenses of the proceedings shall be paid from the partnership property and the individual property of the partners in such proportions as the court shall determine. The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of their respective interests in the partnership. Certificate of discharge shall be granted or refused to each partner

as the same would or ought to be if the proceedings had been by or against him alone under this Act; and in all other respects the proceedings as to the partners shall be conducted in like manner as if they had been commenced and prosecuted by or against one person alone. If such partners reside in different provinces, the court in which the petition is first filed shall retain exclusive jurisdiction over the case. If the petition to be filed by less than all the partners of a partnership those partners who do not join in the petition shall be ordered to show cause why they, as individuals, and said partnership, should not be adjudged to be insolvent, in the same manner as other debtors are required to show cause upon a creditor's petition, as in this Act provided; and no order of adjudication shall be made in said proceedings until after the hearing of said order to show cause.

Sec. 52. Corporations and sociedades anonimas; Banking. — The provisions of this Act shall apply to corporations and sociedades anonimas, and upon the petition of any officer of any corporation or sociedad anonima, duly authorized by the vote of the board of directors or trustees, at a meeting specially called for that purpose, or by the assent in writing of a majority of the directors or trustees as the case may be, or upon a creditor's petition made and presented in the manner provided in respect to debtors, of the like proceedings shall be had and taken as are provided in the case of debtors: Provided, That in case the articles of association or by-laws of any corporation the or sociedad anonima provide a method for such proceedings, such method shall be followed. All the provisions of this Act which apply to the debtor, or set forth his duties, examination, and liabilities, or prescribe penalties, or relate to fraudulent conveyances, payments, and assignments, apply to each and every officer of any corporation or sociedad anonima in relation to the same matters concerning the corporation. Whenever any corporation is declared insolvent, its property and assets shall be distributed to the creditors; due at but no discharge shall be granted to any corporation. The provisions of this Act shall not apply to corporations engaged principally in the banking business, 26 or to any other corporation as to which there is any special provision of law for its liquidation in case of insolvency.

CHAPTER VIIIPROOF OF DEBTS

Sec. 53. Class of debts. — All debts due and payable from the debtor at the time of the adjudication of insolvency, and all debts then existing but not payable until a future time, a discount being made if no interest is payable by the terms of the contract, may be proved against the estate of the debtor.

Sec. 54. Commercial paper. — If the debtor is bound as indorser, surety, bail, or guarantor, upon any bill, bond, note, or other specialty or contract, or for any debt any person, and his liability shall not have become absolute until after the adjudication of insolvency, the creditor may prove the same after such liability shall have become fixed, and before the final dividend shall have been declared.

Sec. 55. Contingent debts. — In all cases of contingent debts and contingent liabilities, contracted by the debtor, and not herein otherwise provided for, the creditor may make claim therefor and have his claim allowed, with the right to share in the dividends, if the contingency shall happen before the order of the final dividend; or he may, at any time, apply to the court to have the present value of the debt or liability ascertained and liquidated, which shall be done in such manner as the court shall order, and it shall be allowed for the amount so ascertained.

Sec. 56. Bail, surety, etc., for the debtor. — Any person liable as bail, surety, or guarantor, or otherwise, for the debtor, who shall have paid the debt, or any part thereof, in discharge of the whole, shall be entitled to prove such debt, or to stand in the place of the creditor, if he shall have proved the same, although such payments shall have been made after the proceedings in insolvency were commenced; and any person so liable for the debtor, and who has not paid the whole of said debt, but is still liable for the same, or any part thereof, may, if the creditor shall fail or omit to prove such debt, prove the same in the name of the creditor.

Sec. 57. Rents and periodical payments. — Where the debtor is liable to pay rent, or other debt falling due at fixed and stated periods, the creditor may prove, for a proportionate part thereof up to the time of the insolvency, as if the same became due from day to day, and not at such fixed and stated periods.

Sec. 58. Mutual debts and credits. — In all cases of mutual debts and mutual credits between the parties, the account between them shall be stated, and one debt set off against the other, and the balance only shall be allowed of a claim in its nature not provable against the estate: Provided, That no set-off or counterclaim shall be allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such debtor within thirty days immediately

preceding the filing, or after the filing of the petition by or against the insolvent.

Sec. 59. Mortgages, pledges, liens, etc.; Release or sale by assignee. — When a creditor has a mortgage, or pledge of real or personal property of the debtor, or a lien thereon, for securing the payment of a debt owing to him from the debtor, or an attachment or execution on property of the debt or duly recorded and not dissolved under this Act, he shall be admitted as a creditor for the balance of the debt only, after deducting the value of such property, such value to be ascertained by agreement between him and the receiver, if any, and if no receiver, then upon such sum as the court or a judge thereof may decide to be fair and reasonable, before the election of an assignee, or by a sale thereof, to be made in such manner as the court or judge thereof shall direct; or the creditor may release or convey his claim to the receiver, if any, or if no receiver then to the sheriff, before the election of an assignee, or to the assignee if an assignee has been elected, upon such property, and be admitted to prove his whole debt. If the value of the property exceeds the sum for which it is so held as security, the assignee may release to the creditor the debtor's right of redemption thereon on receiving such excess; or he may sell the property, subject to the claim of the creditor thereon, and in either case the assignee and creditor, respectively, shall execute all deeds and writings necessary or proper to consummate the transaction. If the property is not sold or released, and delivered up, or its value fixed, the creditor shall not be allowed to prove any part of his debt, but the assignee shall deliver to the creditor all such property upon which the creditor holds a mortgage, pledge, or lien, or upon which he has an attachment or execution.

Sec. 60. Creditors proving claims cannot use; Stay of action. — No creditor, proving his debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of action and suit against him, and all proceedings already commenced, or any unsatisfied judgment already obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtor's discharge, upon proper application and proof to the court having jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied judgments satisfied of record: Provided, That no valid lien existing in good faith thereunder shall be thereby affected. A creditor proving his debt or claim shall not be held to have waived his right of action or suit against the debtor when a discharge has have been refused or the proceedings have been determined to the without a discharge. No creditor whose debt is provable under this Act shall be allowed, after the commencement of proceedings in insolvency, to prosecute to final judgment any action therefor against the debtor until the question of the debtor's discharge shall have been determined, and any such suit proceeding shall, upon the application of the debtor or of any creditor, or the assignee, be stayed to await the determination of the court on the question of discharge: Provided, That if the amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may proceed to judgment for purpose of ascertaining the amount due, which amount, when adjudged, may be allowed in the insolvency proceedings, but execution shall be stayed aforesaid.

Sec. 61. Preferences knowingly accepted contrary to this Act. — Any person who shall have accepted any preference, having reasonable cause to believe that the same was made or given by the debtor contrary to any provision of this Act, shall not be allowed to prove the debt or claim on account of which the preference was made or given, nor shall he receive any dividend thereon, until he shall have surrendered to the assignee all property, money, benefit, or advantage received by him under such preference.

Sec. 62. Examinations under oath by court. — The court may, upon the application of the assignee, or of any creditor, or without any application, before or after adjudication in insolvency, examine upon oath the debtor in relation to his property and his estate and may examine any other person tending or making proof of claims, and may subpoena witnesses to give evidence relating to such matters. All examinations of witnesses shall be had and depositions shall be taken in accordance with and in the same manner as is provided by the Code of Civil Procedure. 27

CHAPTER IXCOMPOSITIONS

Sec. 63. When confirmation filed. — An insolvent may offer terms of composition to his creditors after, but not before, he has filed in court a schedule of his property and list of his creditors as provided in this Act. An application for the confirmation of a composition may be filed in the insolvency court after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a majority in amount of such claims and after the consideration to be paid by the insolvent to his creditors and the money necessary to pay all debts which have priority and the costs of proceedings have been deposited in such place as shall be designated by and subject to the order of the court. A time shall be fixed by the

court for the hearing upon an application for the confirmation of a composition, and for the hearing of such objections as may be made to its confirmation. The court shall confirm a composition if satisfied that (1) it is for the best interest of the creditors; (2) that the insolvent has not been guilty of any of the acts, or of a failure to perform any of the duties, which would create a bar to his discharge; and (3) that the offer and its acceptance are in good faith, and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden. Upon the confirmation of a composition the consideration shall be distributed as the judge shall direct, and the case dismissed, and the title to the insolvent's property shall revest in him. Whenever a composition is not confirmed, the estate in insolvency shall be administered as herein provided. The court may, upon application of a party in interest, filed at any time within six months after the composition has been confirmed, set the same aside, and reinstate the case if it shall be made to appear upon a trial that fraud was practiced in the procuring of such composition, and that the knowledge thereof has come to the petitioner since the confirmation of such composition.

CHAPTER XDISCHARGE

Sec. 64. Discharge. — At any time after the expiration of three months from the adjudication of insolvency, but not later than one year from such adjudication, unless the property of the insolvent has not been converted unto money, the debtor may apply to the court for a discharge from his debts, and the court shall thereupon order notice to be given to all creditors who have proved their debts to appear on a day appointed for that purpose and show cause why a discharge should not be granted to the debtor; said notice shall be given by registered mail and by publication 28 at least once a week, for six weeks, in a newspaper published in the province or city, or, if there be none, in a newspaper which, in the opinion of the judge, will best give notice to the creditors of the said insolvent: Provided, That if no debts have been proven, such notice shall not be required.

Sec. 65. Invalid discharge. — No discharge shall be granted, or if granted shall be valid, (1) if the debtor shall have sworn falsely in his affidavit annexed to his petition, schedule, or inventory, or upon any examination in the course of the proceedings in insolvency, in relation to any material fact concerning his estate or his debts or to any other material fact; or (2) if he has concealed any part of his estate or effects, or any books or writing relating thereto; or (3) if he has been guilty of fraud or willful neglect in the care or custody of his property or in the delivery to the assignee of the property belonging to him at the time of the presentation of his petition and inventory, excepting such property as he is permitted to retain under the provisions of this Act; or (4) if, within one month before the commencement of such proceedings, he has procured his real estate, goods, moneys, or chattels to be attached or seized on execution; or (5) if he has destroyed, mutilated, altered, or falsified any of his books, documents, papers, writings, or securities, or has made, or been privy to the making of, any false or fraudulent entry in any book of account or other document with intent to defraud his creditors; or (6) if he has given any fraudulent preference, contrary to the provisions of this Act, or has made any fraudulent payment, gift, transfer, conveyance, or assignment of any part of his property, or has admitted a false or fictitious debt against his estate; or (7) if, having knowledge that any person has proven such false or fictitious debt, he has not disclosed the same to his assignee within one month after such knowledge; or (8) if, being a merchant or tradesman, he has not kept proper books of account in Arabic numerals and in accordance with the provisions of the Code of Commerce; or (9) if he, or any other person on his account, or in his behalf, has influenced the action of any creditor, at any stage of the proceedings, by any pecuniary consideration or obligation; or (10) if he has, in contemplation of becoming insolvent, made any pledge, payment, transfer, assignment, or conveyance of any part of his property, directly or indirectly, absolutely or conditionally, for the purpose of preferring any creditor or person having a claim against him, or who is, or may be, under liability for him, or for the purpose of preventing the property from coming into the hands of the assignee, or of being distributed under this Act in satisfaction of his debts; or (11) if he has been convicted of any misdemeanor under this Act, or has been guilty of fraud contrary to the true intent of this Act; or (12) in case of voluntary insolvency, has received the benefit of this or any other Act of insolvency or bankruptcy within six years next preceding his application for discharge; or (13) if insolvency proceedings in which he could have applied for a discharge are pending by or against him in the Court of First Instance of any other province or city in the Philippine Islands. Before any discharge is granted, the debtor shall take and subscribe an oath to the effect that he has not done, suffered, or been privy to any act, matter, or thing specified in this Act as grounds for withholding such discharge or as invalidating such discharge, if granted.

Sec. 66. Any creditor opposing the discharge of a debtor shall file his objections thereto, specifying the grounds of his opposition, and after the debtor has filed

and served his answer thereto which pleadings shall be verified, the court shall try the issue or issues raised, according to the practice provided by law in civil actions.

Sec. 67. Discharge of debtor by court. — If it shall appear to the court that the debtor has in all things conformed to his duty under this Act, and that he is entitled under the provisions thereof to receive a discharge, the court shall grant him a discharge from all his debts, except as hereinafter provided, and shall give him a certificate thereof, under the seal of the court, in substance as follows: "In the Court of First Instance of the _____________, Philippine Islands. Whereas, ______________, has been duly adjudged an insolvent under the Insolvency Law of the Philippine Islands, and appears to have conformed to all the requirements of law in that behalf, it is therefore ordered by the court that said _______________ be forever discharged from all debts and claims, which by said Insolvency Law are made provable against his estate, and which existed on the _______ day of _________, on which the petition of adjudication was filed by (or against) him, excepting such debts, if any, as are by said Insolvency Law excepted from the operation of a discharge in insolvency. Given under my hand, and the seal of the court, this ____ day of ______________, anno Domini ______________ Attest: ____________, clerk. (Seal) _____________, judge."

Sec. 68. Debts not released under this Act — No tax or assessment due the Insular Government 29 or any provincial or municipal government, whether proved or not as provided for in this Act, shall be discharged. Nor shall any debt created by the fraud or embezzlement of the debtor, or by his defalcation as a public officer or while acting in a fiduciary capacity, be discharged under this Act, but the debt may be proved, and the dividend thereon shall be a payment on account of said debt. No discharge solvent granted under this Act shall release, discharge, or affect any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise. 30

Sec. 69. Effect of discharge under this Act — A discharge, duly granted under this Act, shall, with the exceptions aforesaid, release the debtor from all claims, debts, liabilities, and demands set forth in his schedule, or which were or might have been proved against his estate in insolvency, and may be pleaded by a simple averment that on the day of its date such discharge was granted to him, setting forth the same in full, and the same shall be a complete bar to all suits brought on any such debts, claims, liabilities, or demands, and the certificate shall be prima facie evidence in favor of such fact and of the regularity of such discharge: Provided, however, That any creditor whose debt was proved or provable against the estate in insolvency who shall see fit to contest the validity of such discharge on the ground that it was fraudulently obtained and who has discovered the facts constituting the fraud subsequent to the discharge, may, at any time within one year after the date thereof, apply to the court which granted it to set it aside and annul the same.

CHAPTER XIFRAUDULENT PREFERENCES AND TRANSFERS

Sec. 70. If any debtor, being insolvent, or in contemplation of insolvency, within thirty days before the filing of a petition by or against him, with a view to giving a preference to any creditor or person having a claim against him or who is under any liability for him, procures any part of his property to be attached, sequestered, or seized on execution, or makes any payment, pledge, mortgage, assignment, transfer, sale, or conveyance of any part of his property, either directly or indirectly, absolutely or conditionally, to anyone, the person receiving such payment, pledge, mortgage, assignment, transfer, sale, or conveyance, or to be benefited thereby, or by such attachment or seizure, having reasonable cause to believe that such debtor is insolvent, and that such attachment, sequestration, seizure, payment, pledge, mortgage, conveyance, transfer, sale, or assignment is made with a view to prevent his property from coming to his assignee in insolvency, or to prevent the same from being distributed ratably among his creditors, or to defeat the object of, or in any way hinder, impede, or delay the operation of or to evade any of the provisions of this Act, such attachment, sequestration, seizure, payment, pledge, mortgage, transfer, sale, assignment, or conveyance is void, and the assignee, or the receiver, may recover the property, or the value thereof, as assets of such insolvent debtor. If such payment, pledge, mortgage, conveyance, sale, assignment, or transfer is not made in the usual and ordinary course of business of the debtor, or if such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud. Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character made by the insolvent within one month before the filing of a petition in insolvency by or against him, except for a valuable pecuniary consideration made in good faith, shall be void. All assignments, transfers, conveyances, mortgages, or incumbrances of real estate shall be deemed, under this section, to have been made at the time the instrument conveying or affecting such realty was filed for record in the office of

the register of deeds of the province or city where the same is situated.

CHAPTER XIIPENAL PROVISIONS

Sec. 71. Acts of debtors punishable under this Act. — From and after the taking effect of this Act, a debtor who commits any one of the following acts shall, upon conviction thereof, be punished by imprisonment for not less than three months nor more than five years for each offense:

1. If he shall, after the commencement of proceedings in insolvency, secrete or conceal any property belonging to his estate or part with, conceal, destroy, alter, mutilate, or falsify or cause to be concealed, destroyed, altered, mutilated, or falsified, any book, deed, document, or writing relating thereto, or remove, or cause to be removed, the same or any part thereof, with the intent to prevent it from coming into the possession of the assignee in insolvency, or to hinder, impede, or delay his assignee in recovering or receiving the same, or if he shall make any payment, gift, sale, assignment, transfer, or conveyance of any property belonging to his estate, with like intent, or shall spend any part thereof in gaming; or if he shall, with intent to defraud willfully and fraudulently conceal from his assignee, or fraudulently or designedly omit from his schedule any property or effects whatsoever; or if, in any case of any person having, to his knowledge or belief, proved a false or fictitious debt against his estate he shall fail to disclose the same to his assignee within one month after coming to the knowledge or belief thereof; or if he shall attempt to account for any of his property by fictitious losses or expenses;

2. If he shall, within three months before commencement of proceedings in insolvency under the false pretense of carrying on business and dealing in the ordinary course of trade, obtain on credit from any person any goods or chattels or shall pawn, pledge, or dispose of, otherwise than by bona fide transactions in the ordinary course of his trade, any of his goods and chattels which have been obtained on credit and remain unpaid for, or shall have suffered loss in any kind of gaming when such loss is one of the causes determining the commencement of proceedings, in insolvency, or shall have sold at a loss or for less than the current price any goods bought on credit and still unpaid for, or shall have advanced payments to the prejudice of his creditors. 31

3. If he shall, from and after the taking effect of this Act, during the proceedings for the suspension of payments, secrete or conceal, or destroy or cause to be destroyed or secreted any property belonging to his estate; or if he shall secrete, destroy, alter, mutilate, or falsify, or cause to be secreted, destroyed, altered, mutilated, or falsified, any book, deed, document, or writing relating thereto, or if he shall, with intent to defraud his creditors, make any payment, sale, assignment, transfer, or conveyance of any property belonging to his estate; or if he shall spend any part thereof in gaming; or if he shall falsely swear to the schedule and inventory exacted by paragraph two of section two as required by sections fifteen, sixteen and seventeen of this Act, with intent to defraud his creditors; or if he shall violate or break in any manner whatsoever the injunction issued by the court under section three of this Act.

CHAPTER XIIIMISCELLANEOUS

Sec. 72. If any debtor shall die after the order of adjudication, the proceedings shall be continued and concluded in like manner and with like validity and effect as if he had lived.

Sec. 73. Pending insolvency proceedings by or against any person, partnership, corporation, or sociedad anonima, no statute of limitations shall run upon a claim of or against the estate of the debtor.

Sec. 74. Any creditor, at any stage of the proceedings, may be represented by his attorney or duly authorized agent, and the attorney or agent, properly authorized, shall be entitled to vote at any creditors' meeting as and for his principal.

Sec. 75. Exempt property to be set apart. — It shall be the duty of the court having jurisdiction of the proceedings, upon petition and after hearing, to exempt and set apart, for the use and benefit of said insolvent, such real and personal property as is by law exempt from execution, and also a homestead, as provided in section four hundred and fifty-two of the Code of Civil Procedure; 32 but no such petition shall be heard as aforesaid until it is first proved that notice of the hearing of the application therefor has been duly given by the clerk, by causing such notice to be posted in at least three public places in the province or city at least ten days prior to the time of such hearing, which notice shall set forth the name of said insolvent debtor, and the time and place appointed for the hearing of such application, and shall briefly indicate the homestead sought to be exempted or

the property sought to be set aside; and the decree must show that such proof was made to the satisfaction of the court, and shall be conclusive evidence of that fact.

Sec. 76. Proceedings, how commenced. — The filing of a petition by or against a debtor upon which, or upon an amendment of which, an order of adjudication in insolvency may be made, shall be deemed to be the commencement of the proceedings in insolvency under this Act.

Sec. 77. Words used in this Act in the singular include the plural, and in the plural, the singular, and the word "debtor" includes partnerships, corporations and sociedades anonimas.

Sec. 78. Appointment of receiver; Election and qualification of assignee. — Upon the filing of either a voluntary or involuntary petition in insolvency, a receiver may be appointed by the court in which the proceeding is pending, or by a judge thereof, at any time before the election of an assignee, when it appears by the verified petition of a creditor that the assets of the insolvent, or a considerable portion thereof, have been pledged, mortgaged, transferred, assigned, conveyed, or seized, on legal process, in contravention or violation of the provisions of section seventy of this Act, and that it is necessary to commence an action to recover the same. The appointment, oath, undertaking, and powers of such receiver shall in all respects be regulated by the general laws of the Philippine Islands applicable to receivers. When an assignee is chosen, and has qualified, the receiver shall forthwith return to court an account of the assets and property which have come into his possession, and of his disbursements, and a report of all actions or proceedings commenced by him for the recovery of any property belonging to the estate, and the court shall thereupon summarily hear and settle the receiver's account, and shall allow him a just compensation for his services and his expenses, including a reasonable attorney's fee, whereupon the receiver shall deliver all property, assets, or effects remaining in his hands, to the assignee who shall be substituted for the receiver in all pending actions or proceedings.

Sec. 79. Attachments. — When an attachment has been made and is not dissolved before the commencement of proceedings in insolvency, or is dissolved by an undertaking given by the defendant, if the claim upon which the attachment suit was commenced is proved against the estate of the debtor, the plaintiff may prove the legal costs and disbursements of the suit, and of the keeping of the property, and the amount thereof shall be a preferred debt.

Sec. 80. Costs. — In all contested matters in insolvency the court may, in its discretion, award costs to either party to be paid by the other, or to either or both parties to be paid out of the estate, as justice and equity may require. In awarding costs, the court may issue execution therefor. In all involuntary cases under this Act, the court shall allow the petitioning creditors out of the estate of the debtor, if any adjudication of insolvency be made, as a preferred claim, all legal costs and disbursements incurred by them in that behalf.

Sec. 81. Dismissal or discontinuance. — If no creditor files written objections, the court may, upon the application of the debtor, if it be voluntary petition, or of the petitioning creditors, if a creditor's petition, dismiss the petition and the discontinue the proceedings at any time before the appointment of an assignee, upon giving not less than two nor more than eight weeks' notice to the creditors, in the same manner that notice of the time and place of election of an assignee is given: Provided, however, That by written consent of all creditors filed in the court the proceedings may be dismissed at any time. After the appointment of an assignee, no dismissal shall be made without the consent of all parties interested in or affected thereby.

Sec. 82. Law governing appeal. — An appeal may be taken to the Supreme Court in the following cases: 33

1. From an order granting or refusing an adjudication of insolvency and, in the latter case, from the order fixing the amount of costs, expenses, damages, and attorney's fees allowed the debtor.

2. From an order made at the hearing of any account of an assignee, allowing or rejecting a creditor's claim, in whole or in part, when the amount in dispute exceeds three hundred pesos.

3. From an order allowing or denying a claim for property not belonging to the insolvent, presented under section forty-eight of this Act.

4. From an order settling an account of an assignee.

5. From an order against or in favor of setting apart homestead or other property claimed as exempt from execution.

6. From an order granting or refusing a discharge to the debtor.

Chapter forty-two of the Code of Civil Procedure, 34 so far as applicable, shall govern appeals under this Act, except that when an assignee has given an official undertaking and appeals from a judgment or order of insolvency, his official undertaking stands in the place of an undertaking on appeal, and the sureties thereon are liable on such undertaking: Provided, however, That an interlocutory appeal shall not stay proceedings unless written be entered into on the part of the appellant, with at least two sureties, in such an amount as the court, or a judge thereof, may direct, but not less than double the value of the property involved, to the effect that if the order appealed from be affirmed, or the appeal dismissed, appellant will pay all costs and damages which the adverse party may sustain by reason of the appeal and the stay of proceedings.

Sec. 83. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby repealed.

Sec. 84. This Act shall take effect on its passage.

Enacted, May 20, 1909.

Fourteenth CongressThird Regular Session

Begun and held in Metro Manila, on Monday, the twenty-seventh day of July, two thousand nine.

REPUBLIC ACT No. 10142

AN ACT PROVIDING FOR THE REHABILITATION OR LIQUIDATION OF FINANCIALLY DISTRESSED ENTERPRISES AND INDIVIDUALS

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

CHAPTER IGENERAL PROVISIONS

Section 1. Title. - This Act shall be known as the "Financial Rehabilitation and Insolvency Act (FRIA) of 2010".

Section 2. Declaration of Policy. - It is the policy of the State to encourage debtors, both juridical and natural persons, and their creditors to collectively and realistically resolve and adjust competing claims and property rights. In furtherance thereof, the State shall ensure a timely, fair, transparent, effective and efficient rehabilitation or liquidation of debtors. The rehabilitation or liquidation shall be made with a view to ensure or maintain certainly and predictability in commercial affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and respect priority of claims, and ensure equitable treatment of creditors who are similarly situated. When rehabilitation is not feasible, it is in the interest of the State to facilities a speedy and orderly liquidation of these debtor's assets and the settlement of their obligations.

Section 3. Nature of Proceedings. - The proceedings under this Act shall be in rem. Jurisdiction over all persons affected by the proceedings shall be considered as acquired upon publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines in the manner prescribed by the rules of procedure to be promulgated by the Supreme Court.

The proceedings shall be conducted in a summary and non-adversarial manner consistent with the declared policies of this Act and in accordance with the rules of procedure that the Supreme Court may promulgate.

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

(a) Administrative expenses shall refer to those reasonable and necessary expenses:

(1) incurred or arising from the filing of a petition under the provisions of this Act;

(2) arising from, or in connection with, the conduct of the proceedings under this Act, including those incurred for the rehabilitation or liquidation of the debtor;

(3) incurred in the ordinary course of business of the debtor after the commencement date;

(4) for the payment of new obligations obtained after the commencement date to finance the rehabilitation of the debtor;

(5) incurred for the fees of the rehabilitation receiver or liquidator and of the professionals engaged by them; and

(6) that are otherwise authorized or mandated under this Act or such other expenses as may be allowed by the Supreme Court in its rules.

(b) Affiliate shall refer to a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation.

(c) Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property, whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the government, whether national or local, including taxes, tariffs and customs duties; and (2) claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities.

(d) Commencement date shall refer to the date on which the court issues the Commencement Order, which shall be retroactive to the date of filing of the petition for voluntary or involuntary proceedings.

(e) Commencement Order shall refer to the order issued by the court under Section 16 of this Act.

(f) Control shall refer to the power of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries or affiliates, more than one-half (1/2) of the voting power of an enterprise unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one-half (1/2) or less of the voting power of an enterprise when there is power:

(1) over more than one-half (1/2) of the voting rights by virtue of an agreement with investors;

(2) to direct or govern the financial and operating policies of the enterprise under a statute or an agreement;

(3) to appoint or remove the majority of the members of the board of directors or equivalent governing body; or

(4) to cast the majority votes at meetings of the board of directors or equivalent governing body.

(g) Court shall refer to the court designated by the Supreme Court to hear and determine, at the first instance, the cases brought under this Act.

(h) Creditor shall refer to a natural or juridical person which has a claim against the debtor that arose on or before the commencement date.

(i) Date of liquidation shall refer to the date on which the court issues the Liquidation Order.

(j) Days shall refer to calendar days unless otherwise specifically stated in this Act.

(k) Debtor shall refer to, unless specifically excluded by a provision of this Act, a sole proprietorship duly registered with the Department of Trade and Industry (DTI), a partnership duly registered with the Securities and Exchange Commission (SEC), a corporation duly organized and existing under Philippine laws, or an individual debtor who has become insolvent as defined herein.

(l) Encumbered property shall refer to real or personal property of the debtor upon which a lien attaches.

(m) General unsecured creditor shall refer to a creditor whose claim or a portion thereof its neither secured, preferred nor subordinated under this Act.

(n) Group of debtors shall refer to and can cover only: (1) corporations that are financially related to one another as parent corporations, subsidiaries or affiliates;

(2) partnerships that are owned more than fifty percent (50%) by the same person; and (3) single proprietorships that are owned by the same person. When the petition covers a group of debtors, all reference under these rules to debtor shall include and apply to the group of debtors.

(o) Individual debtor shall refer to a natural person who is a resident and citizen of the Philippines that has become insolvent as defined herein.

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

(q) Insolvent debtor's estate shall refer to the estate of the insolvent debtor, which includes all the property and assets of the debtor as of commencement date, plus the property and assets acquired by the rehabilitation receiver or liquidator after that date, as well as all other property and assets in which the debtor has an ownership interest, whether or not these property and assets are in the debtor's possession as of commencement date: Provided, That trust assets and bailment, and other property and assets of a third party that are in the possession of the debtor as of commencement date, are excluded therefrom.

(r) Involuntary proceedings shall refer to proceedings initiated by creditors.

(s) Liabilities shall refer to monetary claims against the debtor, including stockholder's advances that have been recorded in the debtor's audited financial statements as advances for future subscriptions.

(t) Lien shall refer to a statutory or contractual claim or judicial charge on real or personal property that legality entities a creditor to resort to said property for payment of the claim or debt secured by such lien.

(u) Liquidation shall refer to the proceedings under Chapter V of this Act.

(v) Liquidation Order shall refer to the Order issued by the court under Section 112 of this Act.

(w) Liquidator shall refer to the natural person or juridical entity appointed as such by the court and entrusted with such powers and duties as set forth in this Act: Provided, That, if the liquidator is a juridical entity, it must designated a natural person who possesses all the qualifications and none of the disqualifications as its representative, it being understood that the juridical entity and the representative are solidarity liable for all obligations and responsibilities of the liquidator.

(x) Officer shall refer to a natural person holding a management position described in or contemplated by a juridical entity's articles of incorporation, bylaws or equivalent documents, except for the corporate secretary, the assistant corporate secretary and the external auditor.

(y) Ordinary course of business shall refer to transactions in the pursuit of the individual debtor's or debtor's business operations prior to rehabilitation or insolvency proceedings and on ordinary business terms.

(z) Ownership interest shall refer to the ownership interest of third parties in property held by the debtor, including those covered by trust receipts or assignments of receivables.

(aa) Parent shall refer to a corporation which has control over another corporation either directly or indirectly through one or more intermediaries.

(bb) Party to the proceedings shall refer to the debtor, a creditor, the unsecured creditors' committee, a stakeholder, a party with an ownership interest in property held by the debtor, a secured creditor, the rehabilitation receiver, liquidator or any other juridical or natural person who stands to be benefited or injured by the outcome of the proceedings and whose notice of appearance is accepted by the court.

(cc) Possessory lien shall refer to a lien on property, the possession of which has been transferred to a creditor or a representative or agent thereof.

(dd) Proceedings shall refer to judicial proceedings commenced by the court's acceptance of a petition filed under this Act.

(ee) Property of others shall refer to property held by the debtor in which other persons have an ownership interest.

(ff) Publication notice shall refer to notice through publication in a newspaper of general circulation in the Philippines on a business day for two (2) consecutive weeks.

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.

(hh) Rehabilitation receiver shall refer to the person or persons, natural or juridical, appointed as such by the court pursuant to this Act and which shall be entrusted with such powers and duties as set forth herein.

(ii) Rehabilitation Plan shall refer to a plan by which the financial well-being and viability of an insolvent debtor can be restored using various means including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization, dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of new business entity as prescribed in Section 62 hereof, or other similar arrangements as may be approved by the court or creditors.

(jj) Secured claim shall refer to a claim that is secured by a lien.

(kk) Secured creditor shall refer to a creditor with a secured claim.

(ll) Secured party shall refer to a secured creditor or the agent or representative of such secured creditor.

(mm) Securities market participant shall refer to a broker dealer, underwriter, transfer agent or other juridical persons transacting securities in the capital market.

(nn) Stakeholder shall refer, in addition to a holder of shares of a corporation, to a member of a nonstock corporation or association or a partner in a partnership.

(oo) Subsidiary shall refer to a corporation more than fifty percent (50%) of the voting stock of which is owned or controlled directly or indirectly through one or more intermediaries by another corporation, which thereby becomes its parent corporation.

(pp) Unsecured claim shall refer to a claim that is not secured by a lien.

(qq) Unsecured creditor shall refer to a creditor with an unsecured claim.

(rr) Voluntary proceedings shall refer to proceedings initiated by the debtor.

(ss) Voting creditor shall refer to a creditor that is a member of a class of creditors, the consent of which is necessary for the approval of a Rehabilitation Plan under this Act.

Section 5. Exclusions. - The term debtor does not include banks, insurance companies, pre-need companies, and national and local government agencies or units.

For purposes of this section:

(a) Bank shall refer to any duly licensed bank or quasi-bank that is potentially or actually subject to conservatorship, receivership or liquidation proceedings under the New Central Bank Act (Republic Act No. 7653) or successor legislation;

(b) Insurance company shall refer to those companies that are potentially or actually subject to insolvency proceedings under the Insurance Code (Presidential Decree No. 1460) or successor legislation; and

(c) Pre-need company shall refer to any corporation authorized/licensed to sell or offer to sell pre-need plans.

Provided, That government financial institutions other than banks and government-owned or controlled corporations shall be covered by this Act, unless their specific charter provides otherwise.

Section 6. Designation of Courts and Promulgation of Procedural Rules. - The Supreme Court shall designate the court or courts that will hear and resolve cases brought under this Act and shall promulgate the rules of pleading, practice and procedure to govern the proceedings brought under this Act.

Section 7. Substantive and Procedural Consolidation. - Each juridical entity shall be considered as a separate entity under the proceedings in this Act. Under these proceedings, the assets and liabilities of a debtor may not be commingled or aggregated with those of another, unless the latter is a related enterprise that is owned or controlled directly or indirectly by the same interests: Provided, however, That the commingling or aggregation of assets and liabilities of the debtor with those of a related enterprise may only be allowed where:

(a) there was commingling in fact of assets and liabilities of the debtor and the related enterprise prior to the commencement of the proceedings;

(b) the debtor and the related enterprise have common creditors and it will be more convenient to treat them together rather than separately;

(c) the related enterprise voluntarily accedes to join the debtor as party petitioner and to commingle its assets and liabilities with the debtor's; and

(d) The consolidation of assets and liabilities of the debtor and the related enterprise is beneficial to all concerned and promotes the objectives of rehabilitation.

Provided, finally, That nothing in this section shall prevent the court from joining other entities affiliated with the debtor as parties pursuant to the rules of procedure as may be promulgated by the Supreme Court.

Section 8. Decisions of Creditors. - Decisions of creditors shall be made according to the relevant provisions of the Corporation Code in the case of stock or nonstock corporations or the Civil Code in the case of partnerships that are not inconsistent with this Act.

Section 9. Creditors Representatives. - Creditors may designate representatives to vote or otherwise act on their behalf by filing notice of such representation with the court and serving a copy on the rehabilitation receiver or liquidator.

Section 10. Liability of Individual Debtor, Owner of a Sole Proprietorship, Partners in a Partnership, or Directors and Officers. - Individual debtor, owner of a sole proprietorship, partners in a partnership, or directors and officers of a debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher to be recovered for benefit of the debtor and the creditors, if they, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts:

(a) Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or

(b) Conceal or authorize or approve the concealment, from the creditors, or embezzles or misappropriates, any property of the debtor.

The court shall determine the extent of the liability of an owner, partner, director or officer under this section. In this connection, in case of partnerships and corporations, the court shall consider the amount of the shareholding or partnership or equity interest of such partner, director or officer, the degree of control of such partner, director or officer over the debtor, and the extent of the involvement of such partner, director or debtor in the actual management of the operations of the debtor.

Section 11. Authorization to Exchange Debt for Equity. - Notwithstanding applicable banking legislation to the contrary, any bank, whether universal or not, may acquire and hold an equity interest or investment in a debtor or its subsidiaries when conveyed to such bank in satisfaction of debts pursuant to a Rehabilitation or Liquidation Plan approved by the court: Provided, That such ownership shall be subject to the ownership limits applicable to universal banks for equity investments and: Provided, further, That any equity investment or interest acquired or held pursuant to this section shall be disposed by the bank within a period of five (5) years or as may be prescribed by the Monetary Board.

CHAPTER IICOURT-SUPERVISED REHABILITATION

(A) Initiation Proceedings.

(1) Voluntary Proceedings.

Section 12. Petition to Initiate Voluntary Proceedings by Debtor. - When approved by the owner in case of a sole proprietorship, or by a majority of the partners in case of a partnership, or in case of a corporation, by a majority vote of the board of directors or trustees and authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose, an insolvent debtor may initiate voluntary proceedings under this Act by filing a petition for rehabilitation with the court and on the grounds hereinafter specifically provided. The petition shall be verified to establish the insolvency of the debtor and the

viability of its rehabilitation, and include, whether as an attachment or as part of the body of the petition, as a minimum the following:

(a) Identification of the debtor, its principal activities and its addresses;

(b) Statement of the fact of and the cause of the debtor's insolvency or inability to pay its obligations as they become due;

(c) The specific relief sought pursuant to this Act;

(d) The grounds upon which the petition is based;

(e) Other information that may be required under this Act depending on the form of relief requested;

(f) Schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any;

(g) An inventory of all its assets including receivables and claims against third parties;

(h) A Rehabilitation Plan;

(i) The names of at least three (3) nominees to the position of rehabilitation receiver; and

(j) Other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated by the Supreme Court.

A group of debtors may jointly file a petition for rehabilitation under this Act when one or more of its members foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other members of the group and/or the participation of the other members of the group is essential under the terms and conditions of the proposed Rehabilitation Plan.

(2) Involuntary Proceedings.

Section 13. Circumstances Necessary to Initiate Involuntary Proceedings. - Any creditor or group of creditors with a claim of, or the aggregate of whose claims is, at least One Million Pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital stock or partners' contributions, whichever is higher, may initiate involuntary proceedings against the debtor by filing a petition for rehabilitation with the court if:

(a) there is no genuine issue of fact on law on the claim/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least sixty (60) days or that the debtor has failed generally to meet its liabilities as they fall due; or

(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against the debtor that will prevent the debtor from paying its debts as they become due or will render it insolvent.

Section 14. Petition to Initiate Involuntary Proceedings. - The creditor/s' petition for rehabilitation shall be verified to establish the substantial likelihood that the debtor may be rehabilitated, and include:

(a) identification of the debtor its principal activities and its address;

(b) the circumstances sufficient to support a petition to initiate involuntary rehabilitation proceedings under Section 13 of this Act;

(c) the specific relief sought under this Act;

(d) a Rehabilitation Plan;

(e) the names of at least three (3) nominees to the position of rehabilitation receiver;

(f) other information that may be required under this Act depending on the form of relief requested; and

(g) other documents required to be filed with the petition pursuant to this Act and the rules of procedure as may be promulgated by the Supreme Court.

(B) Action on the Petition and Commencement of Proceedings.

Section 15. Action on the Petition. - If the court finds the petition for rehabilitation to be sufficient in form and substance, it shall, within five (5) working days from the filing of the petition, issue a Commencement Order. If, within the same

period, the court finds the petition deficient in form or substance, the court may, in its discretion, give the petitioner/s a reasonable period of time within which to amend or supplement the petition, or to submit such documents as may be necessary or proper to put the petition in proper order. In such case, the five (5) working days provided above for the issuance of the Commencement Order shall be reckoned from the date of the filing of the amended or supplemental petition or the submission of such documents.

Section 16. Commencement of Proceedings and Issuance of a Commencement Order. - The rehabilitation proceedings shall commence upon the issuance of the Commencement Order, which shall:

(a) identify the debtor, its principal business or activity/ies and its principal place of business;

(b) summarize the ground/s for initiating the proceedings;

(c) state the relief sought under this Act and any requirement or procedure particular to the relief sought;

(d) state the legal effects of the Commencement Order, including those mentioned in Section 17 hereof;

(e) declare that the debtor is under rehabilitation;

(f) direct the publication of the Commencement Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance;

(g) If the petitioner is the debtor direct the service by personal delivery of a copy of the petition on each creditor holding at least ten percent (10%) of the total liabilities of the debtor as determined from the schedule attached to the petition within five (5) days; if the petitioner/s is/are creditor/s, direct the service by personal delivery of a copy of the petition on the debtor within five (5) days;

(h) appoint a rehabilitation receiver who may or not be from among the nominees of the petitioner/s and who shall exercise such powers and duties defined in this Act as well as the procedural rules that the Supreme Court will promulgate;

(i) summarize the requirements and deadlines for creditors to establish their claims against the debtor and direct all creditors to their claims with the court at least five (5) days before the initial hearing;

(j) direct Bureau of internal Revenue (BIR) to file and serve on the debtor its comment on or opposition to the petition or its claim/s against the debtor under such procedures as the Supreme Court provide;

(k) prohibit the debtor's suppliers of goods or services from withholding the supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services or goods supplied after the issuance of the Commencement Order;

(l) authorize the payment of administrative expenses as they become due;

(m) set the case for initial hearing, which shall not be more than forty (40) days from the date of filing of the petition for the purpose of determining whether there is substantial likelihood for the debtor to be rehabilitated;

(n) make available copies of the petition and rehabilitation plan for examination and copying by any interested party;

(o) indicate the location or locations at which documents regarding the debtor and the proceedings under Act may be reviewed and copied;

(p) state that any creditor or debtor who is not the petitioner, may submit the name or nominate any other qualified person to the position of rehabilitation receiver at least five (5) days before the initial hearing;

(q) include s Stay or Suspension Order which shall:

(1) suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the debtor;

(2) suspend all actions to enforce any judgment, attachment or other provisional remedies against the debtor;

(3) prohibit the debtor from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and

(4) prohibit the debtor from making any payment of its liabilities outstanding as of the commencement date except as may be provided herein.

Section 17. Effects of the Commencement Order. - Unless otherwise provided for in this Act, the court's issuance of a Commencement Order shall, in addition to the effects of a Stay or Suspension Order described in Section 16 hereof:

(a) vest the rehabilitation with all the powers and functions provided for this Act, such as the right to review and obtain records to which the debtor's management and directors have access, including bank accounts or whatever nature of the debtor subject to the approval by the court of the performance bond filed by the rehabilitation receiver;

(b) prohibit or otherwise serve as the legal basis rendering null and void the results of any extrajudicial activity or process to seize property, sell encumbered property, or otherwise attempt to collection or enforce a claim against the debtor after commencement date unless otherwise allowed in this Act, subject to the provisions of Section 50 hereof;

(c) serve as the legal basis for rendering null and void any setoff after the commencement date of any debt owed to the debtor by any of the debtor's creditors;

(d) serve as the legal basis for rendering null and void the perfection of any lien against the debtor's property after the commencement date; and

(e) consolidate the resolution of all legal proceedings by and against the debtor to the court Provided. However, That the court may allow the continuation of cases on other courts where the debtor had initiated the suit.

Attempts to seek legal of other resource against the debtor outside these proceedings shall be sufficient to support a finding of indirect contempt of court.

Section 18. Exceptions to the Stay or Suspension Order. - The Stay or Suspension Order shall not apply:

(a) to cases already pending appeal in the Supreme Court as of commencement date Provided, That any final and executory judgment arising from such appeal shall be referred to the court for appropriate action;

(b) subject to the discretion of the court, to cases pending or filed at a specialized court or quasi-judicial agency which, upon determination by the court is capable of resolving the claim more quickly, fairly and efficiently than the court: Provided, That any final and executory judgment of such court or agency shall be referred to the court and shall be treated as a non-disputed claim;

(c) to the enforcement of claims against sureties and other persons solidarily liable with the debtor, and third party or accommodation mortgagors as well as issuers of letters of credit, unless the property subject of the third party or accommodation mortgage is necessary for the rehabilitation of the debtor as determined by the court upon recommendation by the rehabilitation receiver;

(d) to any form of action of customers or clients of a securities market participant to recover or otherwise claim moneys and securities entrusted to the latter in the ordinary course of the latter's business as well as any action of such securities market participant or the appropriate regulatory agency or self-regulatory organization to pay or settle such claims or liabilities;

(e) to the actions of a licensed broker or dealer to sell pledged securities of a debtor pursuant to a securities pledge or margin agreement for the settlement of securities transactions in accordance with the provisions of the Securities Regulation Code and its implementing rules and regulations;

(f) the clearing and settlement of financial transactions through the facilities of a clearing agency or similar entities duly authorized, registered and/or recognized by the appropriate regulatory agency like the Bangko Sentral ng Pilipinas (BSP) and the SEC as well as any form of actions of such agencies or entities to reimburse themselves for any transactions settled for the debtor; and

(g) any criminal action against individual debtor or owner, partner, director or officer of a debtor shall not be affected by any proceeding commend under this Act.

Section 19. Waiver of taxes and Fees Due to the National Government and to Local Government Units (LGUs). - Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees including penalties, interests and charges thereof due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation.

Section 20. Application of Stay or Suspension Order to Government Financial Institutions. - The provisions of this Act concerning the effects of the Commencement Order and the Stay or Suspension Order on the suspension of rights to foreclose or otherwise pursue legal remedies shall apply to government financial institutions, notwithstanding provisions in their charters or other laws to the contrary.

Section 21. Effectivity and Duration of Commencement Order. - Unless lifted by the court, the Commencement Order shall be for the effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated. In determining whether there is substantial likelihood for the debtor to be successfully rehabilitated, the court shall ensure that the following minimum requirements are met:

(a) The proposed Rehabilitation Plan submitted complies with the minimum contents prescribed by this Act;

(b) There is sufficient monitoring by the rehabilitation receiver of the debtor's business for the protection of creditors;

(c) The debtor has met with its creditors to the extent reasonably possible in attempts to reach consensus on the proposed Rehabilitation Plan;

(d) The rehabilitation receiver submits a report, based on preliminary evaluation, stating that the underlying assumptions and the goals stated in the petitioner's Rehabilitation Plan are realistic reasonable and reasonable or if not, there is, in any case, a substantial likelihood for the debtor to be successfully rehabilitated because, among others:

(1) there are sufficient assets with/which to rehabilitate the debtor;

(2) there is sufficient cash flow to maintain the operations of the debtor;

(3) the debtor's, partners, stockholders, directors and officers have been acting in good faith and which due diligence;

(4) the petition is not s sham filing intended only to delay the enforcement of the rights of the creditor's or of any group of creditors; and

(5) the debtor would likely be able to pursue a viable Rehabilitation Plan;

(e) The petition, the Rehabilitation Plan and the attachments thereto do not contain any materially false or misleading statement;

(f) If the petitioner is the debtor, that the debtor has met with its creditor/s representing at least three-fourths (3/4) of its total obligations to the extent reasonably possible and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan if the petitioner/s is/are a creditor or group of creditors, that/ the petitioner/s has/have met with the debtor and made a good faith effort to reach a consensus on the proposed Rehabilitation Plan; and

(g) The debtor has not committed acts misrepresentation or in fraud of its creditor/s or a group of creditors.

Section 22. Action at the Initial Hearing. - At the initial hearing, the court shall:

(a) determine the creditors who have made timely and proper filing of their notice of claims;

(b) hear and determine any objection to the qualifications of the appointment of the rehabilitation receiver and, if necessary appoint a new one in accordance with this Act;

(c) direct the creditors to comment on the petition and the Rehabilitation Plan, and to submit the same to the court and to the rehabilitation receiver within a period of not more than twenty (20) days; and

(d) direct the rehabilitation receiver to evaluate the financial condition of the debtor and to prepare and submit to the court within forty (40) days from initial hearing the report provided in Section 24 hereof.

Section 23. Effect of Failure to File Notice of Claim. - A creditor whose claim is not listed in the schedule of debts and liabilities and who fails to file a notice of claim in accordance with the Commencement Order but subsequently files a belated claim shall not be entitled to participate in the rehabilitation proceedings but shall be entitled to receive distributions arising therefrom.

Section 24. Report of the Rehabilitation Receiver. - Within forty (40) days from the initial hearing and with or without the comments of the creditors or any of

them, the rehabilitation receiver shall submit a report to the court stating his preliminary findings and recommendations on whether:

(a) the debtor is insolvent and if so, the causes thereof and any unlawful or irregular act or acts committed by the owner/s of a sole proprietorship partners of a partnership or directors or officers of a corporation in contemplation of the insolvency of the debtor or which may have contributed to the insolvency of the debtor;

(b) the underlying assumptions, the financial goals and the procedures to accomplish such goals as stated in the petitioner's Rehabilitation Plan are realistic, feasible and reasonable;

(c) there is a substantial likelihood for the debtor to be successfully rehabilitated;

(d) the petition should be dismissed; and

(e) the debtor should be dissolved and/or liquidated.

Section 25. Giving Due Course to or Dismissal of Petition, or Conversion of Proceedings. - Within ten (10) days from receipt of the report of the rehabilitation receiver mentioned in Section 24 hereof the court may:

(a) give due course to the petition upon a finding that:

(1) the debtor is insolvent; and

(2) there is a substantial likelihood for the debtor to be successfully rehabilitated;

(b) dismiss the petition upon a finding that:

(1)debtor is not insolvent;

(2) the petition i8 a sham filing intended only to delay the enforcement of the rights of the creditor/s or of any group of creditors;

(3)the petition, the Rehabilitation Plan and the attachments thereto contain any materially false or misleading statements; or

(4)the debtor has committed acts of misrepresentation or in fraud of its creditor/s or a group of creditors;

(c)convert the proceedings into one for the liquidation of the debtor upon a finding that:

(1)the debtor is insolvent; and

(2)there is no substantial likelihood for the debtor to be successfully rehabilitated as determined in accordance with the rules to be promulgated by the Supreme Court.

Section 26.Petition Given Due Course. - If the petition is given due course, the court shall direct the rehabilitation receiver to review, revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court within a period of not more than ninety (90) days.

The court may refer any dispute relating to the Rehabilitation Plan or the rehabilitation proceedings pending before it to arbitration or other modes of dispute resolution, as provided for under Republic Act No. 9285, Or the Alternative Dispute Resolution Act of 2004, should it determine that such mode will resolve the dispute more quickly, fairly and efficiently than the court.

Section 27.Dismissal of Petition. - If the petition is dismissed pursuant to paragraph (b) of Section 25 hereof, then the court may, in its discretion, order the petitioner to pay damages to any creditor or to the debtor, as the case may be, who may have been injured by the filing of the petition, to the extent of any such injury.

(C) The Rehabilitation Receiver, Management Committee and Creditors' Committee.

Section 28.Who May Serve as a Rehabilitation Receiver. - Any qualified natural or juridical person may serve as a rehabilitation receiver: Provided, That if the rehabilitation receiver is a juridical entity, it must designate a natural person/s who possess/es all the qualifications and none of the disqualification’s as its representative, it being understood that the juridical entity and the representative/s are solidarily liable for all obligations and responsibilities of the rehabilitation receiver.

Section 29.Qualifications of a Rehabilitation Receiver. - The rehabilitation receiver shall have the following minimum qualifications:

(a)A citizen of the Philippines or a resident of the Philippines in the six (6) months immediately preceding his nomination;

(b)Of good moral character and with acknowledged integrity, impartiality and independence;

(c)Has the requisite knowledge of insolvency and other relevant commercial laws, rules and procedures, as well as the relevant training and/or experience that may be necessary to enable him to properly discharge the duties and obligations of a rehabilitation receiver; and

(d)Has no conflict of interest: Provided, That such conflict of interest may be waived, expressly or impliedly, by a party who may be prejudiced thereby.

Other qualifications and disqualification’s of the rehabilitation receiver shall be set forth in procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.

Section 30.Initial Appointment of the Rehabilitation Receiver. - The court shall initially appoint the rehabilitation receiver, who mayor may not be from among the nominees of the petitioner, However, at the initial hearing of the petition, the creditors and the debtor who are not petitioners may nominate other persons to the position. The court may retain the rehabilitation receiver initially appointed or appoint another who mayor may not be from among those nominated.

In case the debtor is a securities market participant, the court shall give priority to the nominee of the appropriate securities or investor protection fund.

If a qualified natural person or entity is nominated by more than fifty percent (50%) of the secured creditors and the general unsecured creditors, and satisfactory evidence is submitted, the court shall appoint the creditors' nominee as rehabilitation receiver.

Section 31.Powers, Duties and Responsibilities of the Rehabilitation Receiver. - The rehabilitation receiver shall be deemed an officer of the court with the principal duty of preserving and maximizing the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan, To this end, and without limiting the generality of the foregoing, the rehabilitation receiver shall have the following powers, duties and responsibilities:

(a)To verify the accuracy of the factual allegations in the petition and its annexes;

(b)To verify and correct, if necessary, the inventory of all of the assets of the debtor, and their valuation;

(c)To verify and correct, if necessary, the schedule of debts and liabilities of the debtor;

(d)To evaluate the validity, genuineness and true amount of all the claims against the debtor;

(e)To take possession, custody and control, and to preserve the value of all the property of the debtor;

(f)To sue and recover, with the approval of the court, all amounts owed to, and all properties pertaining to the debtor;

(g)To have access to all information necessary, proper or relevant to the operations and business of the debtor and for its rehabilitation;

(h) To sue and recover, with the. approval of the court, all property or money of the debtor paid, transferred or disbursed in fraud of the debtor or its creditors, or which constitute undue preference of creditor/s;

(i) To monitor the operations and the business of the debtor to ensure that no payments or transfers of property are made other than in the ordinary course of business;

(j) With the court's approval, to engage the services of or to employ persons or entities to assist him in the discharge of his functions;

(k) To determine the manner by which the debtor may be best rehabilitated, to review) revise and/or recommend action on the Rehabilitation Plan and submit the same or a new one to the court for approval;

(1) To implement the Rehabilitation Plan as approved by the court, if 80 provided under the Rehabilitation Plan;

(m) To assume and exercise the powers of management of the debtor, if directed by the court pursuant to Section 36 hereof;

(n) To exercise such other powers as may, from time to time, be conferred upon him by the court; and

To submit a status report on the rehabilitation proceedings every quarter or as may be required by the court motu proprio. or upon motion of any creditor. or as may be provided, in the Rehabilitation Plan.

Unless appointed by the court, pursuant to Section 36 hereof, the rehabilitation receiver shall not take over the management and control of the debtor but may recommend the appointment of a management committee over the debtor in the cases provided by this Act.

Section 32.Removal of the Rehabilitation Receiver. – The rehabilitation receiver may be removed at any time by the court either motu proprio or upon motion by any creditor/s holding more than fifty percent (50%) of the total obligations of the debtor, on such grounds as the rules of procedure may provide which shall include, but are not limited to, the following:

(a) Incompetence, gross negligence, failure to perform or failure to exercise the proper degree of care in the performance of his duties and powers;

(b) Lack of a particular or specialized competency required by the specific case;

(c) Illegal acts or conduct in the performance of his duties and powers;

(d) Lack of qualification or presence of any disqualification;

(e) Conflict of interest that arises after his appointment; and

(f) Manifest lack of independence that is detrimental to the general body of the stakeholders.

Section 33.Compensation and Terms of Service. The rehabilitation receiver and his direct employees or independent contractors shall be entitled to compensation for reasonable fees and expenses from the debtor according to the terms approved by the court after notice and hearing. Prior to such hearing, the rehabilitation receiver and his direct employees shall be entitled to reasonable compensation based on quantum meruit. Such costs shall be considered administrative expenses.

Section 34.Oath and Bond of the Rehabilitation Receiver. Prior to entering upon his powers, duties and responsibilities, the rehabilitation receiver shall take an oath and file a bond, in such amount to be fixed by the court, conditioned upon the faithful and proper discharge of his powers, duties and responsibilities.

Section 35.Vacancy. - Incase the position of rehabilitation receiver is vacated for any reason whatsoever. the court shall direct the debtor and the creditors to submit the name/s of their nominee/s to the position. The court may appoint any of the qualified nominees. or any other person qualified for the position.

Section 36.Displacement of Existing Management by the Rehabilitation Receiver or Management Committee. – Upon motion of any interested party, the court may appoint and direct the rehabilitation receiver to assume the powers of management of the debtor, or appoint a management committee that will undertake the management of the debtor. upon clear and convincing evidence of any of the following circumstances:

(a) Actual or imminent danger of dissipation, loss, wastage or destruction of the debtor’s assets or other properties;

(b) Paralyzation of the business operations of the debtor; or

(c) Gross mismanagement of the debtor. or fraud or other wrongful conduct on the part of, or gross or willful violation of this Act by. existing management of the debtor Or the owner, partner, director, officer or representative/s in management of the debtor.

In case the court appoints the rehabilitation receiver to assume the powers of management of the debtor. the court may:

(1) require the rehabilitation receiver to post an additional bond;

(2) authorize him to engage the services or to employ persona or entities to assist him in the discharge of his managerial functions; and

(3) authorize a commensurate increase in his compensation.

Section 37.Role of the Management Committee. – When appointed pursuant to the foregoing section, the management committee shall take the place of the management and the governing body of the debtor and assume their rights and responsibilities.

The specific powers and duties of the management committee, whose members shall be considered as officers of the court, shall be prescribed by the procedural rules.

Section 38.Qualifications of Members of the Management Committee. - The qualifications and disqualification’s of the members of the management committee shall be set forth in the procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.

Section 39.Employment of Professionals. - Upon approval of the court, and after notice and hearing, the rehabilitation receiver or the management committee may employ specialized professionals and other experts to assist each in the performance of their duties. Such professionals and other experts shall be considered either employees or independent contractors of the rehabilitation receiver or the management committee, as the case may be. The qualifications and disqualification’s of the professionals and experts may be set forth in procedural rules, taking into consideration the nature of the business of the debtor and the need to protect the interest of all stakeholders concerned.

Section 40.Conflict of Interest. - No person may be appointed as a rehabilitation receiver, member of a_ management committee, or be employed by the rehabilitation receiver or the management committee if he has a conflict of interest.

An individual shall be deemed to have a conflict of interest if he is so situated as to be materially influenced in the exercise of his judgment for or against any party to the proceedings. Without limiting the generality of the foregoing, an individual shall be deemed to have a conflict of interest if:

(a) he is a creditor, owner, partner or stockholder of the debtor;

(b) he is engaged in a line of business which competes with that of the debtor;

(c) he is, or was, within five (5) years from the filing of the petition, a director, officer, owner, partner or employee of the debtor or any of the creditors, or the auditor or accountant of the debtor;

(d) he is, or was, within two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor;

(e) he is related by consanguinity or affinity within the fourth civil degree to any individual creditor, owners of a sale proprietorship-debtor, partners of a partnership- debtor or to any stockholder, director, officer, employee or underwriter of a corporation-debtor; or

(f) he has any other direct or indirect material interest in the debtor or any of the creditors.

Any rehabilitation receiver, member of the management committee or persons employed or contracted by them possessing any conflict of interest shall make the appropriate disclosure either to the court or to the creditors in case of out-of-court rehabilitation proceedings. Any party to the proceeding adversely affected by the appointment of any person with a conflict of interest to any of the positions enumerated above may however waive his right to object to such appointment and, if the waiver is unreasonably withheld, the court may disregard the conflict of interest, taking into account the general interest of the stakeholders.

Section 41.Immunity. - The rehabilitation receiver and all persons employed by him, and the members of the management committee and all persons employed by it, shall not be subject to any action. claim or demand in connection with any act done or omitted to be done by them in good faith in connection with the exercise of their powers and functions under this Act or other actions duly approved by the court.1awp++il

Section 42.Creditors' Committee. - After the creditors' meeting called pursuant to Section 63 hereof, the creditors belonging to a class may formally organize a committee among

themselves. In addition, the creditors may, as a body, agree to form a creditors' committee composed of a representative from each class of creditors, such as the following:

(a) Secured creditors;

(b) Unsecured creditors;

(c) Trade creditors and suppliers; and

(d) Employees of the debtor.

In the . election of the creditors' representatives, the rehabilitation receiver or his representative shall attend such meeting and extend the appropriate assistance as may be defined in the procedural rules.

Section 43.Role of Creditors' Committee. - The creditors' committee when constituted pursuant to Section 42 of this Act shall assist the rehabilitation receiver in communicating with the creditors and shall be the primary liaison between the rehabilitation receiver and the creditors. The creditors' committee cannot exercise or waive any right or give any consent on behalf of any creditor unless specifically authorized in writing by such creditor. The creditors' committee may be authorized by the court or by the rehabilitation receiver to perform such other tasks and functions as may be defined by the procedural rules in order to facilitate the rehabilitation process.

(D) Determination of Claims.

Section 44.Registry of Claims. - Within twenty (20) days from his assumption into office, the rehabilitation receiver shall establish a preliminary registry of claims. The rehabilitation receiver shall make the registry available for public inspection and provide

publication notice to the debtor, creditors and stakeholders on where and when they may inspect it. All claims included in the registry of claims must be duly supported by sufficient evidence.

Section 45.Opposition or Challenge of Claims. – Within thirty (30) days from the expiration of the period stated in the immediately preceding section, the debtor, creditors, stakeholders and other interested parties may submit a challenge to claim/s to the court, serving a certified copy on the rehabilitation receiver and the creditor holding the challenged claim/so Upon the expiration of the thirty (30)-day period, the rehabilitation receiver shall submit to the court the registry of claims which shall include undisputed claims that have not been subject to challenge.

Section 46.Appeal. - Any decision of the rehabilitation receiver regarding a claim may be appealed to the court.

(E) Governance.

Section 47.Management. - Unless otherwise provided herein, the management of the juridical debtor shall remain with the existing management subject to the applicable law/s and agreement/s, if any, on the election or appointment of directors, managers Or managing partner. However, all disbursements, payments or sale, disposal, assignment, transfer or encumbrance of property , or any other act affecting title or interest in property, shall be subject to the approval of the rehabilitation receiver and/or the court, as provided in the following subchapter.

(F) Use, Preservation and Disposal of Assets and Treatment of Assets and Claims after Commencement Date.

Section 48.Use or Disposition of Assets. - Except as otherwise provided herein, no funds or property of the debtor shall he used or disposed of except in the ordinary course of business of the debtor, or unless necessary to finance the administrative expenses of the rehabilitation proceedings.

Section 49.Sale of Assets. - The court, upon application of the rehabilitation receiver, may authorize the sale of unencumbered property of the debtor outside the ordinary course of business upon a showing that the property, by its nature or because of other circumstance, is perishable, costly to maintain, susceptible to devaluation or otherwise injeopardy.

Section 50.Sale or Disposal of Encumbered Property of the Debtor and Assets of Third Parties Held by Debtor.The court may authorize the sale, transfer, conveyance or disposal of encumbered property of the debtor, or property of others held by the debtor where there is a security interest pertaining to third parties under a financial, credit or other similar transactions if, upon application of the rehabilitation receiver and with the consent of the affected owners of the property, or secured creditor/s in the case of encumbered property of the debtor and, after notice and hearing, the court determines that:

(a) such sale, transfer, conveyance or disposal is necessary for the continued operation of the debtor's business; and

(b) the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party's claim or right.

Provided, That properties held by the debtor where the debtor has authority to sell such as trust receipt or consignment arrangements may be sold or disposed of by the .debtor, if such sale or disposal is necessary for the operation of the debtor's business, and the debtor has made arrangements to provide a substitute lien or ownership right that provides an equal level of security for the counter-party's claim or right.

Sale or disposal of property under this section shall not give rise to any criminal liability under applicable laws.

Section 51.Assets of Debtor Held by Third Parties. – In the case of possessory pledges, mechanic's liens or similar claims, third parties who have in their possession or control property of the debtor shall not transfer, conveyor otherwise dispose of the same to persons other than the debtor, unless upon prior approval of the rehabilitation receiver. The rehabilitation receiver may also:

(a) demand the surrender or the transfer of the possession or control of such property to the rehabilitation receiver or any other person, subject to payment of the claims secured by any possessory Iien/s thereon;

(b) allow said third parties to retain possession or control, if such an arrangement would more likely preserve or increase the value of the property in question or the total value of the assets of the debtor; or

(c) undertake any otI1er disposition of the said property as may be beneficial for the rehabilitation of the debtor, after notice and hearing, and approval of the court.

Section 52.Rescission or Nullity of Sale, Payment, Transfer or Conveyance of Assets. - The court may rescind or declare as null and void any sale, payment, transfer or conveyance of the debtor's unencumbered property or any encumbering thereof by the debtor or its agents or representatives after the commencement date which are not in the ordinary course of the business of the debtor: Provided, however, That the unencumbered property may be sold, encumbered or otherwise disposed of upon order of the court after notice and hearing:

(a) if such are in the interest of administering the debtor and facilitating the preparation and implementation of a Rehabilitation Plan;

(b) in order to provide a substitute lien, mortgage or pledge of property under this Act;

(c) for payments made to meet administrative expenses as they arise;

(d) for payments to victims of quasi delicts upon a showing that the claim is valid and the debtor has insurance to reimburse the debtor for the payments made;

(e) for payments made to repurchase property of the debtor that is auctioned off in a judicial or extrajudicial sale under. This Act; or

(f) for payments made to reclaim property of the debtor held pursuant to a possessory lien.

Section 53.Assets Subject to Rapid Obsolescence, Depreciation and Diminution of Value. - Upon the application of a secured creditor holding a lien against or holder of an ownership interest in property held by the debtor that is subject to potentially rapid obsolescence, depreciation or diminution in value, the court shall, after notice and hearing, order the debtor or rehabilitation receiver to take reasonable steps necessary to prevent the depreciation. If depreciation cannot be avoided and such depreciation is jeopardizing the security or property interest of the secured creditor or owner, the court shall:

(a) allow the encumbered property to be foreclosed upon by the secured creditor according to the relevant agreement between the debtor and the secured creditor, applicable rules of procedure and relevant legislation: Provided. That the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits; or

(b) upon motion of, or with the consent of the affected secured creditor or interest owner. order the conveyance of a lien against or ownership interest in substitute property of the debtor to the secured creditor: Provided. That other creditors holding liens on such property, if any, do not object thereto, or, if such property is not available;

(c) order the conveyance to the secured creditor or holder . of an ownership interest of a lien on the residual funds from the sale of encumbered property during the proceedings; or

(d) allow the sale or disposition of the property: Provided. That the sale or disposition will maximize the value of the property for the benefit of the secured creditor and the debtor, and the proceeds of the sale will be distributed in accordance with the order prescribed under the rules of concurrence and preference of credits.

Section 54.Post-commencement Interest. - The rate and term of interest, if any, on secured and unsecured claims shall be determined and provided for in the approved Rehabilitation Plan.

Section 55.Post-commencement Loans and Obligations. - With the approval of the court upon the recommendation of the rehabilitation receiver, the debtor, in order to enhance its

rehabilitation. may:

(a) enter into credit arrangements; or

(b) enter into credit arrangements, secured by mortgages of its unencumbered property or secondary mortgages of encumbered property with the approval of senior secured parties with regard to the encumbered property; or

(c) incur other obligations as may be essential for its rehabilitation.

The payment of the foregoing obligations shall be considered administrative expenses under this Act.

Section 56.Treatment of Employees, Claims. Compensation of employees required to carry on the business shall be considered an administrative expense. Claims of separation pay for months worked prior to the commencement date shall be considered a pre- ommencement claim. Claims for salary and separation pay for work performed after the commencement date shall be an administrative expense.

Section 57.Treatment of Contracts. - Unless cancelled by virtue of a final judgment of a court of competent jurisdiction issued prior to the issuance of the Commencement Order, or at anytime thereafter by the court before which the rehabilitation proceedings are pending, all valid and subbsisting contracts of the debtor with creditors and other third parties as at the commencement date shall continue in force: Provided, That within ninety (90)days following the commencement of proceedings, the debtor, with the consent of the rehabilitation receiver, shall notify each contractual counter-party of whether it is confirming the particular contract. Contractual obligations of the debtor arising or performed during this period, and afterwards for confirmed contracts, shall be considered administrative expenses. Contracts not confirmed within the required deadline shall be considered terminated. Claims for actual damages, if any, arising as a result of the election to terminate a contract shall be considered a pre-commencement claim against the debtor. Nothing contained herein shall prevent the cancellation or termination of any contract of the debtor for any ground provided by law.

(G) Avoidance Proceedings.

Section 58.Rescission or Nullity of Certain Pre-commencement Transactions. Any transaction occurring prior to commencement date entered into by the debtor or involving its funds or assets may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a creditor or creditors or which constitute undue preference of creditors. Without limiting the generality of the foregoing, a disputable presumption of such design shall arise if the transaction:

(a) provides unreasonably inadequate consideration to the debtor and is executed within ninety (90) days prior to the commencement date;

(b) involves an accelerated payment of a claim to a creditor within ninety (90) days prior to the commencement date;

(c) provides security or additional security executed within ninety (90) days prior to the commencement date;

(d) involves creditors, where a creditor obtained, or received the benefit of, more than its pro rata share in the assets of the debtor, executed at a time when the debtor was insolvent; or

(e) is intended to defeat, delay or hinder the ability of the creditors to collect claims where the effect of the transaction is to put assets of the debtor beyond the reach of creditors or to otherwise prejudice the interests of creditors.

Provided, however, That nothing in this section shall prevent the court from rescinding or declaring as null and void a transaction on other grounds provided by relevant legislation and jurisprudence: Provided, further, That the provisions of the Civil Code on rescission shall in any case apply to these transactions.

Section 59.Actions for Rescission or Nullity. - (a) The rehabilitation receiver or, with his conformity, any creditor may initiate and prosecute any action to rescind, or declare null and void any transaction described in Section 58 hereof. If the rehabilitation receiver does not consent to the filing or prosecution of such action,

(b) If leave of court is granted under subsection (a), the rehabilitation receiver shall assign and transfer to the creditor all rights, title and interest in the chose in action or subject matter of the proceeding, including any document in support thereof.

(c) Any benefit derived from a proceeding taken pursuant to subsection (a), to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.

(d) Where, before an order is made under subsection (a), the rehabilitation receiver (or liquidator) signifies to the court his readiness to institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, m that case, the benefit derived from the proceeding, if instituted within the time limits so fixed, belongs to the estate.

(H) Treatment of Secured Creditors.

Section 60.No Diminution of Secured Creditor Rights. The issuance of the Commencement Order and the Suspension or Stay Order, and any other provision of this Act, shall not be

deemed in any way to diminish or impair the security or lien of a secured creditor, or the value of his lien or security, except that his right to enforce said security or lien may be suspended during the term of the Stay Order.

The court, upon motion or recommendation of the rehabilitation receiver, may allow a secured creditor to enforce his security or lien, or foreclose upon property of the debtor

securing his/its claim, if the said property is not necessary for the rehabilitation of the debtor. The secured creditor and/or the other lien holders shall be admitted to the rehabilitation proceedings only for the balance of his claim, if any.

Section 61.Lack of Adequate Protection. - The court, on motion or motu proprio, may terminate, modify or set conditions for the continuance of suspension of payment, or relieve a claim from the coverage thereof, upon showing that: (a) a creditor does not have adequate protection over property securing its claim; or

(b) the value of a claim secured by a lien on property which is not necessary for rehabilitation of the debtor exceeds the fair market value of the said property.

For purposes of this section, a creditor shall be deemed to lack adequate protection if it can be shown that:

(a) the debtor fails or refuses to honor a pre-existing agreement with the creditor to keep the property insured;

(b) the debtor fails or refuses to take commercially reasonable steps to maintain the property; or

(c) the property has depreciated to an extent that the creditor is under secured.

Upon showing of a lack of protection, the court shall order the debtor or the rehabilitation receiver to make arrangements to provide for the insurance or maintenance of the property; or to make payments or otherwise provide additional or replacement security such that the obligation is fully secured. If such arrangements are not feasible, the court may modify the Stay Order to allow the secured creditor lacking adequate protection to enforce its security claim against the debtor: Provided, however, That the court may deny the creditor the remedies in this paragraph if the property subject of the enforcement is required for the rehabilitation of the debtor.

(i) Administration of Proceedings.

Section 62.Contents of a Rehabilitation Plan. – The Rehabilitation Plan shall, as a minimum:

(a) specify the underlying assumptions, the financial goals and the procedures proposed to accomplish such goals;

(b) compare the amounts expected to be received by the creditors under the Rehabilitation Plan with those that they will receive if liquidation ensues within the next one hundred twenty (120) days;

(c) contain information sufficient to give the various classes of creditors a reasonable basis for determining whether supporting the Plan is in their financial interest when compared to the immediate liquidation of the debtor, including any reduction of principal interest and penalties payable to the creditors;

(d) establish classes of voting creditors;

(e) establish subclasses of voting creditors if prior approval has been granted by the court;

(f) indicate how the insolvent debtor will be rehabilitated including, but not limited to, debt forgiveness, debt rescheduling, reorganization or quasi-reorganization. dacion en pago, debt-equity conversion and sale of the business (or parts of it) as a going concern, or setting-up of a new business entity or other similar arrangements as may be necessary to restore the financial well-being and visibility of the insolvent debtor;

(g) specify the treatment of each class or subclass described in subsections (d) and (e);

(h) provide for equal treatment of all claims within the same class or subclass, unless a particular creditor voluntarily agrees to less favorable treatment;

(i) ensure that the payments made under the plan follow the priority established under the provisions of the Civil Code on concurrence and preference of credits and other applicable laws;

(j) maintain the security interest of secured creditors and preserve the liquidation value of the security unless such has been waived or modified voluntarily;

(k) disclose all payments to creditors for pre-commencement debts made during the proceedings and the justifications thereof;

(1) describe the disputed claims and the provisioning of funds to account for appropriate payments should the claim be ruled valid or its amount adjusted;

(m) identify the debtor's role in the implementation of the Plan;

(n) state any rehabilitation covenants of the debtor, the breach of which shall be considered a material breach of the Plan;

(o) identify those responsible for the future management of the debtor and the supervision and implementation of the Plan, their affiliation with the debtor and their remuneration;

(p) address the treatment of claims arising after the confirmation of the Rehabilitation Plan;

(q) require the debtor and its counter-parties to adhere to the terms of all contracts that the debtor has chosen to confirm;

(r) arrange for the payment of all outstanding administrative expenses as a condition to the Plan's approval unless such condition has been waived in writing by the creditors concerned;

(s) arrange for the payment" of all outstanding taxes and assessments, or an adjusted amount pursuant to a compromise settlement with the BlR Or other applicable tax authorities;

(t) include a certified copy of a certificate of tax clearance or evidence of a compromise settlement with the BIR;

(u) include a valid and binding r(,solution of a meeting of the debtor's stockholders to increase the shares by the required amount in cases where the Plan contemplates an additional issuance of shares by the debtor;

(v) state the compensation and status, if any, of the rehabilitation receiver after the approval of the Plan; and

(w) contain provisions for conciliation and/or mediation as a prerequisite to court assistance or intervention in the event of any disagreement in the interpretation or implementation of the Rehabilitation Plan.

Section 63.Consultation with Debtor and Creditors. – if the court gives due course to the petition, the rehabilitation receiver shall confer with the debtor and all the classes of creditors, and may consider their views and proposals ill the review, revision or preparation of a new Rehabilitation Plan.

Section 64.Creditor Approval of Rehabilitation Plan. – The rehabilitation receiver shall notify the creditors and stakeholders that the Plan is ready for their examination. Within twenty (2Q) days from the said notification, the rehabilitation receiver shall convene the creditors, either as a whole or per class, for purposes of voting on the approval of the Plan. The Plan shall be deemed rejected unless approved by all classes of creditors w hose rights are adversely modified or affected by the Plan. For purposes of this section, the Plan is deemed to have been approved by a class of creditors if members of the said class holding more than fifty percent (50%) of the total claims of the said class vote in favor of the Plan. The votes of the creditors shall be based solely on the amount of their respective claims based on the registry of claims submitted by the rehabilitation receiver pursuant to Section 44 hereof.

Notwithstanding the rejection of the Rehabilitation Plan, the court may confirm the Rehabilitation Plan if all of the following circumstances are present:

(a)The Rehabilitation Plan complies with the requirements specified in this Act.

(b) The rehabilitation receiver recommends the confirmation of the Rehabilitation Plan;

(c) The shareholders, owners or partners of the juridical debtor lose at least their controlling interest as a result of the Rehabilitation Plan; and

(d) The Rehabilitation Plan would likely provide the objecting class of creditors with compensation which has a net present value greater than that which they would have received if the debtor were under liquidation.

Section 65.Submission of Rehabilitation Plan to the Court. - 1fthe Rehabilitation Plan is approved, the rehabilitation receiver shall submit the same to the court for confirmation. Within five (5) days from receipt of the Rehabilitation Plan, the court shall notify the creditors that the Rehabilitation Plan has been submitted for confirmation, that any creditor may obtain copies of the Rehabilitation Plan and that any creditor may file an objection thereto.

Section 66.Filing of Objections to Rehabilitation Plan. – A creditor may file an objection to the Rehabilitation Plan within twenty (20) days from receipt of notice from the court that the Rehabilitation Plan has been submitted for confirmation. Objections to a Rehabilitation Plan shall be limited to the following:

(a) The creditors' support was induced by fraud;

(b)The documents or data relied upon in the Rehabilitation Plan are materially false or misleading; or

(c)The Rehabilitation Plan is in fact not supported by the voting creditors.

Section 67.Hearing on the Objections. - If objections have been submitted during the relevant period, the court shall issue an order setting the time and date for the hearing or hearings on the objections.

If the court finds merit in the objection, it shall order the rehabilitation receiver or other party to cure the defect, whenever feasible. If the court determines that the debtor acted in bad faith, or that it is not feasible to cure the defect, the court shall convert the proceedings into one for the liquidation of the debtor under Chapter V of this Act.

Section 68.Confirmation of the Rehabilitation Plan. – If no objections are filed within the relevant period or, if objections are filed, the court finds them lacking in merit, or determines that the basis for the objection has been cured, or determines that the debtor has complied with an order to cure the objection, the court shall issue an order confirming the Rehabilitation Plan.

The court may confirm the Rehabilitation Plan notwithstanding unresolved disputes over claims if the Rehabilitation Plan has made adequate provisions for paying such claims.

For the avoidance of doubt, the provisions of other laws to the contrary notwithstanding, the court shall have the power to approve or implement the Rehabilitation Plan despite the lack of approval, or objection from the owners, partners or stockholders of the insolvent debtor: Provided, That the terms thereof

are necessary to restore the financial well-being and viability of the insolvent debtor.

Section 69.Effect of Confirmation of the Rehabilitation Plan, - The confirmation of the Rehabilitation Plan by the court shall result in the following:

(a) The Rehabilitation Plan and its provisions shall be binding upon the debtor and all persons who may be affected by . it, including the creditors, whether or not such persons have participated in the proceedings or opposed the Rehabilitation Plan or whether or not their claims have been scheduled;

(b) The debtor shall comply with the provisions of the Rehabilitation Plan and shall take all actions necessary to carry out the Plan;

(c) Payments shall be made to the creditors in accordance with the provisions of the Rehabilitation Plan;

(d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the Rehabilitation Plan;

(e) Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the Plan is successfully implement; and

(f) Claims arising after approval of the Plan that are otherwise not treated by the Plan are not subject to any Suspension Order.

The Order confirming the Plan shall comply with Rules 36 of the Rules of Court: Provided, however, That the court may maintain jurisdiction over the case in order to resolve claims against the debtor that remain contested and allegations that the debtor has breached the Plan.

Section 70. Liability of General Partners of a Partnership for Unpaid Balances Under an Approved Plan. - The approval of the Plan shall not affect the rights of creditors to pursue actions against the general partners of a partnership to the extent they are liable under relevant legislation for the debts thereof.

Section 71. Treatment of Amounts of Indebtedness or Obligations Forgiven or Reduced. - Amounts of any indebtedness or obligations reduced or forgiven in connection with a Plan's approval shall not be subject to any tax in furtherance of the purposes of this Act.

Section 72. Period for Confirmation of the Rehabilitation Plan. - The court shall have a maximum period of one (1) year from the date of the filing of the petition to confirm a Rehabilitation Plan.

If no Rehabilitation Plan is confirmed within the said period, the proceedings may upon motion or motu propio, be converted into one for the liquidation of the debtor .

Section 73. Accounting Discharge of Rehabilitation Receiver. - Upon the confirmation of the Rehabilitation Plan, the rehabilitation receiver shall provide a final report and accounting to the court. Unless the Rehabilitation Plan specifically requires and describes the role of the rehabilitation receiver after the approval of the Rehabilitation Plan, the court shall discharge the rehabilitation receiver of his duties.

(j) Termination of Proceedings

Section 74. Termination of Proceedings. - The rehabilitation proceedings under Chapter II shall, upon motion by any stakeholder or the rehabilitation receiver be terminated by order of the court either declaring a successful implementation of the Rehabilitation Plan or a failure of rehabilitation.

There is failure of rehabilitation in the following cases:

(a) Dismissal of the petition by the court;

(b) The debtor fails to submit a Rehabilitation Plan;

(c) Under the Rehabilitation Plan submitted by the debtor, there is no substantial likelihood that the debtor can be rehabilitated within a reasonable period;

(d) The Rehabilitation Plan or its amendment is approved by the court but in the implementation thereof, the debtor fails to perform its obligations thereunder or there is a failure to realize the objectives, targets or goals set forth therein, including the timelines and conditions for the settlement of the obligations due to the creditors and other claimants;

(e) The commission of fraud in securing the approval of the Rehabilitation Plan or its amendment; and

(f) Other analogous circumstances as may be defined by the rules of procedure.

Upon a breach of, or upon a failure of the Rehabilitation Plan the court, upon motion by an affected party may:

(1) Issue an order directing that the breach be cured within a specified period of time, falling which the proceedings may be converted to a liquidation;

(2) Issue an order converting the proceedings to a liquidation;

(3) Allow the debtor or rehabilitation receiver to submit amendments to the Rehabilitation Plan, the approval of which shall be governed by the same requirements for the approval of a Rehabilitation Plan under this subchapter;

(4) Issue any other order to remedy the breach consistent with the present regulation, other applicable law and the best interests of the creditors; or

(5) Enforce the applicable provisions of the Rehabilitation Plan through a writ of execution.

Section 75. Effects of Termination. - Termination of the proceedings shall result in the following:

(a) The discharge of the rehabilitation receiver subject to his submission of a final accounting; and

(b) The lifting of the Stay Order and any other court order holding in abeyance any action for the enforcement of a claim against the debtor.

Provided, however, That if the termination of proceedings is due to failure of rehabilitation or dismissal of the petition for reasons other than technical grounds, the proceedings shall be immediately converted to liquidation as provided in Section 92 of this Act.

CHAPTER IIIPRE-NEGOTIATED REHABILITATION

Section 76. Petition by Debtor. - An insolvent debtor, by itself or jointly with any of its creditors, may file a verified petition with the court for the approval of a pre-negotiated Rehabilitation Plan which has been endorsed or approved by creditors holding at least two-thirds (2/3) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. The petition shall include as a minimum:

(a) a schedule of the debtor's debts and liabilities;

(b) an inventory of the debtor's assets;

(c) the pre-negotiated Rehabilitation Plan, including the names of at least three (3) qualified nominees for rehabilitation receiver; and

(d) a summary of disputed claims against the debtor and a report on the provisioning of funds to account for appropriate payments should any such claims be ruled valid or their amounts adjusted.

Section 77. Issuance of Order. - Within five (5) working days, and after determination that the petition is sufficient in form and substance, the court shall issue an Order which shall;

(a) identify the debtor, its principal business of activity/ies and its principal place of business;

(b) declare that the debtor is under rehabilitation;

(c) summarize the ground./s for the filling of the petition;

(d) direct the publication of the Order in a newspaper of general circulation in the Philippines once a week for at least two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of its issuance;

(e) direct the service by personal delivery of a copy of the petition on each creditor who is not a petitioner holding at least ten percent (10%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, within three (3) days;

(f) state that copies of the petition and the Rehabilitation Plan are available for examination and copying by any interested party;

(g) state that creditors and other interested parties opposing the petition or Rehabilitation Plan may file their objections or comments thereto within a period of not later than twenty (20) days from the second publication of the Order;

(h) appoint a rehabilitation receiver, if provided for in the Plan; and

(i) include a Suspension or Stay Order as described in this Act.

Section 78. Approval of the Plan. - Within ten (10) days from the date of the second publication of the Order, the court shall approve the Rehabilitation Plan unless a creditor or other interested party submits an objection to it in accordance with the next succeeding section.

Section 79. Objection to the Petition or Rehabilitation Plan. - Any creditor or other interested party may submit to the court a verified objection to the petition or the Rehabilitation Plan not later than eight (8) days from the date of the second publication of the Order mentioned in Section 77 hereof. The objections shall be limited to the following:

(a) The allegations in the petition or the Rehabilitation Plan or the attachments thereto are materially false or misleading;

(b) The majority of any class of creditors do not in fact support the Rehabilitation Plan;

(c) The Rehabilitation Plan fails to accurately account for a claim against the debtor and the claim in not categorically declared as a contested claim; or

(d) The support of the creditors, or any of them was induced by fraud.

Copies of any objection to the petition of the Rehabilitation Plan shall be served on the debtor, the rehabilitation receiver (if applicable), the secured creditor with the largest claim and who supports the Rehabilitation Plan, and the unsecured creditor with the largest claim and who supports the Rehabilitation Plan.

Section 80. Hearing on the Objections. - After receipt of an objection, the court shall set the same for hearing. The date of the hearing shall be no earlier than twenty (20) days and no later than thirty (30) days from the date of the second publication of the Order mentioned in Section 77 hereof. If the court finds merit in the objection, it shall direct the debtor, when feasible to cure the detect within a reasonable period. If the court determines that the debtor or creditors supporting the Rehabilitation Plan acted in bad faith, or that the objection is non-curable, the court may order the conversion of the proceedings into liquidation. A finding by the court that the objection has no substantial merit, or that the same has been cured shall be deemed an approval of the Rehabilitation Plan.

Section 81. Period for Approval of Rehabilitation Plan. - The court shall have a maximum period of one hundred twenty (120) days from the date of the filing of the petition to approve the Rehabilitation Plan. If the court fails to act within the said period, the Rehabilitation Plan shall be deemed approved.

Section 82. Effect of Approval. - Approval of a Plan under this chapter shall have the same legal effect as confirmation of a Plan under Chapter II of this Act.

CHAPTER IVOUT-OF-COURT OR INFORMAL RESTRUCTURING AGREEMENTS OR REHABILITATION PLANS

Section 83. Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans. - An out-of-curt or informal restructuring agreement or Rehabilitation Plan that meets the minimum requirements prescribed in this chapter is hereby recognized as consistent with the objectives of this Act.

Section 84. Minimum Requirements of Out-of-Court or Informal Restructuring Agreements and Rehabilitation Plans. - For an out-of-court or informal restructuring/workout agreement or Rehabilitation Plan to qualify under this chapter, it must meet the following minimum requirements:

(a) The debtor must agree to the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan;

(b) It must be approved by creditors representing at least sixty-seven (67%) of the secured obligations of the debtor;

(c) It must be approved by creditors representing at least seventy-five percent (75%) of the unsecured obligations of the debtor; and

(d) It must be approved by creditors holding at least eighty-five percent (85%) of the total liabilities, secured and unsecured, of the debtor.

Section 85. Standstill Period. - A standstill period that may be agreed upon by the parties pending negotiation and finalization of the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan contemplated herein shall be effective and enforceable not only against the contracting parties but also against the other creditors: Provided, That (a) such agreement is approved by creditors representing more than fifty percent (50%) of the total liabilities of the debtor; (b) notice thereof is publishing in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; and (c) the standstill period does not exceed one hundred twenty (120) days from the date of effectivity. The notice must invite creditors to participate in the negotiation for out-of-court rehabilitation or restructuring agreement and notify them that said agreement will be binding on all creditors if the required majority votes prescribed in Section 84 of this Act are met.

Section 86. Cram Down Effect. - A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an informal workout framework referred to in this chapter shall have the same legal effect as confirmation of a Plan under Section 69 hereof. The notice of the Rehabilitation Plan or restructuring agreement or Plan shall be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the Philippines. The Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of fifteen (15) days from the date of the last publication of the notice thereof.

Section 87. Amendment or Modification. - Any amendment of an out-of-court restructuring/workout agreement or Rehabilitation Plan must be made in accordance with the terms of the agreement and with due notice on all creditors.

Section 88. Effect of Court Action or Other Proceedings. - Any court action or other proceedings arising from, or relating to, the out-of-court or informal restructuring/workout agreement or Rehabilitation Plan shall not stay its implementation, unless the relevant party is able to secure a temporary restraining order or injunctive relief from the Court of Appeals.

Section 89. Court Assistance. - The insolvent debtor and/or creditor may seek court assistance for the execution or implementation of a Rehabilitation Plan under this Chapter, under such rules of procedure as may be promulgated by the Supreme Court.

CHAPTER VLIQUIDATION OF INSOLVENT JURIDICAL DEBTORS

Section 90. Voluntary Liquidation. - An insolvent debtor may apply for liquidation by filing a petition for liquidation with the court. The petition shall be verified, shall establish the insolvency of the debtor and shall contain, whether as an attachment or as part of the body of the petition;

(a) a schedule of the debtor's debts and liabilities including a list of creditors with their addresses, amounts of claims and collaterals, or securities, if any;

(b) an inventory of all its assets including receivables and claims against third parties; and

(c) the names of at least three (3) nominees to the position of liquidator.

At any time during the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the debtor may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the debtor is seeking immediate dissolution and termination of its corporate existence.

If the petition or the motion, as the case may be, is sufficient in form and substance, the court shall issue a Liquidation Order mentioned in Section 112 hereof.

Section 91. Involuntary Liquidation. - Three (3) or more creditors the aggregate of whose claims is at least either One million pesos (Php1,000,000,00) or at least twenty-five percent (25%0 of the subscribed capital stock or partner's contributions of the debtor, whichever is higher, may apply for and seek the liquidation of an insolvent debtor by filing a petition for liquidation of the debtor with the court. The petition shall show that:

(a) there is no genuine issue of fact or law on the claims/s of the petitioner/s, and that the due and demandable payments thereon have not been made for at least

one hundred eighty (180) days or that the debtor has failed generally to meet its liabilities as they fall due; and

(b) there is no substantial likelihood that the debtor may be rehabilitated.

At any time during the pendency of or after a rehabilitation court-supervised or pre-negotiated rehabilitation proceedings, three (3) or more creditors whose claims is at least either One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the subscribed capital or partner's contributions of the debtor, whichever is higher, may also initiate liquidation proceedings by filing a motion in the same court where the rehabilitation proceedings are pending to convert the rehabilitation proceedings into liquidation proceedings. The motion shall be verified, shall contain or set forth the same matters required in the preceding paragraph, and state that the movants are seeking the immediate liquidation of the debtor.

If the petition or motion is sufficient in form and substance, the court shall issue an Order:

(1) directing the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; and

(2) directing the debtor and all creditors who are not the petitioners to file their comment on the petition or motion within fifteen (15) days from the date of last publication.

If, after considering the comments filed, the court determines that the petition or motion is meritorious, it shall issue the Liquidation Order mentioned in Section 112 hereof.

Section 92. Conversion by the Court into Liquidation Proceedings. - During the pendency of court-supervised or pre-negotiated rehabilitation proceedings, the court may order the conversion of rehabilitation proceedings to liquidation proceedings pursuant to (a) Section 25(c) of this Act; or (b) Section 72 of this Act; or (c) Section 75 of this Act; or (d) Section 90 of this Act; or at any other time upon the recommendation of the rehabilitation receiver that the rehabilitation of the debtor is not feasible. Thereupon, the court shall issue the Liquidation Order mentioned in Section 112 hereof.

Section 93. Powers of the Securities and Exchange Commission (SEC). - The provisions of this chapter shall not affect the regulatory powers of the SEC under Section 6 of Presidential Decree No. 902-A, as amended, with respect to any dissolution and liquidation proceeding initiated and heard before it.

CHAPTER VIINSOLVENCY OF INDIVIDUAL DEBTORS

(A) Suspension of Payments.

Section 94. Petition. - An individual debtor who, possessing sufficient property to cover all his debts but foreseeing the impossibility of meeting them when they respectively fall due, may file a verified petition that he be declared in the state of suspension of payments by the court of the province or city in which he has resides for six (6) months prior to the filing of his petition. He shall attach to his petition, as a minimum: (a) a schedule of debts and liabilities; (b) an inventory of assess; and (c) a proposed agreement with his creditors.

Section 95. Action on the Petition. - If the court finds the petition sufficient in form and substance, it shall, within five (5) working days from the filing of the petition, issue an Order:

(a) calling a meeting of all the creditors named in the schedule of debts and liabilities at such time not less than fifteen (15) days nor more than forty (40) days from the date of such Order and designating the date, time and place of the meeting;

(b) directing such creditors to prepare and present written evidence of their claims before the scheduled creditors' meeting;

(c) directing the publication of the said order in a newspaper of general circulation published in the province or city in which the petition is filed once a week for two (2) consecutive weeks, with the first publication to be made within seven (7) days from the time of the issuance of the Order;

(d) directing the clerk of court to cause the sending of a copy of the Order by registered mail, postage prepaid, to all creditors named in the schedule of debts and liabilities;

(e) forbidding the individual debtor from selling, transferring, encumbering or disposing in any manner of his property, except those used in the ordinary

operations of commerce or of industry in which the petitioning individual debtor is engaged so long as the proceedings relative to the suspension of payments are pending;

(f) prohibiting the individual debtor from making any payment outside of the necessary or legitimate expenses of his business or industry, so long as the proceedings relative to the suspension of payments are pending; and

(g) appointing a commissioner to preside over the creditors' meeting.

Section 96. Actions Suspended. - Upon motion filed by the individual debtor, the court may issue an order suspending any pending execution against the individual debtor. Provide, That properties held as security by secured creditors shall not be the subject of such suspension order. The suspension order shall lapse when three (3) months shall have passed without the proposed agreement being accepted by the creditors or as soon as such agreement is denied.

No creditor shall sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition for suspension of payments and for as long as proceedings remain pending except:

(a) those creditors having claims for personal labor, maintenance, expense of last illness and funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and

(b) secured creditors.

Section 97. Creditors' Meeting. - The presence of creditors holding claims amounting to at least three-fifths (3/5) of the liabilities shall be necessary for holding a meeting. The commissioner appointed by the court shall preside over the meeting and the clerk of court shall act as the secretary thereof, subject to the following rules:

(a) The clerk shall record the creditors present and amount of their respective claims;

(b) The commissioner shall examine the written evidence of the claims. If the creditors present hold at least three-fifths (3/5) of the liabilities of the individual debtor, the commissioner shall declare the meeting open for business;

(c) The creditors and individual debtor shall discuss the propositions in the proposed agreement and put them to a vote;

(d) To form a majority, it is necessary:

(1) that two-thirds (2/3) of the creditors voting unite upon the same proposition; and

(2) that the claims represented by said majority vote amount to at least three-fifths (3/5) of the total liabilities of the debtor mentioned in the petition; and

(e) After the result of the voting has been announced, all protests made against the majority vote shall be drawn up, and the commissioner and the individual debtor together with all creditors taking part in the voting shall sign the affirmed propositions.

No creditor who incurred his credit within ninety (90) days prior to the filing of the petition shall be entitled to vote.

Section 98. Persons Who May Refrain From Voting. - Creditors who are unaffected by the Suspension Order may refrain from attending the meeting and from voting therein. Such persons shall not be bound by any agreement determined upon at such meeting, but if they should join in the voting they shall be bound in the same manner as are the other creditors.

Section 99. Rejection of the Proposed Agreement. - The proposed agreement shall be deemed rejected if the number of creditors required for holding a meeting do not attend thereat, or if the two (2) majorities mentioned in Section 97 hereof are not in favor thereof. In such instances, the proceeding shall be terminated without recourse and the parties concerned shall be at liberty to enforce the rights which may correspond to them.

Section 100. Objections. - If the proposal of the individual debtor, or any amendment thereof made during the creditors' meeting, is approved by the majority of creditors in accordance with Section 97 hereof, any creditor who attended the meeting and who dissented from and protested against the vote of the majority may file an objection with the court within ten (10) days from the date of the last creditors' meeting. The causes for which objection may be made to the decision made by the majority during the meeting shall be: (a) defects in the call for the meeting, in the holding thereof and in the deliberations had thereat which

prejudice the rights of the creditors; (b) fraudulent connivance between one or more creditors and the individual debtor to vote in favor of the proposed agreement; or (c) fraudulent conveyance of claims for the purpose of obtaining a majority. The court shall hear and pass upon such objection as soon as possible and in a summary manner.

In case the decision of the majority of creditors to approve the individual debtor's proposal or any amendment thereof made during the creditors' meeting is annulled by the court, the court shall declare the proceedings terminated and the creditors shall be at liberty to exercise the rights which may correspond to them.

Section 101. Effects of Approval of Proposed Agreement. - If the decision of the majority of the creditors to approve the proposed agreement or any amendment thereof made during the creditors' meeting is uphold by the court, or when no opposition or objection to said decision has been presented, the court shall order that the agreement be carried out and all parties bound thereby to comply with its terms.

The court may also issue all orders which may be necessary or proper to enforce the agreement on motion of any affected party. The Order confirming the approval of the proposed agreement or any amendment thereof made during the creditors' meeting shall be binding upon all creditors whose claims are included in the schedule of debts and liabilities submitted by the individual debtor and who were properly summoned, but not upon: (a) those creditors having claims for personal labor, maintenance, expenses of last illness and funeral of the wife or children of the debtor incurred in the sixty (60) days immediately prior to the filing of the petition; and (b) secured creditors who failed to attend the meeting or refrained from voting therein.

Section 102. Failure of Individual Debtor to Perform Agreement. - If the individual debtor fails, wholly or in part, to perform the agreement decided upon at the meeting of the creditors, all the rights which the creditors had against the individual debtor before the agreement shall revest in them. In such case the individual debtor may be made subject to the insolvency proceedings in the manner established by this Act.

(B) Voluntary Liquidation.

Section 103. Application. - An individual debtor whose properties are not sufficient to cover his liabilities, and owing debts exceeding Five hundred thousand pesos (Php500,000.00), may apply to be discharged from his debts and liabilities by filing a verified petition with the court of the province or city in which he has resided for six (6) months prior to the filing of such petition. He shall attach to his petition a schedule of debts and liabilities and an inventory of assets. The filing of such petition shall be an act of insolvency.

Section 104. Liquidation Order. - If the court finds the petition sufficient in form and substance it shall, within five (5) working days issue the Liquidation Order mentioned in Section 112 hereof.

(C) In voluntary Liquidation.

Section 105. Petition; Acts of Insolvency. - Any creditor or group of creditors with a claim of, or with claims aggregating at least Five hundred thousand pesos (Php500, 000.00) may file a verified petition for liquidation with the court of the province or city in which the individual debtor resides.

The following shall be considered acts of insolvency, and the petition for liquidation shall set forth or allege at least one of such acts:

(a) That such person is about to depart or has departed from the Republic of the Philippines, with intent to defraud his creditors;

(b) That being absent from the Republic of the Philippines, with intent to defraud his creditors, he remains absent;

(c) That he conceals himself to avoid the service of legal process for the purpose of hindering or delaying the liquidation or of defrauding his creditors;

(d) That he conceals, or is removing, any of his property to avoid its being attached or taken on legal process;

(e) That he has suffered his property to remain under attachment or legal process for three (3) days for the purpose of hindering or delaying the liquidation or of defrauding his creditors;

(f) That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying the liquidation or of defrauding any creditors or claimant;

(g) That he has willfully suffered judgment to be taken against him by default for the purpose of hindering or delaying the liquidation or of defrauding his creditors;

(h) That he has suffered or procured his property to be taken on legal process with intent to give a preference to one or more of his creditors and thereby hinder or delay the liquidation or defraud any one of his creditors;

(i) That he has made any assignment, gift, sale, conveyance or transfer of his estate, property, rights or credits with intent to hinder or delay the liquidation or defraud his creditors;

(j) That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance or transfer of his estate, property, rights or credits;

(k) That being a merchant or tradesman, he has generally defaulted in the payment of his current obligations for a period of thirty (30) days;

(l) That for a period of thirty (30) days, he has failed, after demand, to pay any moneys deposited with him or received by him in a fiduciary; and

(m) That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property subject to execution to satisfy the judgment.

The petitioning creditor/s shall post a bond in such as the court shall direct, conditioned that if the petition for liquidation is dismissed by the court, or withdrawn by the petitioner, or if the debtor shall not be declared an insolvent the petitioners will pay to the debtor all costs, expenses, damages occasioned by the proceedings and attorney's fees.

Section 106. Order to Individual Debtor to Show Cause. - Upon the filing of such creditors' petition, the court shall issue an Order requiring the individual debtor to show cause, at a time and place to be fixed by the said court, why he should not be adjudged an insolvent. Upon good cause shown, the court may issue an Order forbidding the individual debtor from making payments of any of his debts, and transferring any property belonging to him. However, nothing contained herein shall affect or impair the rights of a secured creditor to enforce his lien in accordance with its terms.

Section 107. Default. - If the individual debtor shall default or if, after trial, the issues are found in favor of the petitioning creditors the court shall issue the Liquidation Order mentioned in Section 112 hereof.

Section 108. Absent Individual Debtor. - In all cases where the individual debtor resides out of the Republic of the Philippines; or has departed therefrom; or cannot, after due diligence, be found therein; or conceals himself to avoid service of the Order to show cause, or any other preliminary process or orders in the matter, then the petitioning creditors, upon submitting the affidavits requisite to procedure an Order of publication, and presenting a bond in double the amount of the aggregate sum of their claims against the individual debtor, shall be entitled to an Order of the court directing the sheriff of the province or city in which the matter is pending to take into his custody a sufficient amount of property of the individual debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings. Upon receiving such Order of the court to take into custody of the property of the individual debtor, it shall be the duty of the sheriff to take possession of the property and effects of the individual debtor, not exempt from execution, to an extent sufficient to cover the amount provided for and to prepare within three (3) days from the time of taking such possession, a complete inventory of all the property so taken, and to return it to the court as soon as completed. The time for taking the inventory and making return thereof may be extended for good cause shown to the court. The sheriff shall also prepare a schedule of the names and residences of the creditors, and the amount due each, from the books of the debtor, or from such other papers or data of the individual debtor available as may come to his possession, and shall file such schedule or list of creditors and inventory with the clerk of court.

Section 109. All Property Taken to be Held for All Creditors; Appeal Bonds; Exemptions to Sureties. - In all cases where property is taken into custody by the sheriff, if it does not embrace all the property and effects of the debtor not exempt from execution, any other creditor or creditors of the individual debtor, upon giving bond to be approved by the court in double the amount of their claims, singly or jointly, shall be entitled to similar orders and to like action, by the sheriff; until all claims be provided for, if there be sufficient property or effects. All property taken into custody by the sheriff by virtue of the giving of any such bonds shall be held by him for the benefit of all creditors of the individual debtor whose claims shall be duly proved as provided in this Act. The bonds provided for in this section and the preceding section to procure the order for custody of the property and effects of the individual debtor shall be conditioned that if, upon final hearing of the petition in insolvency, the court shall find in favor of the

petitioners, such bonds and all of them shall be void; if the decision be in favor of the individual debtor, the proceedings shall be dismissed, and the individual debtor, his heirs, administrators, executors or assigns shall be entitled to recover such sum of money as shall be sufficient to cover the damages sustained by him, not to exceed the amount of the respective bonds. Such damages shall be fixed and allowed by the court. If either the petitioners or the debtor shall appeal from the decision of the court, upon final hearing of the petition, the appellant shall be required to give bond to the successful party in a sum double the amount of the value of the property in controversy, and for the costs of the proceedings.

Any person interested in the estate may take exception to the sufficiency of the sureties on such bond or bonds. When excepted to the petitioner's sureties, upon notice to the person excepting of not less than two (2) nor more than five (5) days, must justify as to their sufficiency; and upon failure to justify, or of others in their place fail to justify at the time and place appointed the judge shall issue an Order vacating the order to take the property of the individual debtor into the custody of the sheriff, or denying the appeal, as the case may be.

Section 110. Sale Under Execution. - If, in any case, proper affidavits and bonds are presented to the court or a judge thereof, asking for and obtaining an Order of publication and an Order for the custody of the property of the individual debtor and thereafter the petitioners shall make it appear satisfactorily to the court or a judge thereof that the interest of the parties to the proceedings will be subserved by a sale thereof, the court may order such property to be sold in the same manner as property is sold under execution, the proceeds to de deposited in the court to abide by the result of the proceedings.

CHAPTER VIIPROVISIONS COMMON TO LIQUIDATION IN INSOLVENCY OF INDIVIDUAL AND JURIDICAL DEBTORS

Section 111. Use of Term Debtor. - For purposes of this chapter, the term debtor shall include both individual debtor as defined in Section 4(o) and debtor as defined in Section 4(k) of this Act.

(A) The Liquidation Order.

Section 112. Liquidation Order. - The Liquidation Order shall:

(a) declare the debtor insolvent;

(b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved;

(c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution;

(d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks;

(e) direct payments of any claims and conveyance of any property due the debtor to the liquidator;

(f) prohibit payments by the debtor and the transfer of any property by the debtor;

(g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure;

(h) authorize the payment of administrative expenses as they become due;

(i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and

(j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication.

Section 113. Effects of the Liquidation Order. - Upon the issuance of the Liquidation Order:

(a) the juridical debtor shall be deemed dissolved and its corporate or juridical existence terminated;

(b) legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court;

(c) all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees;

(d) no separate action for the collection of an unsecured claim shall be allowed. Such actions already pending will be transferred to the Liquidator for him to accept and settle or contest. If the liquidator contests or disputes the claim, the court shall allow, hear and resolve such contest except when the case is already on appeal. In such a case, the suit may proceed to judgment, and any final and executor judgment therein for a claim against the debtor shall be filed and allowed in court; and

(e) no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.

Section 114. Rights of Secured Creditors. - The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law. A secured creditor may:

(a) waive his right under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or

(b) maintain his rights under the security or lien:

If the secured creditor maintains his rights under the security or lien:

(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator. When the value of the property is less than the claim it secures, the liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance. If its value exceeds the claim secured, the liquidator may convey the property to the creditor and waive the debtor's right of redemption upon receiving the excess from the creditor;

(2) the liquidator may sell the property and satisfy the secured creditor's entire claim from the proceeds of the sale; or

(3) the secure creditor may enforce the lien or foreclose on the property pursuant to applicable laws.

(B) The Liquidator.

Section 115. Election of Liquidator. - Only creditors who have filed their claims within the period set by the court, and whose claims are not barred by the statute of limitations, will be allowed to vote in the election of the liquidator. A secured creditor will not be allowed to vote, unless: (a) he waives his security or lien; or (b) has the value of the property subject of his security or lien fixed by agreement with the liquidator, and is admitted for the balance of his claim.

The creditors entitled to vote will elect the liquidator in open court. The nominee receiving the highest number of votes cast in terms of amount of claims, ad who is qualified pursuant to Section 118 hereof, shall be appointed as the liquidator.

Section 116. Court-Appointed Liquidator. - The court may appoint the liquidator if:

(a) on the date set for the election of the liquidator, the creditors do not attend;

(b) the creditors who attend, fail or refuse to elect a liquidator;

(c) after being elected, the liquidator fails to qualify; or

(d) a vacancy occurs for any reason whatsoever, In any of the cases provided herein, the court may instead set another hearing of the election of the liquidator.

Provided further, That nothing in this section shall be construed to prevent a rehabilitation receiver, who was administering the debtor prior to the commencement of the liquidation, from being appointed as a liquidator.

Section 117. Oath and Bond of the Liquidator. -Prior to entering upon his powers, duties and responsibilities, the liquidator shall take an oath and file a bond, In such amount to be fixed by the court, conditioned upon the proper and faithful discharge of his powers, duties and responsibilities.

Section 118. Qualifications of the Liquidator. - The liquidator shall have the qualifications enumerated in Section 29 hereof. He may be removed at any time by the court for cause, either motu propio or upon motion of any creditor entitled to vote for the election of the liquidator.

Section 119. Powers, Duties and Responsibilities of the Liquidator. - The liquidator shall be deemed an officer of the court with the principal duly of preserving and maximizing the value and recovering the assets of the debtor, with the end of liquidating them and discharging to the extent possible all the

claims against the debtor. The powers, duties and responsibilities of the liquidator shall include, but not limited to:

(a) to sue and recover all the assets, debts and claims, belonging or due to the debtor;

(b) to take possession of all the property of the debtor except property exempt by law from execution;

(c) to sell, with the approval of the court, any property of the debtor which has come into his possession or control;

(d) to redeem all mortgages and pledges, and so satisfy any judgement which may be an encumbrance on any property sold by him;

(e) to settle all accounts between the debtor and his creditors, subject to the approval of the court;

(f) to recover any property or its value, fraudulently conveyed by the debtor;

(g) to recommend to the court the creation of a creditors' committee which will assist him in the discharge of the functions and which shall have powers as the court deems just, reasonable and necessary; and

(h) upon approval of the court, to engage such professional as may be necessary and reasonable to assist him in the discharge of his duties.

In addition to the rights and duties of a rehabilitation receiver, the liquidator, shall have the right and duty to take all reasonable steps to manage and dispose of the debtor's assets with a view towards maximizing the proceedings therefrom, to pay creditors and stockholders, and to terminate the debtor's legal existence. Other duties of the liquidator in accordance with this section may be established by procedural rules.

A liquidator shall be subject to removal pursuant to procedures for removing a rehabilitation receiver.

Section 120. Compensation of the Liquidator. - The liquidator and the persons and entities engaged or employed by him to assist in the discharge of his powers and duties shall be entitled to such reasonable compensation as may determined by the liquidation court, which shall not exceed the maximum amount as may be prescribed by the Supreme Court.

Section 121. Reporting Requiremen5ts. - The liquidator shall make and keep a record of all moneys received and all disbursements mad by him or under his authority as liquidator. He shall render a quarterly report thereof to the court , which report shall be made available to all interested parties. The liquidator shall also submit such reports as may be required by the court from time to time as well as a final report at the end of the liquidation proceedings.

Section 122. Discharge of Liquidator. - In preparation for the final settlement of all the claims against the debtor , the liquidator will notify all the creditors, either by publication in a newspaper of general circulation or such other mode as the court may direct or allow, that will apply with the court for the settlement of his account and his discharge from liability as liquidator. The liquidator will file a final accounting with the court, with proof of notice to all creditors. The accounting will be set for hearing. If the court finds the same in order, the court will discharge the liquidator.

(C) Determination of Claims

Section 123. Registry of Claims. - Within twenty (20) days from his assumption into office the liquidator shall prepare a preliminary registry of claims of secured and unsecured creditors. Secured creditors who have waived their security or lien, or have fixed the value of the property subject of their security or lien by agreement with the liquidator and is admitted as a creditor for the balance , shall be considered as unsecured creditors. The liquidator shall make the registry available for public inspection and provide publication notice to creditors, individual debtors owner/s of the sole proprietorship-debtor, the partners of the partnership-debtor and shareholders or members of the corporation-debtor, on where and when they may inspect it. All claims must be duly proven before being paid.

Section 124. Right of Set-off. - If the debtor and creditor are mutually debtor and creditor of each other one debt shall be set off against the other, and only the balance, if any shall be allowed in the liquidation proceedings.

Section 125. - Opposition or Challenge to Claims. - Within thirty (30 ) days from the expiration of the period for filing of applications for recognition of claims, creditors, individual debtors, owner/s of the sole proprietorship-debtor, partners

of the partnership-debtor and shareholders or members of the corporation -debtor and other interested parties may submit a challenge to claim or claims to the court, serving a certified copy on the liquidator and the creditor holding the challenged claim. Upon the expiration of the (30) day period, the rehabilitation receiver shall submit to the court the registry of claims containing the undisputed claims that have not been subject to challenge. Such claims shall become final upon the filling of the register and may be subsequently set aside only on grounds or fraud, accident, mistake or inexcusable neglect.

Section 126. Submission of Disputed to the Court. - The liquidator shall resolve disputed claims and submit his findings thereon to the court for final approval. The liquidator may disallow claims.

(D) Avoidance Proceedings.

Section 127. Rescission or Nullity of Certain Transactions. - Any transaction occurring prior to the issuance of the Liquidation Order or, in case of the conversion of the rehabilitation proceedings prior to the commencement date, entered into by the debtor or involving its assets, may be rescinded or declared null and void on the ground that the same was executed with intent to defraud a creditor or creditors or which constitute undue preference of creditors. The presumptions set forth in Section 58 hereof shall apply.

Section 128. Actions for Rescission or Nullity. - (a) The liquidator or, with his conformity, a creditor may initiate and prosecute any action to rescind, or declare null and void any transaction described in the immediately preceding paragraph. If the liquidator does not consent to the filling or prosecution of such action, any creditor may seek leave of the court to commence said action.

(b) if leave of court is granted under subsection (a) hereof, the liquidator shall assign and transfer to the creditor all rights, title and interest in the chose in action or subject matter of the proceeding, including any document in support thereof.

(c) Any benefit derived from a proceeding taken pursuant to subsection (a) hereof, to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.

(d) Where, before an orders is made under subsection (a) hereof, the liquidator signifies to the court his readiness to the institute the proceeding for the benefit of the creditors, the order shall fix the time within which he shall do so and, in that case the benefit derived from the proceedings, if instituted within the time limits so fixed, belongs to the estate.

(E) The Liquidation Plan.

Section 129. The Liquidation Plan. - Within three (3) months from his assumption into office, the Liquidator shall submit a Liquidation Plan to the court. The Liquidation Plan shall, as a minimum enumerate all the assets of the debtor and a schedule of liquidation of the assets and payment of the claims.

Section 130. Exempt Property to be Set Apart. - It shall be the duty of the court, upon petition and after hearing, to exempt and set apart, for the use and benefit of the said insolvent, such real and personal property as is by law exempt from execution, and also a homestead; but no such petition shall be heard as aforesaid until it is first proved that notice of the hearing of the application therefor has been duly given by the clerk, by causing such notice to be posted it at least three (3) public places in the province or city at least ten (10) days prior to the time of such hearing, which notice shall set forth the name of the said insolvent debtor, and the time and place appointed for the hearing of such application, and shall briefly indicate the homestead sought to be exempted or the property sought to be set aside; and the decree must show that such proof was made to the satisfaction of the court, and shall be conclusive evidence of that fact.

Section 131. Sale of Assets in Liquidation. - The liquidator may sell the unencumbered assets of the debtor and convert the same into money. The sale shall be made at public auction. However, a private sale may be allowed with the approval of the court if; (a) the goods to be sold are of a perishable nature, or are liable to quickly deteriorate in value, or are disproportionately expensive to keep or maintain; or (b) the private sale is for the best interest of the debtor and his creditors.

With the approval of the court, unencumbered property of the debtor may also be conveyed to a creditor in satisfaction of his claim or part thereof.

Section 132. manner of Implementing the Liquidation Plan. - The Liquidator shall implement the Liquidation Plan as approved by the court. Payments shall be made to the creditors only in accordance with the provisions of the Plan.

Section 133. Concurrence and Preference of Credits. - The Liquidation Plan and its Implementation shall ensure that the concurrence and preference of credits as enumerated in the Civil Code of the Philippines and other relevant laws shall be observed, unless a preferred creditor voluntarily waives his preferred right. For purposes of this chapter, credits for services rendered by employees or laborers to the debtor shall enjoy first preference under Article 2244 of the Civil Code, unless the claims constitute legal liens under Article 2241 and 2242 thereof.

Section 134. Order Removing the Debtor from the List of Registered Entitles at the Securities and Exchange Commission. - Upon determining that the liquidation has been completed according to this Act and applicable law, the court shall issue an Order approving the report and ordering the SEC to remove the debtor from the registry of legal entities.

Section 135. Termination of Proceedings. - Upon receipt of evidence showing that the debtor has been removed from the registry of legal entities at the SEC. The court shall issue an Order terminating the proceedings.

(F) Liquidation of a Securities Market Participant.

Section 136. Liquidation of a Securities Market Participant. - The foregoing provisions of this chapter shall be without prejudice to the power of a regulatory agency or self- regulatory organization to liquidate trade-related claims of clients or customers of a securities market participant which, for purposes of investor protection, are hereby deemed to have absolute priority over other claims of whatever nature or kind insofar as trade-related assets are concerned.

For purposes of this section, trade -related assets include cash, securities, trading right and other owned and used by the securities market participant in the ordinary course of this business.

CHAPTER VIIIPROCEEDINGS ANCILLARY TO OTHER INSOLVENCY OR REHABILITAION PROCEEDINGS

(A) Banks and Other Financial Institutions Under Rehabilitation Receivership Pursuant to a State-funded or State-mandated Insurance System.

Section 137. Provision of Assistance. - The court shall issue orders, adjudicate claims and provide other relief necessary to assist in the liquidation of a financial under rehabilitation receivership established by a state-funded or state-mandated insurance system.

Section 138. Application of Relevant Legislation. - The liquidation of bank, financial institutions, insurance companies and pre-need companies shall be determined by relevant legislation. The provisions in this Act shall apply in a suppletory manner.

(B) Cross-Border Insolvency Proceedings.

Section 139. Adoption of Uncitral Model Law on Cross-Border Insolvency. - Subject to the provision of Section 136 hereof and the rules of procedure that may be adopted by the Supreme Court, the Model Law on Cross-Border Insolvency of the United Nations Center for International Trade and Development is hereby adopted as part of this Act.

Section 140. Initiation of Proceedings. - The court shall set a hearing in connection with an insolvency or rehabilitation proceeding taking place in a foreign jurisdiction, upon the submission of a petition by the representative of the foreign entity that is the subject of the foreign proceeding.

Section 141. Provision of Relief. - The court may issue orders:

(a) suspending any action to enforce claims against the entity or otherwise seize or foreclose on property of the foreign entity located in the Philippines;

(b) requiring the surrender property of the foreign entity to the foreign representative; or

(c) providing other necessary relief.

Section 142. Factors in Granting Relief. - In determining whether to grant relief under this subchapter, the court shall consider;

(a) the protection of creditors in the Philippines and the inconvenience in pursuing their claim in a foreign proceeding;

(b) the just treatment of all creditors through resort to a unified insolvency or rehabilitation proceedings;

(c) whether other jurisdictions have given recognition to the foreign proceeding;

(d) the extent that the foreign proceeding recognizes the rights of creditors and other interested parties in a manner substantially in accordance with the manner prescribed in this Act; and

(e) the extent that the foreign proceeding has recognized and shown deference to proceedings under this Act and previous legislation.

CHAPTER IXFUNDS FOR REHABILITATION OF GOVERNMENT-OWNED AND CONTROLLED CORPORATIONS

Section 143. Funds for Rehabilitation of Government -owned and Controlled Corporations. - Public funds for the rehabilitation of government-owned and controlled corporations shall be released only pursuant to an appropriation by Congress and shall be supported by funds actually available as certified by the National Treasurer.

The Department of Finance, in collaboration with the Department of Budget and Management, shall promulgate the rules for the use and release of said funds.

CHAPTER XMISCELLANEOUS PROVISIOS

Section 144. Applicability of Provisions. - The provisions in Chapter II, insofar as they are applicable, shall likewise apply to proceedings in Chapters II and IV.

Section 145. Penalties. - An owner, partner, director, officer or other employee of the debtor who commits any one of the following acts shall, upon conviction thereof, be punished by a fine of not more than One million pesos (Php 1, 000,000.00) and imprisonment for not less than three(3) months nor more than five (5) years for each offense;

(a) if he shall, having notice of the commencement of the proceedings, or having reason to believe that proceedings are about to be commented, or in contemplation of the proceedings hide or conceal, or destroy or cause to be destroyed or hidden any property belonging to the debtor or if he shall hide, destroy, after mutilate or falsify, or cause to be hidden, destroyed, altered, mutilated or falsified, any book, deed, document or writing relating thereto; if he shall, with intent to defraud the creditors of the debtor, make any payment sale, assignment, transfer or conveyance of any property belongings to the debtor

(b) if he shall, having knowledge belief of any person having proved a false or fictitious claim against the debtor, fail to disclose the same to the rehabilitation receiver of liquidator within one (1) month after coming to said knowledge or belief; or if he shall attempt to account for any of the debtors property by fictitious losses or expense; or

(c) if he shall knowingly violate a prohibition or knowingly fail to undertake an obligation established by this Act.

Section 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. - This Act shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension of payments and rehabilitation cases then pending, except to the extent that in opinion of the court their application would not be feasible or would work injustice, in which event the procedures set forth in prior laws and regulations shall apply.

Section 147. Application to Pending Contracts. - This Act shall apply to all contracts of the debtor regardless of the date of perfection.

Section 148. Repeating Clause. - The Insolvency Law (Act No. 1956). As amended is hereby repealed. All other laws, orders, rules and regulations or parts thereof inconsistent with any provision of this Act are hereby repealed or modified accordingly.

Section 149. Separability Clause. - If any provision of this Act shall be held invalid, the remainder of this Act not otherwise affected shall remain in full force effect

Section 150. Effectivity Clause. - This Act shall take effect fifteen (15) days after its complete publication in the Official Gazette or in at least two (2) national newspaper of general circulation.

Approved,

(Sgd.) JUAN PONCE ENRILE (Sgd.) PROSPERO C.

President of the Senate NOGRALESSpeaker of the House of Representatives

This Act which is a consolidation of House Bill No. 7090 and Senate Bill No. 61 was finally passed by the House of Representatives and the Senate on February 1. 2010 and February 2, 2010, respectively.