credtrans pledge

8/9/2019 Credtrans Pledge

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CREDIT TRANSACTIONSPart VIII: Pledge (Articles 2085-212!

"#R# N$# 120528 %a&'ar 2)* 2001

ATT+# DIONISIO CA,IO* %R#* petitioner,vs.CO.RT O/ APPEA,S a&d DR# PA,O .# AE,,A* respondents.

.IS.IN"* J#:

Before us is the petition for review on certiorari by petitioner DionisioCalibo, Jr., assailing the decision of the Court of Appeals in CA-G.R. C!o. "#$%&, which a'r(ed the decision of the Regional )rial Court ofCebu, Branch **, declaring private respondent as the lawfulpossessor of a tractor sub+ect of a replevin suit and orderingpetitioner to pay private respondent actual da(ages and attorneysfees.

)he facts of the case, as su((aried by respondent court, areundisputed.

/on January 0&, *#$#, plainti1-appellee 2herein petitioner34ablo 5. Abella purchased an 67 0*% agricultural tractorwith 8erial !o. %%*%& and 9ngine !o. 4*0:6%%*## ;9<hibitA= Record, p.&> which he used in his far( in Dagohoy, Bohol.

8o(eti(es in ?ctober or !ove(ber *#@&, 4ablo Abellasson, 6ie abella rented for residential purpose the house of

defendant-appellant Dionosio R. Calibo, Jr., in )agbilaran City.

n ?ctober *#@:, 4ablo Abella pulled out his afore(entionedtractor fro( his far( in Dagohoy, Bohol, and left it in thesafeeeping of his son, 6ie Abella, in )agbilaran City. 6ieept the tractor in the garage of the house he was leasingfro( Calibo.

8ince he started renting Calibos house, 6ie had beenreligiously paying the (onthly rentals therefor, butbeginning !ove(ber of *#@:, he stopped doing so. )hefollowing (onth, Calibo learned that 6ie had never paidthe charges for electric and water consu(ption in the leasedpre(ises which the latter was duty-bound to shoulder. )hus,Calibo confronted 6ie about his rental arrears and theunpaid electric and water bills. During this confrontation,6ie infor(ed Calibo that he ;6ie> would be staying in theleased property only until the end of Dece(ber *#@:. 6iealso assured Calibo that he would be settling his accountwith the latter, o1ering the tractor as security. 6ie evenased Calibo to help hi( nd a buyer for the tractor so hecould sooner pay his outstanding obligation.1âwphi1.nêt

n January *#@$ when a new tenant (oved into the housefor(erly leased to 6ie, Calibo had the tractor (oved to thegarage of his fathers house, also in )agbilaran City.

Apprehensive over 6ies unsettled account, Calibo visitedhi( in his Cebu City address in January, 7ebruary and 6arch,*#@$ and tried to collect pay(ent. ?n all three occasions,Calibo was unable to tal to 6ie as the latter wasreportedly out of town. ?n his third trip to Cebu City, Caliboleft word with the occupants of the Abella residence thereat

that there was a prospective buyer for the tractor. )hefollowing wee, 6ie saw Calibo in )agbilaran City to inuireabout the possible tractor buyer. )he sale, however, did notpush through as the buyer did not co(e bac any(ore.Ehen again confronted with his outstanding obligation, 6iereassured Calibo that the tractor would stand as aguarantee for its pay(ent. )hat was the last ti(e Calibosaw or heard fro( 6ie.

After a long while, or on !ove(ber 00, *#@@, 6ies father,4ablo Abella, ca(e to )agbilaran City to clai( and taepossession of the tractor. Calibo, however, infor(ed 4ablothat 6ie left the tractor with hi( as security for thepay(ent of 6ies obligation to hi(. 4ablo o1ered to write6ie a chec for 40,%%%.%% in pay(ent of 6ies unpaidlease rentals, in addition to issuing postdated checs tocover the unpaid electric and water bills the correctness of

which 4ablo said he still had to verify with 6ie. Calibo told4ablo that he would accept the 40,%%%.%%-chec only if thelatter would e<ecute a pro(issory note in his favor to coverthe a(ount of the unpaid electric and water bills. 4ablo wasnot a(enable to this proposal. )he two of the( havingfailed to co(e to an agree(ent, 4ablo left and went bac toCebu City, unsuccessful in his atte(pt to tae possession ofthe tractor.*

?n !ove(ber 0&, *#@@, private respondent instituted an action forreplevin, clai(ing ownership of the tractor and seeing to recoverpossession thereof fro( petitioner. As adverted to above, the trialcourt ruled in favor of private respondent= so did the Court of Appealswhen petitioner appealed.

)he Court of Appeals sustained the ruling of the trial court that 6ieAbella could not have validly pledged the sub+ect tractor to petitionersince he was not the owner thereof, nor was he authoried by itsowner to pledge the tractor. Respondent court also re+ectedpetitioners contention that, if not a pledge, then a deposit wascreated. )he Court of Appeals said that under the Civil Code, thepri(ary purpose of a deposit is only safeeeping and not, as in thiscase, securing pay(ent of a debt.

)he Court of Appeals reduced the a(ount of actual da(ages payableto private respondent, deducting therefro( the cost of transportingthe tractor fro( )agbilaran, Bohol, to Cebu City.

Fence, this petition.

9ssentially, petitioner clai(s that the tractor in uestion was validlypledged to hi( by private respondents son 6ie Abella to answer forthe latters (onetary obligations to petitioner. n the alternative,petitioner asserts that the tractor was left with hi(, in the concept ofan inneeper, on deposit and that he (ay validly hold on thereto until6ie Abella pays his obligations.

4etitioner (aintains that even if 6ie Abella were not the owner ofthe tractor, a principal-agent relationship (ay be i(plied between6ie Abella and private respondent. Fe contends that the latter failedto repudiate the alleged agency, nowing that his son is acting on hisbehalf without authority when he pledged the tractor to petitioner.4etitioner argues that, under Article *#** of the Civil Code, private

respondent is bound by the pledge, even if it were beyond theauthority of his son to pledge the tractor, since he allowed his son toact as though he had full powers.

?n the other hand, private respondent asserts that respondent courthad correctly ruled on the (atter.

n a contract of pledge, the creditor is given the right to retain hisdebtors (ovable property in his possession, or in that of a thirdperson to who( it has been delivered, until the debt is paid. 7or thecontract to be valid, it is necessary that ;*> the pledge is constitutedto secure the fulll(ent of a principal obligation= ;0> the pledgor bethe absolute owner of the thing pledged= and ;"> the personconstituting the pledge has the free disposal of his property, and inthe absence thereof, that he be legally authoried for the purpose.0

As found by the trial court and a'r(ed by respondent court, thepledgor in this case, 6ie Abella, was not the absolute owner of thetractor that was allegedly pledged to petitioner. )he tractor wasowned by his father, private respondent, who left the euip(ent withhi( for safeeeping. Clearly, the second reuisite for a valid pledge,that the pledgor be the absolute owner of the property, is absent inthis case. Fence, there is no valid pledge.

Fe who is not the owner or proprietor of the propertypledged or (ortgaged to guarantee the fulll(ent of aprincipal obligation, cannot legally constitute such aguaranty as (ay validly bind the property in favor of hiscreditor, and the pledgee or (ortgagee in such a caseacuires no right whatsoever in the property pledged or(ortgaged."

)here also does not appear to be any agency in this case. Ee agree

with the Court of Appeals that

As indicated in Article *@:#, for an agency relationship tobe dee(ed as i(plied, the principal (ust now that anotherperson is acting on his behalf without authority. Fere,appellee categorically stated that the only purpose for hisleaving the sub+ect tractor in the care and custody of 6ieAbella was for safeeeping, and denitely not for hi( topledge or alienate the sa(e. f it were true that 6iepledged appeellees tractor to appellant, then 6ie wasacting not only without appellees authority but without thelatters nowledge as well.

Article *#**, on the other hand, (andates that the principalis solidarily liable with the agent if the for(er allowed thelatter to act as though he had full powers. Again, in view ofappellees lac of nowledge of 6ies pledging the tractor

without any authority fro( hi(, it stands to reason that thefor(er could not have allowed the latter to pledge thetractor as if he had full powers to do so.H

)here is liewise no valid deposit in this case. n a contract of deposit,a person receives an ob+ect belonging to another with the obligationof safely eeping it and of returning the sa(e.& 4etitioner hi(selfstates that he received the tractor not to safely eep it but as a for(of security for the pay(ent of 6ie Abellas obligations. )here is nodeposit where the principal purpose for receiving the ob+ect is notsafeeeping.:

Conseuently, petitioner had no right to refuse delivery of the tractorto its lawful owner. ?n the other hand, private respondent, as owner,

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *




had every right to see to repossess the tractor, including theinstitution of the instant action for replevin.1âwphi1.nêt

Ee do not here pass upon the other assign(ent of errors (ade bypetitioner concerning alleged irregularities in the raIe and dispositionof the case at the trial court. A petition for review on certiorari is notthe proper vehicle for such allegations.

4ERE/ORE* the instant petition is DENIED for lac of (erit, andthe decision of the Court of Appeals in CA-G.R. C !o. "#$%&is A//IRED# Costs against petitioner.

SO ORDERED#

"#R# N$# 16772 N$e3er 22* 2005

DEVE,OPENT AN9 O/ TE PI,IPPINES* 4etitioner,vs.PR.DENTIA, AN9* Respondent.

D 9 C 8 ? !

CORONA* J#:

Develop(ent Ban of the 4hilippines ;DB4> assails in this petition forreview on certiorari under Rule H& of the Rules of Court the Dece(ber*H, *### decision* and the June @, 0%%% resolution of the Court ofAppeals in CA-G.R. C !o. H&$@". )he challenged decision dis(issedDB4s appeal and a'r(ed the 7ebruary *0, *##* decision of theRegional )rial Court of 6aati, Branch *"$ in Civil Case !o. @@-#"* intoto, while the i(pugned resolution denied DB4s (otion forreconsideration for being pro forma.

n *#$", Kirag )e<tile 6ills, nc. ;Kite<> opened an irrevocableco((ercial letter of credit with respondent 4rudential Ban for58LH#@,%%%. )his was in connection with its i(portation of &,%%%spindles for spinning (achinery with drawing fra(e, si(ple< Myfra(e, ring spinning fra(e and various accessories, spare parts andtool gauge. )hese were released to Kite< under covering trustreceipts it e<ecuted in favor of 4rudential Ban. Kite< installed andused the ite(s in its te<tile (ill located in 6ontalban, Rial.

?n ?ctober *%, *#@%, DB4 granted a foreign currency loan in thea(ount of 58LH,@%$,&&* to Kite<. )o secure the loan, Kite< e<ecutedreal estate and chattel (ortgages on its plant site in 6ontalban, Rial,including the buildings and other i(prove(ents, (achineries andeuip(ents there. A(ong the (achineries and euip(ents(ortgaged in favor of DB4 were the articles covered by the trustreceipts.

8o(eti(e in June *#@0, 4rudential Ban learned about DB4s plan forthe overall rehabilitation of Kite<. n a July *H, *#@0 letter, 4rudentialBan notied DB4 of its clai( over the various ite(s covered by thetrust receipts which had been installed and used by Kite< in thete<tile (ill. 4rudential Ban infor(ed DB4 that it was the absolute and

+uridical owner of the said ite(s and they were thus not part of the(ortgaged assets that could be legally ceded to DB4.

7or the failure of Kite< to pay its obligation, DB4 e<tra-+udiciallyforeclosed on the real estate and chattel (ortgages, including thearticles clai(ed by 4rudential Ban. During the foreclosure sale heldon April *#, *#@", DB4 acuired the foreclosed properties as thehighest bidder.

8ubseuently, DB4 caused to be published in the 8epte(ber 0, *#@Hissue of the )i(es Journal an invitation to bid in the public sale to beheld on 8epte(ber *%, *#@H. t called on interested parties to sub(itbids for the sale of the te<tile (ill for(erly owned by Kite<, the landon which it was built, as well as the (achineries and euip(entstherein. Kearning of the intended public auction, 4rudential Banwrote a letter dated 8epte(ber :, *#@H to DB4 reasserting its clai(over the ite(s covered by trust receipts in its na(e and advisingDB4 not to include the( in the auction. t also de(anded the turn-over of the articles or alternatively, the pay(ent of their value.

An e<change of correspondences ensued between 4rudential Banand DB4. n reply to 4rudential Bans 8epte(ber :, *#@H letter, DB4reuested docu(ents to enable it to evaluate 4rudential Bans clai(.?n 8epte(ber 0@, *##H, 4rudential Ban provided DB4 the reuesteddocu(ents. )wo (onths later, 4rudential Ban followed up the statusof its clai(. n a letter dated Dece(ber ", *#@H, DB4 infor(ed4rudential Ban that its clai( had been referred to DB4s legaldepart(ent and instructed 4rudential Ban to get in touch with itschief legal counsel. )here being no concrete action on DB4s part,4rudential Ban, in a letter dated July "%, *#@&, (ade a nal de(andon DB4 for the turn-over of the contested articles or the pay(ent oftheir value. Eithout the nowledge of 4rudential Ban, however, DB4sold the Kite< te<tile (ill, as well as the (achineries and euip(entstherein, to Kyon )e<tile 6ills, nc. ;Kyon> on June @, *#@$.

8ince its de(ands re(ained unheeded, 4rudential Ban led aco(plaint for a su( of (oney with da(ages against DB4 with theRegional )rial Court of 6aati, Branch *"$, on 6ay 0H, *#@@. )heco(plaint was doceted as Civil Case !o. @@-#"*.

?n 7ebruary *0, *##*, the trial court decided0 in favor of 4rudentialBan. Applying the provisions of 4D **&, otherwise nown as the)rust Receipts Kaw, it ruled

Ehen 4R5D9!)AK BA!N released possession of the sub+ectproperties, over which it holds absolute title to K)9O upon the latters

e<ecution of the trust receipts, the latter was bound to hold saidproperties in trust for the for(er, and ;a> to sell or otherwise disposeof the sa(e and to turn over to 4R5D9!)AK BA!N the a(ount stillowing= or ;b> to return the goods if unsold. 8ince K)9O was allowed tosell the properties being clai(ed by 4R5D9!)AK BA!N, all the (orewas it authoried to (ortgage the sa(e, provided of course K)9Oturns over to 4R5D9!)AK BA!N all a(ounts owing. Ehen DB4, wellaware of the status of the properties, acuired the sa(e in the publicauction, it was bound by the ter(s of the trust receipts of which K)9Owas the entrustee. 8i(ply stated, DB4 held no better right than K)9O,and is thus bound to turn over whatever a(ount was due4R5D9!)AK BA!N. Being a trustee ex malecio of 4R5D9!)AKBA!N, DB4 is necessarily liable therefor. n fact, DB4 (ay well beconsidered as an agent of K)9O when the for(er sold the propertiesbeing clai(ed by 4R5D9!)AK BA!N, with the correspondingresponsibility to turn over the proceeds of the sa(e to 4R5D9!)AKBA!N." ;Citations o(itted>

)he dispositive portion of the decision read

EF9R97?R9, +udg(ent is hereby rendered ordering defendantD99K?469!) BA!N ?7 )F9 4FK44!98 to pay plainti1 4R5D9!)AKBA!N

a> 4",0:*,@"H.%%, as actual da(ages, with interest thereon co(putedfro( *% August *#@& until the entire a(ount shall have been fullypaid=

b> 4&%,%%%.%% as e<e(plary da(ages= and

c> *%P of the total a(ount due as and for attorneys fees.

8? ?RD9R9D.

Aggrieved, DB4 led an appeal with the Court of Appeals. Fowever,the appellate court dis(issed the appeal and a'r(ed the decision ofthe trial court in toto. t applied the provisions of 4D **& and held thatownership over the contested articles belonged to 4rudential Ban asentrustor, not to Kite<. Conseuently, even if Kite< (ortgaged theite(s to DB4 and the latter foreclosed on such (ortgage, DB4 wasduty-bound to turn over the proceeds to 4rudential Ban, being theparty that advanced the pay(ent for the(.

?n DB4s argu(ent that the disputed articles were not proper ob+ectsof a trust receipt agree(ent, the Court of Appeals ruled that the ite(swere part of the trust agree(ent entered into by and between4rudential Ban and Kite<. 8ince the agree(ent was not contrary tolaw, (orals, public policy, custo(s and good order, it was binding onthe parties.

6oreover, the appellate court found that DB4 was not a (ortgagee ingood faith. t also upheld the nding of the trial court that DB4 was atrustee ex malecio of 4rudential Ban over the articles covered bythe trust receipts.

DB4 led a (otion for reconsideration but the appellate court deniedit for being pro forma. Fence, this petition.

)rust receipt transactions are governed by the provisions of 4D **&which denes such a transaction as follows

8ection H. What constitutes a trust receipt transaction. Q A trustreceipt transaction, within the (eaning of this Decree, is anytransaction by and between a person referred to in this Decree as theentruster, and another person referred to in this Decree as entrustee,whereby the entruster, who owns or holds absolute title or security

interests over certain specied goods, docu(ents or instru(ents,releases the sa(e to the possession of the entrustee upon the latterse<ecution and delivery to the entruster of a signed docu(ent called atrust receipt wherein the entrustee binds hi(self to hold thedesignated goods, docu(ents or instru(ents in trust for the entrusterand to sell or otherwise dispose of the goods, docu(ents orinstru(ents with the obligation to turn over to the entruster theproceeds thereof to the e<tent of the a(ount owing to the entrusteror as appears in the trust receipt or the goods, docu(ents orinstru(ents the(selves if they are unsold or not otherwise disposedof, in accordance with the ter(s and conditions specied in the trustreceipt, or for other purposes substantially euivalent to any of thefollowing

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage 0

http://www.lawphil.net/judjuris/juri2005/nov2005/gr_143772_2005.html#fnt1









*. n the case of goods or docu(ents, ;a> to sell the goods or procuretheir sale= or ;b> to (anufacture or process the goods with thepurpose of ulti(ate sale 4rovided, )hat, in the case of goodsdelivered under trust receipt for the purpose of (anufacturing orprocessing before its ulti(ate sale, the entruster shall retain its titleover the goods whether in its original or processed for( until theentrustee has co(plied fully with his obligation under the trustreceipt= or ;c> to load, unload, ship or tranship or otherwise deal withthe( in a (anner preli(inary or necessary to their sale= or

0. n the case of instru(ents, ;a> to sell or procure their sale ore<change= or ;b> to deliver the( to a principal= or ;c> to e1ect the

consu((ation of so(e transactions involving delivery to a depositoryor register= or ;d> to e1ect their presentation, collection or renewal.

< < < < < < < < <

n a trust receipt transaction, the goods are released by the entruster;who owns or holds absolute title or security interests over the saidgoods> to the entrustee on the latters e<ecution and delivery to theentruster of a trust receipt. )he trust receipt evidences the absolutetitle or security interest of the entruster over the goods. As aconseuence of the release of the goods and the e<ecution of thetrust receipt, a two-fold obligation is i(posed on the entrustee,na(ely ;*> to hold the designated goods, docu(ents or instru(entsin trust for the purpose of selling or otherwise disposing of the( and;0> to turn over to the entruster either the proceeds thereof to thee<tent of the a(ount owing to the entruster or as appears in the trust

receipt, or the goods, docu(ents or instru(ents the(selves if theyare unsold or not otherwise disposed of, in accordance with the ter(sand conditions specied in the trust receipt. n the case of goods,they (ay also be released for other purposes substantially euivalentto ;a> their sale or the procure(ent of their sale= or ;b> their(anufacture or processing with the purpose of ulti(ate sale, in whichcase the entruster retains his title over the said goods whether intheir original or processed for( until the entrustee has co(plied fullywith his obligation under the trust receipt= or ;c> the loading,unloading, ship(ent or transship(ent or otherwise dealing with the(in a (anner preli(inary or necessary to their sale.H )hus, in a trustreceipt transaction, the release of the goods to the entrustee, on hise<ecution of a trust receipt, is essentially for the purpose of their saleor is necessarily connected with their ulti(ate or subseuent sale.

Fere, Kite< was not engaged in the business of selling spinning(achinery, its accessories and spare parts but in (anufacturing andproducing te<tile and various inds of fabric. )he articles were notreleased to Kite< to be sold. !or was the transfer of possessionintended to be a preli(inary step for the said goods to be ulti(atelyor subseuently sold. nstead, the conte(poraneous and subseuentacts of both Kite< and 4rudential Ban showed that the i(portedarticles were released to Kite< to be installed in its te<tile (ill andused in its business. DB4 itself was aware of this. )o support itsassertion that the contested articles were e<cluded fro( goods thatcould be covered by a trust receipt, it contended

/irst. )hat the chattels in controversy were procured by DB4s(ortgagor Kirag )e<tile 6ills ;K)9O> for theecl'sie 'se $; itstetile 3ills. )hey were &$t procured -

;a> to sell or otherwise procure their sale=

;b> to (anufacture or process the goods with the

purpose of ulti(ate sale.& ;e(phasis supplied>

Fence, the transactions between Kite< and 4rudential Ban wereallegedly not trust receipt transactions within the (eaning of 4D **&.t follows that, contrary to the decisions of the trial court and theappellate court, the transactions were not governed by the )rustReceipts Kaw.

Ee disagree.

)he various agree(ents between 4rudential Ban and Kite<co((only deno(inated as trust receipts were valid. As the Court of Appeals correctly ruled, their provisions did not contravene the law,(orals, good custo(s, public order or public policy.

)he agree(ents unifor(ly provided

Received, upon the )rust hereinafter (entioned fro( the 4R5D9!)AKBA!N ;hereinafter referred to as BA!N> the following goods and(erchandise, t<e =r$=ert $; said AN9 specied in the bill oflading as follows

A(ount of Bill Description of 8ecurity 6ars !os.

and in consideration thereof, I>4e <ere agree t$ <$ld saidg$$ds i& tr'st ;$r t<e AN9 a&d as its =r$=ertwith liberty to

sell the sa(e for its account but without authority to (ae any otherdisposition whatsoever of the said goods or any part thereof ;or theproceeds thereof> either by way of conditional sale, pledge, orotherwise.

< < < < < < < < <: ;9(phasis supplied>

)he articles were owned by 4rudential Ban and they were only heldby Kite< in trust. Ehile it was allowed to sell the ite(s, Kite< had noauthority to dispose of the( or any part thereof or their proceedsthrough conditional sale, pledge or any other (eans.

Article 0%@& ;0> of the Civil Code reuires that, in a contract of pledgeor (ortgage, it is essential that the pledgor or (ortgagor should bethe absolute owner of the thing pledged or (ortgaged. Article 0%@&;"> further (andates that the person constituting the pledge or(ortgage (ust have the free disposal of his property, and in theabsence thereof, that he be legally authoried for the purpose.

Kite< had neither absolute ownership, free disposal nor the authorityto freely dispose of the articles. Kite< could not have sub+ected the(to a chattel (ortgage. )heir inclusion in the (ortgage was void$ andhad no legal e1ect.@ )here being no valid (ortgage, there could alsobe no valid foreclosure or valid auction sale.# )hus, DB4 could not beconsidered either as a (ortgagee or as a purchaser in good faith.*%

!o one can transfer a right to another greater than what he hi(selfhas.** Nemo dat quod non habet . Fence, Kite< could not transfer aright that it did not have over the disputed ite(s. Corollarily, DB4could not acuire a right greater than what its predecessor-in-interesthad. )he spring cannot rise higher than its source.*0 DB4 (erelystepped into the shoes of Kite< as trustee of the i(ported articles withan obligation to pay their value or to return the( on 4rudential Bansde(and. By its failure to pay or return the( despite 4rudential Bansrepeated de(ands and by selling the( to Kyon without 4rudentialBans nowledge and confor(ity, DB4 beca(e a trustee exmalecio.

?n the (atter of actual da(ages ad+udged by the trial court anda'r(ed by the Court of Appeals, DB4 wants this Court to review theevidence presented during the trial and to reverse the factual ndingsof the trial court. )his Court is, however, not a trier of facts and it isnot its function to analye or weigh evidence anew.*" )he rule is thatfactual ndings of the trial court, when adopted and conr(ed by theCA, are binding and conclusive on this Court and generally will not be

reviewed on appeal.*H Ehile there are recognied e<ceptions to thisrule, none of the established e<ceptions nds application here.

Eith regard to the i(position of e<e(plary da(ages, the appellatecourt agreed with the trial court that the reuire(ents for the awardthereof had been su'ciently established. 4rudential Bansentitle(ent to co(pensatory da(ages was liewise a(ply proven. twas also shown that DB4 was aware of 4rudential Bans clai( asearly as July, *#@0. Fowever, it ignored the latters de(and, includedthe disputed articles in the (ortgage foreclosure and caused theirsale in a public auction held on April *#, *#@" where it was declaredas the highest bidder. )hereafter, in the series of co((unicationsbetween the(, DB4 gave 4rudential Ban the false i(pression that itsclai( was still being evaluated. Eithout acting on 4rudential Bansplea, DB4 included the contested articles a(ong the properties it soldto Kyon in June, *#@$. )he trial court found that this chain of eventsshowed DB4s fraudulent atte(pt to prevent 4rudential Ban fro(

asserting its rights. t s(aced of bad faith, if not deceit. )hus, theaward of e<e(plary da(ages was in order. Due to the award ofe<e(plary da(ages, the grant of attorneys fees was proper.*&

DB4s assertion that both the trial and appellate courts failed toaddress the issue of prescription is of no (o(ent. ts clai( that,under Article **H: ;*> of the Civil Code, 4rudential Bans cause ofaction had prescribed as it should be reconed fro( ?ctober *%,*#@%, the day the (ortgage was registered, is not correct. )he writtene<tra-+udicial de(and by the creditor interrupted the prescription ofaction.*: Fence, the four-year prescriptive period which DB4 insistsshould be counted fro( the registration of the (ortgage wasinterrupted when 4rudential Ban wrote the e<tra-+udicial de(andsfor the turn over of the articles or their value. n particular, the lastde(and letter sent by 4rudential Ban was dated July "%, *#@@ andthis was received by DB4 the following day. )hus, contrary to DB4sclai(, 4rudential Bans right to enforce its action had not yet

prescribed when it led the co(plaint on 6ay 0H, *#@@.

4ERE/ORE, the petition is hereby DENIED. )he Dece(ber *H,*### decision and June @, 0%%% resolution of the Court of Appeals inCA-G.R. C !o. H&$@" are A//IRED.

Costs against the petitioner.

"#R# N$# 11?7) /er'ar 1* 2000

CAVITE DEVE,OPENT AN9 a&d /AR EAST AN9 AND TR.STCOPAN+* petitioners,vs.

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SPO.SES C+R.S ,I a&d ,O,ITA CAN ,I a&d CO.RT O/APPEA,S* respondents.

ENDO@A* J.:

)his is a petition for review on certiorari of the decision* of the Courtof Appeals in C.A. GR C !o. H0"*& and the order dated Dece(ber #,*##$ denying petitioners (otion for reconsideration.

)he following facts are not in dispute.

4etitioners Cavite Develop(ent Ban ;CDB> and 7ar 9ast Ban and )rust Co(pany ;79B)C> are baning institutions duly organied ande<isting under 4hilippine laws. ?n or about June *&, *#@", a certainRodolfo Guansing obtained a loan in the a(ount of 4#%,%%%.%% fro(CDB, to secure which he (ortgaged a parcel of land situated at !o.:" Calavite 8treet, Ka Ko(a, Sueon City and covered by )C) !o."%%@%# registered in his na(e. As Guansing defaulted in the pay(entof his loan, CDB foreclosed the (ortgage. At the foreclosure sale heldon 6arch *&, *#@H, the (ortgaged property was sold to CDB as thehighest bidder. Guansing failed to redee(, and on 6arch 0, *#@$,CDB consolidated title to the property in its na(e. )C) !o. "%%@%# inthe na(e of Guansing was cancelled and, in lieu thereof, )C) !o."&&&@@ was issued in the na(e of CDB.1âwphi1.nêt

?n June *:, *#@@, private respondent Kolita Chan Ki(, assisted by abroer na(ed Re(edios Gatpandan, o1ered to purchase the propertyfro( CDB. )he written ?1er to 4urchase, signed by Ki( andGatpandan, states in part

Ee hereby o1er to purchase your property at T:" Calaviteand Retiro 8ts., Ka Ko(a, Sueon City for 4"%%,%%%.%% underthe following ter(s and conditions

;*> *%P ?ption 6oney=

;0> Balance payable in cash=

;"> 4rovided that the property shall be cleared ofillegal occupants or tenants.

4ursuant to the foregoing ter(s and conditions of the o1er, Ki( paidCDB 4"%,%%%.%% as ?ption 6oney, for which she was issued ?'cial

Receipt !o. "*:%, dated June *$, *#@@, by CDB. Fowever, after so(eti(e following up the sale, Ki( discovered that the sub+ect propertywas originally registered in the na(e of 4erfecto Guansing, father of(ortgagor Rodolfo Guansing, under )C) !o. #**H@. Rodolfosucceeded in having the property registered in his na(e under )C)!o. "%%@%#, the sa(e title he (ortgaged to CDB and fro( which thelatters title ;)C) !o. "&&&@@> was derived. t appears, however, thatthe father, 4erfecto, instituted Civil Case !o. S-"#$"0 in the Regional

)rial Court, Branch @", Sueon City, for the cancellation of his sonstitle. ?n 6arch 0", *#@H, the trial court rendered a decision0 restoring4erfectos previous title ;)C) !o. #**H@> and cancelling )C) !o."%%@%# on the ground that the latter was fraudulently secured byRodolfo. )his decision has since beco(e nal and e<ecutory.

Aggrieved by what she considered a serious (isrepresentation byCDB and its (other-co(pany, 79B)C, on their ability to sell thesub+ect property, Ki(, +oined by her husband, led on August 0#,

*#@# an action for specic perfor(ance and da(ages againstpetitioners in the Regional )rial Court, Branch #:, Sueon City, whereit was doceted as Civil Case !o. S-@#-0@:". ?n April 0%, *##%, theco(plaint was a(ended by i(pleading the Register of Deeds ofSueon City as an additional defendant.

?n 6arch *%, *##", the trial court rendered a decision in favor of theKi( spouses. t ruled that ;*> there was a perfected contract of salebetween Ki( and CDB, contrary to the latters contention that thewritten o1er to purchase and the pay(ent of 4"%,%%%.%% were (erelypre-conditions to the sale and still sub+ect to the approval of 79B)C=;0> perfor(ance by CDB of its obligation under the perfected contractof sale had beco(e i(possible on account of the *#@H decision inCivil Case !o. S-"#$"0 cancelling the title in the na(e of (ortgagorRodolfo Guansing= ;"> CDB and 79B)C were not e<e(pt fro( liabilitydespite the i(possibility of perfor(ance, because they could notcredibly disclai( nowledge of the cancellation of Rodolfo Guansings

title without the ad(itting their failure to discharge their duties to thepublic as reputable baning institutions= and ;H> CDB and 79B)C areliable for da(ages for the pre+udice caused against the Ki(s." Basedon the foregoing ndings, the trial court ordered CDB and 79B)C topay private respondents, +ointly and severally, the a(ount of4"%,%%%.%% plus interest at the legal rate co(puted fro( June *$,*#@@ until full pay(ent. t also ordered petitioners to pay privaterespondents, +ointly and severally, the a(ounts of 40&%,%%%.%% as(oral da(ages, 4&%,%%%.%% as e<e(plary da(ages, 4"%,%%%.%% asattorneys fees, and the costs of the suit.H

4etitioners brought the (atter to the Court of Appeals, which, on?ctober *H, *##$, a'r(ed in toto the decision of the Regional )rialCourt. 4etitioners (oved for reconsideration, but their (otion wasdenied by the appellate court on Dece(ber #, *##$. Fence, thispetition. 4etitioners contend that U

*. )he Fonorable Court of Appeals erred when it held thatpetitioners CDB and 79B)C were aware of the decision dated6arch 0", *#@H of the Regional )rial Court of Sueon City inCivil Case !o. S-"#$"0.

0. )he Fonorable Court of Appeals erred in orderingpetitioners to pay interest on the deposit of )FR)V

)F?58A!D 498?8 ;4"%,%%%.%%> by applying Article 00%# ofthe !ew Civil Code.

". )he Fonorable Court of Appeals erred in ordering

petitioners to pay (oral da(ages, e<e(plary da(ages,attorneys fees and costs of suit.

.

At the outset, it is necessary to deter(ine the legal relation, if any, ofthe parties.

4etitioners deny that a contract of sale was ever perfected betweenthe( and private respondent Kolita Chan Ki(. )hey contend thatKi(s letter-o1er clearly states that the su( of 4"%,%%%,%% was givenas option (oney, not as earnest (oney.& )hey thus conclude that thecontract between CDB and Ki( was (erely an option contract, not acontract of sale.

)he contention has no (erit. Contracts are not dened by the parries

thereto but by principles of law.:

n deter(ining the nature of acontract, the courts are not bound by the na(e or title given to it bythe contracting parties.$ n the case at bar, the su( of 4"%,%%%.%%,although deno(inated in the o1er to purchase as option (oney, isactually in the nature of earnest (oney or down pay(ent whenconsidered with the other ter(s of the o1er. n Carceler v . Court of

Appeals,@ we e<plained the nature of an option contract, vi . U

An option contract is a preparatory contract in which oneparty grants to the other, for a <ed period and underspecied conditions, the power to decide, whether or not toenter into a principal contract, it binds the party who hasgiven the option not to enter into the principal contract withany other person during the period= designated, and withinthat period, to enter into such contract with the one towho( the option was granted, if the latter should decide touse the option. t is a separate agree(ent distinct fro( the

contract to which the parties (ay enter upon theconsu((ation of the option.

An option contract is therefore a contract separate fro( andpreparatory to a contract of sale which, if perfected, does not result inthe perfection or consu((ation of the sale. ?nly when the option ise<ercised (ay a sale be perfected.

n this case, however, after the pay(ent of the *%P option (oney,the ?1er to 4urchase provides for the pay(ent only of the balance ofthe purchase price, i(plying that the option (oney for(s part ofthe purchase price. )his is precisely the result of paying earnest(oney under Art. *H@0 of the Civil Code. t is clear then that theparties in this case actually entered into a contract of sale, partiallyconsu((ated as to the pay(ent of the price. 6oreover, the followingndings of the trial court based on the testi(ony of the witnessesestablish that CDB accepted Ki(s o1er to purchase

t is further to be noted that CDB and 79B)C alreadyconsidered plainti1s o1er as good and no longer sub+ect toa nal approval. n his testi(ony for the defendants on7ebruary *", *##0, 79B)Cs Keo(ar Gu(an stated that hewas then in the Acuired Assets Depart(ent of 79B)Cwherein plainti1s o1er to purchase was endorsed thereto by6yoresco Abadilla, CDBs senior vice-president, with areco((endation that the necessary petition for writ ofpossession be led in the proper court= that thereco((endation was in accord with one of the conditions of the o1er, i.e., the clearing of the property of illegaloccupants or tenants ;tsn, p. *0>= that, in co(pliance withthe reuest, a petition for writ of possession was thereafterled on July 00, *#@@ ;9<hs. * and *-A>= that the o1er (etthe reuire(ents of the bans= and that no re+ection of theo1er was thereafter relayed to the plainti1s ;p. *$>= which

was not a nor(al procedure, and neither did the bansreturn the a(ount of 4"%,%%%.%% to the plainti1s.#

Given CDBs acceptance of Ki(s o1er to purchase, it appears that acontract of sale was perfected and, indeed, partially e<ecutedbecause of the partial pay(ent of the purchase price. )here is,however, a serious legal obstacle to such sale, rendering it i(possiblefor CDB to perfor( its obligation as seller to deliver and transferownership of the property.

Nemo dat quod non habet , as an ancient Katin (a<i( says. ?necannot give what one does not have. n applying this precept to acontract of sale, a distinction (ust be ept in (ind between theperfection and consu((ation stages of the contract.

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage H




A contract of sale is perfected at the (o(ent there is a (eeting of(inds upon the thing which is the ob+ect of the contract and upon theprice.*% t is, therefore, not reuired that, at the perfection stage, theseller be the owner of the thing sold or even that such sub+ect (atterof the sale e<ists at that point in ti(e.** )hus, under Art. *H"H of theCivil Code, when a person sells or alienates a thing which, at thatti(e, was not his, but later acuires title thereto, such title passes byoperation of law to the buyer or grantee. )his is the sa(e principlebehind the sale of future goods under Art. *H:0 of the Civil Code.Fowever, under Art. *H&#, at the ti(e of delivery or consu((ationstage of the sale, it is reuired that the seller be the owner of thething sold. ?therwise, he will not be able to co(ply with his obligation

to transfer ownership to the buyer. t is at the consu((ation stagewhere the principle of nemo dat quod non habet applies.

n !i"nos v . Court of Appeals,*0 the sub+ect contract of sale was heldvoid as the sellers of the sub+ect land were no longer the owners ofthe sa(e because of a prior sale.*" Again, in Nool v . Court of

Appeals,*H we ruled that a contract of repurchase, in which the sellerdoes not have any title to the property sold, is invalid

Ee cannot sustain petitioners view. Article *"$% of the CivilCode is applicable only to valid and enforceable contracts.

)he Regional )rial Court and the Court of Appeals rules thatthe principal contract of sale contained in 9<hibit C and theau<iliary contract of repurchase in 9<hibit D are both void.

)his conclusion of the two lower courts appears to ndsupport in !i"nos v . Court of Appeals, where the Court held

Be that as it (ay, it is evident that whenpetitioners sold said land to the Cabigas spouses,they were no longer owners of the sa(e and thesale is null and void.

n the present case, it is clear that the sellers no longer hadany title to the parcels of land at the ti(e of sale. 8ince9<hibit D, the alleged contract of repurchase, wasdependent on the validity of 9<hibit C, it is itself void. A voidcontract cannot give rise to a valid one. erily, Article *H00of the Civil Code provides that ;a> contract which is thedirect result of a previous illegal contract, is also void andine<istent.

Ee should however add that Dignos did not cite its basis forruling that a sale is null and void where the sellers were

no longer the owners of the property. 8uch a situation;where the sellers were no longer owners> does not appearto be one of the void contracts enu(erated in Article *H%#of the Civil Code. 6oreover, the Civil Code itself recognies asale where the goods are to be acuired . . . by the sellerafter the perfection of the contract of sale, clearly i(plyingthat a sale is possible even if the seller was not the owner atthe ti(e of sale, provided he acuires title to the propertylater on.

n the present case, however, it is liewise clear that thesellers can no longer deliver the ob+ect of the sale to thebuyers, as the buyers the(selves have already acuiredtitle and delivery thereof fro( the rightful owner, the DB4.

)hus, such contract (ay be dee(ed to be inoperative and(ay thus fall, by analogy, under ite( !o. & of Article *H%#of the Civil Code )hose which conte(plate an i(possible

service. Article *H&# of the Civil Code provides that thevendor (ust have a right to transfer the ownership thereof2sub+ect of the sale3 at the ti(e it is delivered. Fere,delivery of ownership is no longer possible. t has beco(ei(possible.*&

n this case, the sale by CDB to Ki( of the property (ortgaged in*#@" by Rodolfo Guansing (ust, therefore, be dee(ed a nullity forCDB did not have a valid title to the said property. )o be sure, CDBnever acuired a valid title to the property because the foreclosuresale, by virtue of which, the property had been awarded to CDB ashighest bidder, is liewise void since the (ortgagor was not theowner of the property foreclosed.

A foreclosure sale, though essentially a forced sale, is still a sale inaccordance with Art. *H&@ of the Civil Code, under which the(ortgagor in default, the forced seller, beco(es obliged to transfer

the ownership of the thing sold to the highest bidder who, in turn, isobliged to pay therefor the bid price in (oney or its euivalent. Beinga sale, the rule that the seller (ust be the owner of the thing soldalso applies in a foreclosure sale. )his is the reason Art. 0%@&*: of theCivil Code, in providing for the essential reuisites of the contract of(ortgage and pledge, reuires, a(ong other things, that the(ortgagor or pledgor be the absolute owner of the thing pledged or(ortgaged, in anticipation of a possible foreclosure sale should the(ortgagor default in the pay(ent of the loan.

)here is, however, a situation where, despite the fact that the(ortgagor is not the owner of the (ortgaged property, his title beingfraudulent, the (ortgage contract and any foreclosure sale arisingtherefro( are given e1ect by reason of public policy. )his is thedoctrine of the (ortgagee in good faith based on the rule that all

persons dealing with property covered by a )orrens Certicate of )itle,as buyers or (ortgagees, are not reuired to go beyond what appearson the face of the title.*$ )he public interest in upholding theindefeasibility of a certicate of title, as evidence of the lawfulownership of the land or of any encu(brance thereon, protects abuyer or (ortgagee who, in good faith, relied upon what appears onthe face of the certicate of title.

)his principle is cited by petitioners in clai(ing that, as a (ortgageeban, it is not reuired to (ae a detailed investigation of the historyof the title of the property given as security before accepting a(ortgage.

Ee are not convinced, however, that under the circu(stances of thiscase, CDB can be considered a (ortgagee in good faith. Ehilepetitioners are not e<pected to conduct an e<haustive investigationon the history of the (ortgagors title, they cannot be e<cused fro(the duty of e<ercising the due diligence reuired of baninginstitutions. n #omas v . #omas,*@ we noted that it is standard practicefor bans, before approving a loan, to send representatives to thepre(ises of the land o1ered as collateral and to investigate who arereal owners thereof, noting that bans are e<pected to e<ercise (orecare and prudence than private individuals in their dealings, eventhose involving registered lands, for their business is a1ected withpublic interest. Ee held thus

Ee, indeed, nd (ore weight and vigor in a doctrine whichrecognies a better right for the innocent original registered

owner who obtained his certicate of title through perfectlylegal and regular proceedings, than one who obtains hiscerticate fro( a totally void one, as to prevail over +udicialpronounce(ents to the e1ect that one dealing with aregistered land, such as a purchaser, is under no obligationto loo beyond the certicate of title of the vendor, for in thelatter case, good faith has yet to be established by thevendee or transferee, being the (ost essential condition,coupled with valuable consideration, to entitle hi( torespect for his newly acuired title even as against theholder of an earlier and perfectly valid title. #here mi"ht becircumstances apparent on the face of the certicate of titlewhich could excite suspicion as to prompt inquir$% such aswhen the transfer is not b$ virtue of a voluntar$ act of theori"inal re"istered owner% as in the instant case% where itwas b$ means of a self&executed deed of extra&'udicialsettlement% a fact which should be noted on the face of(usebia #omas certicate of title. 7ailing to (ae such

inuiry would hardly be consistent with any pretense ofgood faith, which the appellant ban invoes to clai( theright to be protected as a (ortgagee, and for the reversal of the +udg(ent rendered against it by the lower court.*#

n this case, there is no evidence that CDB observed its duty ofdiligence in ascertaining the validity of Rodolfo Guansings title. tappears that Rodolfo Guansing obtained his fraudulent title bye<ecuting an 9<tra-Judicial 8ettle(ent of the 9state Eith Eaiverwhere he (ade it appear that he and 4erfecto Guansing were the onlysurviving heirs entitled to the property, and that 4erfecto had waivedall his rights thereto. )his self-e<ecuted deed should have placed CDBon guard against any possible defect in or uestion as to the(ortgagors title. 6oreover, the alleged ocular inspection report0% byCDBs representative was never for(ally o1ered in evidence. ndeed,petitioners ad(it that they are aware that the sub+ect land was beingoccupied by persons other than Rodolfo Guansing and that said

persons, who are the heirs of 4erfecto Guansing, contest the title ofRodolfo.0*

.

)he sale by CDB to Ki( being void, the uestion now arises as to who,if any, a(ong the parties was at fault for the nullity of the contract.Both the trial court and the appellate court found petitioners guilty offraud, because on June *:, *#@@, when Ki( was ased by CDB to paythe *%P option (oney, CDB already new that it was no longer theowner of the said property, its title having beencancelled.00 4etitioners contend that ;*> such nding of the appellatecourt is founded entirely on speculation and con+ecture= ;0> neitherCDB nor 79B)C was a party in the case where the (ortgagors titlewas cancelled= ;"> CDB is not privy to any proble( a(ong theGuansings= and ;H> the nal decision cancelling the (ortgagors titlewas not annotated in the latters title.

As a rule, only uestions of law (ay be raised in a petition for review,e<cept in circu(stances where uestions of fact (ay be properlyraised.0" Fere, while petitioners raise these factual issues, they havenot su'ciently shown that the instant case falls under any of thee<ceptions to the above rule. Ee are thus bound by the ndings offact of the appellate court. n any case, we are convinced ofpetitioners negligence in approving the (ortgage application ofRodolfo Guansing.

.

Ee now co(e to the civil e1ects of the void contract of sale betweenthe parties. Article *H*0;0> of the Civil Code provides

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage &




f the act in which the unlawful or forbidden cause consistsdoes not constitute a cri(inal o1ense, the following rulesshall be observed

< < < < < < < < <

;0> Ehen only one of the contracting parties is at fault, hecannot recover what he has given by reason of the contract,or as for the fulll(ent of what has been pro(ised hi(.

)he other, who is not at fault, (ay de(and the return ofwhat he has given without any obligation to co(ply with his

pro(ise.

4rivate respondents are thus entitled to recover the 4"%,%%%,%%option (oney paid by the(. 6oreover, since the ling of the actionfor da(ages against petitioners a(ounted to a de(and byrespondents for the return of their (oney, interest thereon at thelegal rate should be co(puted fro( August 0#, *#@#, the date ofling of Civil Case !o. S-@#-0@:", not June *$, *#@@, when petitionersaccepted the pay(ent. )his is in accord with our ruling inCastillov . Abala$an0H that in case of avoid sale, the seller has no rightwhatsoever to eep the (oney paid by virtue thereof and shouldrefund it, with interest at the legal rate, co(puted fro( the date ofling of the co(plaint until fully paid. ndeed, Art. *H*0;0> whichprovides that the non-guilty party (ay de(and the return of what hehas given clearly i(plies that without such prior de(and, theobligation to return what was given does not beco(e legallyde(andable.

Considering CDBs negligence, we sustain the award of (oralda(ages on the basis of Arts. 0* and 00*# of the Civil Code and ourruling in #an v . Court of Appeals0& that (oral da(ages (ay berecovered even if a bans negligence is not attended with (alice andbad faith. Ee nd, however, that the su( of 40&%,%%%.%% awarded bythe trial court is e<cessive. 6oral da(ages are only intended toalleviate the (oral su1ering undergone by private respondent, not toenrich the( at the e<penses of the petitioners.0: Accordingly, theaward of (oral da(ages (ust be reduced to 4&%,%%%.%%.

Kiewise, the award of 4&%,%%%.%% as e<e(plary da(ages, although +ustied under Art. 00"0 of the Civil Code, is e<cessive and should bereduced to 4"%,%%%.%%. )he award of 4"%,%%%.%% attorneys feesbased on Art. 00%@, pars. *, 0, & and ** of the Civil Code shouldsi(ilarly be reduced to 40%,%%%.%%.

EF9R97?R9, the decision of the Court of Appeals is A77R69D withthe 6?D7CA)?! as to the award of da(ages as abovestated.1âwphi1.nêt

8? ?RD9R9D.

)ellosillo% *uisumbin"% )uena and !e +eon% ,r.% ,,.% concur.

"#R# N$# 128??) Oct$er 6* 2002

AERTA VDA# DE %A+E*a&d <er c<ildre& a&d>$r <eirs $; t<e late "RACIANO %A+E*&a3el: 4I,/REDO* ARCIA,* AN.E,* ANTONIO* all

s'r&a3ed %A+Et<e <eirs $; DOINADOR %A+E* &a3el: S.PREA (s'rii&gs=$'se! a&d <is c<ildre&* &a3el: ARANDO* NICANOR*@ENAIDA* CATERINE* ROSA,INE* DORIS* VIC9+ a&d ARI,+N*all s'r&a3ed %A+Ea&d t<e <eirs $; t<e late NI,IE %A+E SANCE@* &a3el*INOCENCIO SANCE@ (s'rii&g s=$'se! a&d <er c<ildre&:E,SA* CONCEPCION* C,EO/E* A,E%ANDRO* E/REN a&dACRINA* all s'r&a3ed SANCE@a&d /,ORA %A+E RAVANES* assisted <er <'sa&d* CESARRAVANES* petitioners,vs.ON# CO.RT O/ APPEA,S* SIBTEENT DIVISION* CE.ASIANCARS INC#*"EOR"E NERI* CONNIE NERI* 4I,,IA ,EON" 9OC ,EE*ED.ARD %AES ,EE* ROERTO .+ 9I* AND CAR,ES .+9I1 ETROPO,ITAN AN9 AND TR.ST COPAN+* RENE NATIVIDADAND>OR %ON DOE i& s'stit'ti$& $; ABIO

PERE@

*s'ed i& <is ca=acit as Cit S<eri $; a&da'eCit* respondents.

D 9 C 8 ? !

.IS.IN"* J.:

)his petition assails the decision0 dated 8epte(ber *#, *##:, of theCourt of Appeals in CA-G.R. C !o. H:H#: and its resolution" dated7ebruary 0*, *##$, denying the (otion for reconsideration. 8aiddecision had a'r(ed that of the Regional )rial Court of Cebu City,Branch *&, in Civil Case !o. C9B-0*":# for Annul(ent of Contract andDa(ages with 4rayer for the ssuance of 4reli(inary n+unction. H

)he following facts are borne by the records

)he spouses Graciano and 6a(erta Jay(e are the registered ownersof Kot 0$%%, situated in the 6unicipality of 6andaue ;now 6andaue

City>, Cebu, consisting of 0,&:@ s.(. and covered by )ransferCerticate of )itle !o. @0#%.

?n January @, *#$", they entered into a Contract of Kease& withGeorge !eri, president of Airland 6otors Corporation ;now CebuAsiancars nc.>, covering one-half of Kot 0$%%. )he lease was fortwenty ;0%> years.

)he ter(s and conditions of the lease contract: stipulated that CebuAsiancars nc. ;hereafter, Asiancars> (ay use the leased pre(ises asa collateral to secure pay(ent of a loan which Asiancars (ay obtainfro( any ban, provided that the proceeds of the loan shall be usedsolely for the construction of a building which, upon the ter(ination of the lease or the voluntary surrender of the leased pre(ises before thee<piration of the contract, shall auto(atically beco(e the property ofthe Jay(e spouses ;the lessors>.

A 8pecial 4ower of Attorney$ dated January 0:, *#$H, was e<ecuted infavor of respondent George !eri, who used the lot to secure a loan of4"%%,%%% fro( the General Ban and )rust Co(pany. )he loan wasfully paid on August *H, *#$$.@

n ?ctober *#$$, Asiancars obtained a loan of 4:,%%%,%%% fro( the6etropolitan Ban and )rust Co(pany ;6B)C>. )he entire Kot 0$%%was o1ered as one of several properties given as collateral for theloan. As (ortgagors, the spouses signed a Deed of Real 9state6ortgage# dated !ove(ber 0*, *#$$ in favor of 6B)C. t stated thatthe deed was to secure the pay(ent of a loan obtained by Asiancarsfro( the ban.

)o assure the Jay(e spouses, !eri and the other o'cers of Asiancars,na(ely Benny Kiongben Kee, Eillia( Keong Noc Kee, Connie 5. !eri,9dward Ja(es Kee, Roberto 5yi( and Charles 4. 5yi(, e<ecuted an

undertaing

*%

dated !ove(ber $, *#$$. n it they pro(ised, in theirpersonal capacities andWor in representation of Cebu Asiancars, nc.,to co(pensate 6r. 6rs. Graciano Jay(e for any and all or whateverda(age they (ay sustain or su1er by virtue and arising out of the(ortgage to 6B)C of the aforestated parcel of land.** n addition,!eri wrote a letter dated 8epte(ber *, *#@* *0 addressed to 6a(erta

Jay(e acnowledging her condence and help e<tended to hi(, hisfa(ily and Asiancars. Fe pro(ised to pay their indebtedness to 6B)Cbefore the loan was due.

6eeting nancial di'culties and incurring an outstanding balance onthe loan, Asiancars conveyed ownership of the building on the leasedpre(ises to 6B)C, by way of dacion en pago.*" )he building wasvalued at 4#@%,%%% and the a(ount was applied as partial pay(entfor the loan. )here still re(ained a balance of 40,#H0,HH#.::, whichAsiancars failed to pay.

9ventually, 6B)C e<tra+udicially foreclosed the (ortgage. A publicauction was held on 7ebruary H, *#@*. 6B)C was the highest bidderfor 4*,%:$,"HH."&. A certicate of sale was issued and was registeredwith the Register of Deeds on 7ebruary 0", *#@*.

6eanwhile, Graciano Jay(e died, survived by his widow 6a(erta andtheir children. As a result of the foreclosure, Gracianos heirs led acivil co(plaint,*H in January of *#@0, for Annul(ent of Contract withDa(ages with 4rayer for ssuance of 4reli(inary n+unction, againstrespondent Asiancars, its o'cers and incorporators and 6B)C. Kater,in *###, 6a(erta Jay(e also passed away.

4etitioners clai( that !eri and Asiancars did not tell the( that theindebtedness secured by the (ortgage was for 4:,%%%,%%% and thatthe security was the whole of Kot 0$%%. 4etitioners allege that thedeed presented to the Jay(e spouses was in blan, withoute<planation on the stipulations contained therein, e<cept that its

conditions were identical to those of the stipulations when they(ortgaged half the lots area previously with General Ban.4etitioners also alleged that the Jay(e spouses were illiterate andonly new how to sign their na(es. )hat because they did not nowhow to read nor write, and had given their full trust and condence toGeorge !eri, the spouses were deceived into signing the Deed of Real9state 6ortgage. )heir intention as well as consent was only to bebound as guarantors.

Respondents deny that any fraud was e(ployed, nor was there asche(e to (ae the spouses sign as (ortgagors instead ofguarantors. )hey aver that the spouses were fully advised andco(pensated for the use of their property as collateral with 6B)C=that they voluntarily signed the deed of (ortgage upon the reuest of George !eri, who( they previously trusted and who fullled his

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage :




pro(ise to pay the loan to General Ban and who obtained therelease of the sa(e property by faithfully paying his indebtednesswith General Ban.

After trial, the R)C rendered a decision, disposing as follows

EF9R97?R9, in view of the foregoing evidences, argu(ents andconsiderations, this Court hereby renders +udg(ent as follows

*. Declaring the Real 9state 6ortgage e<ecuted by the Jay(es in favor of 6etroban as valid and binding=

0. Declaring the 5ndertaing e<ecuted by George !eri,Benny Keongben Kee already deceased, Eillia( Keong Noc,Connie 5. !eri, 9dward Ja(es Kee, Roberto 5yi(, andCharles 4. 5yi( on !ove(ber $, *#$$ to be valid andbinding as well upon the signatories thereof=

". Allowing the Jay(es to redee( the (ortgaged property,Kot 0$%% covered by )C) @0#% of the Register of Deeds of6andaue City for the a(ount of 40,#H0,HH@.:: plus interestat the rate of :P per annu( within ninety ;#%> days fro(date of nality of this +udg(ent until paid. Fowever, if theplainti1s fail to redee( said property, then let a Certicateof 8aleWdenite Deed of 8ale be issued in favor of6etropolitan Ban and )rust Co. covering said Kot 0$%%=

H. Folding the defendants George !eri, Eillia( Keong Noc,Connie 5. !eri, 9dward Ja(es Kee, Roberto 5yi(, andCharles 5yi( +ointly liable on their 5ndertaing dated!ove(ber $, *#$$ as they are hereby reuired to rei(bursethe Jay(es the a(ount that the Jay(es will pay to6etropolitan Ban and )rust Co. for the rede(ption=

&. Reuiring the defendants George !eri, Eillia( Keong Noc,Connie 5. !eri, 9dward Ja(es Kee, Roberto 5yi( andCharles 5yi( to pay +ointly attorneys fees to the Jay(es inthe a(ount of 4&%,%%%.%%=

:. Reuiring the defendants George !eri, Eillia( Keong Noc,Connie 5. !eri, 9dwards Ja(es Kee, Roberto 5yi( andCharles 5yi( to pay +ointly the cost of this suit.

8? ?RD9R9D.*&

4etitioners and respondent 6B)C elevated the case to the Court ofAppeals, which a'r(ed the ruling of the R)C, with (odicationsstated in this wise

*. Declaring valid and binding the Real 9state 6ortgagee<ecuted by plainti1s in favor of defendant 6B)C=

0. Declaring valid the foreclosure of the (ortgage and theforeclosure sale=

". Declaring that the period to redee( Kot 0$%% had e<piredon 7ebruary 0", *#@0 without plainti1s redee(ing it=

H. ?rdering the 8heri1 of 6andaue City to issue a denite

Deed of 8ale covering Kot 0$%% in favor of defendant 6B)C=

&. Declaring valid and binding the dacion en pago e<ecutedby defendant Asiancars in favor of defendant 6B)C=

:. Declaring defendant 6B)C as owner of the building on Kot0$%%=

$. ?rdering defendant 6B)C to pay to plainti1s the a(ountof 4#0,%@"."" for the use of the land fro( Dece(ber *@,*#@* to 7ebruary 0", *#@0, with si< percent ;:P> interestper annu( until paid=

@. ?rdering defendant Asiancars, !eris, 5yi(s, Kee and Nocto pay +ointly and severally the plainti1s the ;a> actual valueof the lot in the a(ount of 4",@&0,%%%.%%= ;b> 4H%%,%%%.%%

(oral da(ages= ;c> 4*&%,%%%.%% e<e(plary da(ages and4*%%,%%%.%% attorneys fee, all with si< percent ;:P> interestper annu( until fully paid=

#. Cost against defendants Asiancars, !eris, 5yi(s, Keeand Noc.

8? ?RD9R9D.*:

4etitioners led a (otion for reconsideration, which the CA denied.Fence, this petition which assigns the following errors

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)FA) )F9 8O ;:> 6KK?! !D9B)9D!988 ?7 C9B5 A8A!CAR8 EA8?9R4AD, )F58 6B)C AK8? ?KA)9D AR)8. 0*H0, CK C?D9 ?7

)F9 4FK44!98=

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ACA)9 )F9 4R96898 54?! )F9 )9R6!A)?! ?7 )F9 C?!)RAC)?7 K9A89 ?! JA!5ARV #, *##" 45R85A!) )? 9OF. C, A!DKN9E89 4AV R9!)AK )F9R9A7)9R, 7?R )8 589 A) 4#:,"%%.%%6?!)FKV 5!)K 6B)C AC)5AKKV ACA)98 )F9 4R96898.*$

?n 6arch *", 0%%0, the Court set a hearing on this petition, andparties were given thirty days for si(ultaneous sub(ission of theirrespective (e(oranda. 4etitioners additionally sub(ittedreplyWre+oinder and respondent 6B)C also sub(itted its re+oinder Qsur-re+oinder.

)wo (ain issues are for our resolution. 7irst, whether or not the R96should be annulled on the ground of vitiated consent= and second,whether or not the dacion en pago by Asiancars in favor of 6B)C isvalid and binding despite the stipulation in the lease contract thatownership of the building will vest on the Jay(es at the ter(ination of

the lease.

)he facts show that the spouses a'<ed their signature on the Deed of Real 9state 6ortgage, in the presence of two instru(ental witnesses,and duly notaried by Atty. Rodolfo V. Cabrera. As a notarieddocu(ent, it has in its favor the presu(ption of regularity, and tooverco(e this presu(ption, there (ust be evidence that is clear,convincing and (ore than (erely preponderant that there wasirregularity in its e<ecution= otherwise, the docu(ent should beupheld.*@

)he Deed of Real 9state 6ortgage entered into by the Jay(e spousespartae of a )hird 4arty 6ortgage under Art. 0%@& ;"> of the CivilCode which reads

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage $




)he following reuisites are essential to the contracts of pledge and(ortgage <<< ;"> )hat the persons constituting the pledge or(ortgage have the free disposal of their property, and in the absencethereof, that they be legally authoried for the purpose.

)hird persons who are not parties to the principal obligation (aysecure the latter by pledging or (ortgaging their own property.

n the case of Kustan vs. CA, et al.,*# this Court recognied theabovecited provision and held that so long as valid consent wasgiven, the fact that the loans were solely for the benet of ;the

debtor> would not invalidate the (ortgage with respect to petitionersproperty. n consenting thereto even granting that petitioner (ay notbe assu(ing personal liability for the debt, her property shallnevertheless secure and respond for the perfor(ance of the principalobligation.

Clearly, the law recognies instances when persons not directlyparties to a loan agree(ent (ay give as security their own propertiesfor the principal transaction. n this case, the spouses should not beallowed to disclai( the validity of a transaction they voluntarily andnowingly entered into for the si(ple reason that such transactionturned out pre+udicial to the( later on.

Both the trial and appellate courts found that no fraud attended thee<ecution of the deed of (ortgage. )his is a factual nding that bindsthis Court. 7urther, the records clearly show that the spouses Jay(eagreed to use their property as collateral for !eris loan because !eri

had their full trust and condence. 6a(erta herself testied that sheand her husband were assured by !eris pro(ise that he would taefull responsibility for whatever happens to the property of the spousesand that he would co(ply with his obligations to the ban.0%

)he spouses were assisted by their own lawyer, Atty. Cirilo 8anche,in all their transactions, including the ones with Asiancars and 6B)C.Atty. 8anche even signed as an instru(ental witness to a 8pecial4ower of Attorney e<ecuted by the spouses in favor of !eri,authoriing the latter to (ortgage the sa(e property to 6B)C.Although the said 84A was eventually not used because 6B)Creuired that the spouses the(selves e<ecute the R96, still, the factre(ains that the spouses were already set on allowing the (ortgage.n addition, we note that !elia 8anche, the daughter of the spousesand one of the petitioners herein, ad(itted that their parentsconsulted her and her siblings before their parents e<ecuted theDeed.0*

Eith the assistance of a lawyer and consultation with their literatechildren, the spouses though illiterate could not feign ignorance of thestipulations in the deed. 4atently, theirs was not a vitiated consent. tcould not now be +ustiably asserted by petitioners that the Jay(espouses only intended to be bound as guarantors and not as(ortgagors.

n this +urisdiction, when the property of a third person which hasbeen e<pressly (ortgaged to guarantee an obligation to which thesaid person is a stranger, said property is directly and +ointly liable forthe fulll(ent thereof, in the sa(e (anner as the (ortgagedproperty of the debtor hi(self.00

n the case at bar, when Asiancars failed to pay its obligations with6B)C, the properties given as security ;one of the( being the landowned by the Jay(es> beca(e sub+ect to foreclosure. Ehen severalthings are given to secure the sa(e debt in its entirety, all of the(are liable for the debt, and the creditor does not have to divide hisaction by distributing the debt a(ong the various things pledged or(ortgaged. 9ven when only a part of the debt re(ains unpaid, all thethings are liable for such balance.0"

At the ti(e of the foreclosure, Asiancars had a re(aining balance of40,%*%,:"".0@. )hus, 6B)C had every right to e1ect the e<tra+udicialforeclosure of the (ortgaged properties to satisfy its clai(.

)he appellate court found that the spouses lost their right to redee(their property. 5nder 8ection $@ of the General Baning Act then inforce,0H the (ortgagor or debtor whose real property has beenforeclosed and sold at public auction, has the right to redee( theproperty within one year fro( the sale of the real estate as a result ofthe foreclosure. )he reconing date in the case of a registered land is

fro( the date of registration of the certicate of sale.0&

f norede(ption is ti(ely (ade, the buyer in a foreclosure sale beco(esthe absolute owner of the property purchased.0: n this case, thecerticate of sale was registered on 7ebruary 0", *#@*, givingpetitioners until 7ebruary 0", *#@0 to redee( the property. )his theyfailed to do, hence, ownership of the property already vested in thepurchaser, private respondent 6B)C.

6uch as we sy(pathie with petitioners plight, we are unable to nd(erit in their plea for the annul(ent of the deed of sale covering Kot0$%% as a result of foreclosure of (ortgage. 4etitioners failed to showthe reuired uantu( of evidence that they were fraudulently (adeto sign as (ortgagors. As early as ales v. illa, "& 4hil. $:# ;*#*:>,this Court has sounded a note of warning to litigants

/)he law furnishes no protection to the inferior si(ply because he isinferior any (ore than it protects the strong because he is strong. )helaw furnishes protection to both alie Q to one no (ore or less thanthe other. t (aes no distinction between the wise and the foolish,the great and the s(all, the strong and the wea. )he foolish (aylose all they have to the wise= but that does not (ean that the lawwill give it bac to the( again. Courts cannot follow one every step of his life and e<tricate hi( fro( bad bargains, protect hi( fro( unwiseinvest(ents, relieve hi( fro( one-sided contracts, or annul thee1ects of foolish acts.0$

4etitioners however, are not without recourse for the loss of their

property. Although they cannot go after respondent 6B)C, they havein their favor the undertaing e<ecuted by George !eri and other(e(bers of his fa(ily. )he undertaing also bound respondentAsiancars, as well as its o'cers who were signatories to the aforesaid5ndertaing, to rei(burse petitioners for the da(ages they su1eredby reason of the (ortgage.

)he alienation of the building by Asiancars in favor of 6B)C for thepartial satisfaction of its indebtedness is, in our view, also valid. )heownership of the building had been e1ectively in the na(e of thelessee-(ortgagor ;Asiancars>, though with the provision that saidownership be transferred to the Jay(es upon ter(ination of the leaseor the voluntary surrender of the pre(ises. )he lease was constitutedon January @, *#$" and was to e<pire 0% years thereafter, or on

January @, *##". )he alienation via dacion en pago was (ade byAsiancars to 6B)C on Dece(ber *@, *#@%, during the subsistence ofthe lease. At this point, the (ortgagor, Asiancars, could validly

e<ercise rights of ownership, including the right to alienate it, as it didto 6B)C.

Dacion en pago is the delivery and trans(ission of ownership of athing by the debtor to the creditor as an accepted euivalent of theperfor(ance of the obligation.0@ t is a special (ode of pay(entwhere the debtor o1ers another thing to the creditor who accepts itas euivalent of pay(ent of an outstanding debt. )he undertaingreally partaes in one sense of the nature of sale, that is the creditoris really buying the thing or property of the debtor, pay(ent for whichis to be charged against the debtors debt. As such, the essentialele(ents of a contract of sale, na(ely, consent, ob+ect certain, andcause or consideration (ust be present. n its (odern concept, whatactually taes place in dacion en pago is an ob+ective novation of theobligation where the thing o1ered as an accepted euivalent of theperfor(ance of an obligation is considered as the ob+ect of thecontract of sale, while the debt is considered as the purchase price. n

any case, co((on consent is an essential prereuisite, be it sale ornovation, to have the e1ect of totally e<tinguishing the debt orobligation.0#

Ee also nd that the Court of Appeals did not err in considering 6B)Cas a purchaser in good faith. 6B)C had no nowledge of thestipulation in the lease contract. Although the sa(e lease wasregistered and duly annotated on the certicate of title of Kot 0$%%,6B)C was charged with constructive nowledge only of the fact oflease of the land and not of the specic provision stipulating transferof ownership of the building to the Jay(es upon ter(ination of thelease. )here was no annotation on the title of anyencu(brance."% Ehile the alienation was in violation of the stipulationin the lease contract between the Jay(es and Asiancars, 6B)Cs ownrights could not be pre+udiced by Asiancars actions unbenownst to6B)C. )hus, the transfer of the building in favor of 6B)C was properlyheld valid and binding by respondent Court of Appeals.

?ne point, however, has to be cleared. )he appellate court ordered6B)C to pay rentals to petitioners at the rate of 40&.%% (onthly persuare (eter. 7or the Asiancars building stood on the lot owned bythe petitioners, until the ti(e 6B)C also consolidated its ownershipover the lot. Rentals would have to be paid starting on Dece(ber *@,*#@%, when the buildings ownership was transferred to 6B)C, until7ebruary 0", *#@0, when 6B)C nally consolidated its ownership overKot 0$%%. Fence, we agree that there was error in the co(putation ofrentals by the CA."* 7ro( Dece(ber *@, *#@% until 7ebruary 0", *#@0,is a period of * year, 0 (onths and & days. )hus, 6B)C should pay topetitioners rentals for the use of the occupied lot,"0 consisting of*,$%% s. (. at the (onthly rate of 40&.%% per s. (. for that period,in the total a(ount of 4:%0,%@"."", with si< ;:> percent interest perannu( until fully paid.

7inally, we are in agree(ent that bad faith attended Asiancarstransfer of the building to 6B)C. Asiancars was well aware of itscovenant with the Jay(es that the buildings ownership was to betransferred to the Jay(es upon ter(ination of the lease. ndeed,petitioners su1ered (ental an<iety and nervous shoc upon learningthat the ownership of the building standing on their property hadalready been transferred to 6B)C. )he apparent disregard ofpetitioners right by Asiancars and other private respondents providesenough basis for an award of (oral as well as e<e(plaryda(ages"" by the appellate court.

EF9R97?R9, the assailed decision of the Court of Appeals isA77R69D with the 6?D7CA)?! that private respondent 6B)C isordered to pay petitioners rentals in the total a(ount of 4:%0,%@"."",with si< ;:> percent interest per annu( until fully paid. n all other

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage @




respects, the assailed decision and resolution of the Court of Appealsare A77R69D.

8? ?RD9R9D.

)ellosillo% -Chairman% Austria&/artine% and Calle'o% 0r.% ,,.% concur./endoa% ,.% on ocial leave.

"#R# N$# ,-6))60 Se=te3er 25* 1)8?

"EA R# ECANOVA* acc$3=a&ied <er <'sa&d*NICANOR ECANOVA* %R#* a&d PRESCI,,A R# ASA*acc$3=a&ied <er <'sa&d* /RANCISCO ASA* petitioners,vs.ON# IDPANTAO ,# ADI,* Presidi&g %'dge* ra&c< II* C$'rt $;/irst I&sta&ce $; Il$il$* TE PROVINCIA, SERI// O/ I,OI,O*a&d PIO SERVANDO* respondents.

+AP* J.:

4etitioners see the annul(ent of various orders issued by therespondent 4residing Judge of Branch , Court of 7irst nstance of

loilo, in Civil Case !o. *0"*0 entitled 23io 0ervando versus ,ose 4.0ervando et al.2 A te(porary restraining order was issued by thisCourt on 6ay #, *#$#, staying until further orders the e<ecution of thedecision rendered by the respondent Judge in said case.

)he case under review is for the annul(ent of a deed of sale dated6arch **, *#$@, e<ecuted by defendant Jose V. 8ervando in favor ofhis co-defendants, the petitioners herein, covering three parcels ofland situated in loi lo City. Clai(ing that the said parcels of land were(ortgaged to hi( in *#$% by the vendor, who is his cousin, to securea loan of 40%,%%%.%%, the plainti1 4io 8ervando i(pugned the validityof the sale as being fraudulent, and prayed that it be declared nulland void and the transfer certicates of title issued to the vendees becancelled, or alternatively, if the sale is not annulled, to order thedefendant Jose 8ervando to pay the a(ount of 40%,%%%.%%, plusinterests, and to order defendants to pay da(ages. Attached to theco(plaint was a copy of the private docu(ent evidencing the alleged

(ortgage ;Anne< A>, which is uoted hereunder

August 0%, *#$%

)his is to certify that , Jose Vusay 8ervando, thesole owner of three parcel of land under )a<Declaration !o. 0@#%&, HH*0" and "*&#* at Kot!o. *, *@:"-4ortion of *@:" *@:% situated at 8to.!ino 8t., Arevalo, Co(pania 8t. Co(pania 8t.,nterior 6olo, respectively, have this date(ortgaged the said property to (y cousin 4io8ervando, in the a(ount of )E9!)V )F?58A!D498?8 ;40%,%%%.%%>, redee(able for a period note<ceeding ten ;*%> years, the (ortgage a(ountbearing an interest of *%P per annu(.

further certify that in case fail to redee( the

said properties within the period stated above, (ycousin 4io 8ervando, shall beco(e the sole ownerthereof.

;8GD.> J?89 V58AV 89RA!D?

E)!98898

;8gd> 9rnesto G. Jeruta

;8gd> 7rancisco B. illanueva

)he defendants (oved to dis(iss the co(plaint on the grounds thatit did not state a cause of action, the alleged (ortgage being invalidand unenforceable since it was a (ere private docu(ent and was not

recorded in the Registry of Deeds= and that the plainti1 was not thereal party in interest and, as a (ere (ortgagee, had no standing touestion the validity of the sale. )he (otion was denied by therespondent Judge, in its order dated June 0%, *#$@, on the groundthat this action is actually one for collection.

?n June 0", *#$@, defendant Jose V. 8ervando died. )he defendantsled a 6anifestation and 6otion, infor(ing the trial court accordingly,and (oving for the dis(issal of the co(plaint pursuant to 8ection 0*of Rule " of the Rules of Court, pointing out that the action was for.recovery of (oney based on an actionable docu(ent to which onlythe deceased defendant was a party. )he (otion to dis(iss wasdenied on July 0&, *#$@, it appearing fro( the face of the co(plaintthat the instant action is not purely a (oney clai(, it being onlyincidental, the (ain action being one for annul(ent and da(ages.

?n August *, *#$@, plainti1 led a (otion to declare defendants indefault, and on the very ne<t day, August 0, the respondent Judgegranted the (otion and set the hearing for presentation of plainti1sevidence e<-parte on August 0H, *#$@.

?n August 0, *#$@, or the sa(e day that the default order wasissued, defendants Fechanova and 6asa led their Answers, denyingthe allegations of the co(plaint and repeating, by way of special anda'r(ative defenses, the grounds stated in their (otions to dis(iss.

?n August 0&, *#$@, a +udg(ent by default was rendered against the

defendants, annulling the deed of sale in uestion and ordering theRegister of Deeds of loilo to cancel the titles issued to 4riscilla 6asaand Ge((a Fechanova, and to revive the title issued in the na(e of

Jose V. 8ervando and to deliver the sa(e to the plainti1.

)he defendants too ti(ely steps to appeal the decision to the Courtof Appeals by ling a notice of appeal, an appeal bond, and a recordon appeal. Fowever, the trial court disapproved the record on appealdue to the failure of defendants to co(ply with its order to eli(inatetherefro( the answer led on August 0, *#$@ and accordingly,dis(issed the appeal, and on 7ebruary 0, *#$@, issued an ordergranting the writ of e<ecution prayed for by plainti1.

Ee nd the petition (eritorious, and the sa(e is hereby given duecourse.

t is clear fro( the records of this case that the plainti1 has no causeof action. 4lainti1 has no standing to uestion the validity of the deedof sale e<ecuted by the deceased defendant Jose 8ervando in favor of his co-defendants Fechanova and 6asa. !o valid (ortgage has beenconstituted plainti1s favor, the alleged deed of (ortgage being a(ere private docu(ent and not registered= (oreover, it contains astipulation -pacto comisorio which is null and void under Article 0%@@of the Civil Code. 9ven assu(ing that the property was validly(ortgaged to the plainti1, his recourse was to foreclose the(ortgage, not to see annul(ent of the sale.

EF9R97?R9, the decision of the respondent court dated August 0&,*#$" and its ?rder of 7ebruary 0, *#$# are set aside, and theco(plaint led by plainti1 dated 7ebruary H, *#$@ is herebydis(issed.

8? ?RD9R9D.

"#R# N$# ,-5)55 %a&'ar 1* 1)8)

TE ANI,A AN9IN" CORPORATION* plainti1-appellee,vs.ANASTACIO TEODORO* %R# a&d "RACE ANNATEODORO* defendants-appellants.

5ormoso 6 *uimbo +aw 7ce for plainti8&appellee.

0eran 3. 9ivera for defendants&appellants.

IDIN* J.:

)his is an appeal fro( the decisionX of the Court of 7irst nstance of6anila, Branch O in Civil Case !o. $@*$@ for collection of su( of(oney based on pro(issory notes e<ecuted by the defendants-appellants in favor of plainti1-appellee ban. )he dispositive portionof the appealed decision ;Record on Appeal, p. ""> reads as follows

EF9R97?R9 +udg(ent is hereby rendered ;a>sentencing defendants, Anastacio )eodoro, Jr. andGrace Anna )eodoro +ointly and severally, to payplainti1 the su( of 4*&,%"$.** plus *0P interestper annu( fro( 8epte(ber "%, *#:# until fullypaid, in pay(ent of 4ro(issory !otes !o. **H@$,plus the su( of 4*,%%%.%% as attorneys fees= and;b> sentencing defendant Anastacio )eodoro, Jr. to

pay plainti1 the su( of 4@,#"H.$H, plus interest at*0P per annu( fro( 8epte(ber "%, *#:# untilfully paid, in pay(ent of 4ro(issory !otes !os.**&*& and **:##, plus the su( of 4&%%.%% anattorneys fees.

Eith Costs against defendants.

)he facts of the case as found by the trial court are as follows

?n April 0&, *#::, defendants, together withAnastacio )eodoro, 8r., +ointly and severally,e<ecuted in favor of plainti1 a 4ro(issory !ote;!o. **H@$> for the su( of 4*%,H0%.%% payable in

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage #




*0% days, or on August 0&, *#::, at *0P interestper annu(. Defendants failed to pay the saida(ount inspire of repeated de(ands and theobligation as of 8epte(ber "%, *#:# stood at 4*&,*"$.** including accrued interest and servicecharge.

?n 6ay ", *#:: and June 0%, *#::, defendantsAnastacio )eodoro, 8r. ;7ather> and Anastacio

)eodoro, Jr. ;8on> e<ecuted in favor of plainti1 two4ro(issory !otes ;!os. **&*& and **:##> for4@,%%%.%% and 4*,%%%.%% respectively, payable in

*0% days at *0P interest per annu(. 7ather and8on (ade a partial pay(ent on the 6ay ", *#::pro(issory !ote but none on the June 0%, *#::4ro(issory !ote, leaving still an unpaid balance of4@,#"H.$H as of 8epte(ber "%, *#:# includingaccrued interest and service charge.

)he three 4ro(issory !otes stipulated that anyinterest due if not paid at the end of every (onthshall be added to the total a(ount then due, thewhole a(ount to bear interest at the rate of *0Pper annu( until fully paid= and in case of collectionthrough an attorney-at-law, the (aers shall,

+ointly and severally, pay *%P of the a(ount over-due as attorneys fees, which in no case shall beleas than 40%%.%%.

t appears that on January 0H, *#:H, the 8one<ecuted in favor of plainti1 a Deed of Assign(entof Receivables fro( the 9(ergency 9(ploy(entAd(inistration in the su( of 4HH,:"&.%%. )he Deedof Assign(ent provided that it was for and inconsideration of certain credits, loans, overdraftsand other credit acco((odations e<tended todefendants as security for the pay(ent of saidsu( and the interest thereon, and that defendantsdo hereby re(ise, release and uitclai( all itsrights, title, and interest in and to the accountsreceivables. 7urther.

;*> )he title and right of possession to said accounts receivable is tore(ain in the assignee, and it shall have the right to collect the sa(efro( the debtor, and whatsoever the Assignor does in connection withthe collection of said accounts, it agrees to do as agent andrepresentative of the Assignee and in trust for said Assignee =

<<< <<< <<<

;:> )he Assignor guarantees the e<istence and legality of saidaccounts receivable, and the due and punctual pay(ent thereof untothe assignee, ... on de(and, ... and further, that Assignor warrantsthe solvency and credit worthiness of each and every account.

;$> )he Assignor does hereby guarantee the pay(ent when due on allsu(s payable under the contracts giving rise to the accountsreceivable ... including reasonable attorneys fees in enforcing anyrights against the debtors of the assigned accounts receivable andwill pay upon de(and, the entire unpaid balance of said contract inthe event of non-pay(ent by the said debtors of any (onthly su( atits due date or of any other default by said debtors=

<<< <<< <<<

;#> ... )his Assign(ent shall also stand as a continuing guarantee forany and all whatsoever there is or in the future there will be +ustlyowing fro( the Assignor to the Assignee ...

n their stipulations of 7act, it is ad(itted by the parties that plainti1e<tended loans to defendants on the basis and by reason of certaincontracts entered into by the defunct 9(ergency 9(ploy(entAd(inistration ;99A> with defendants for the fabrication of shingboats, and that the 4hilippine 7isheries Co((ission succeeded the99A after its abolition= that non-pay(ent of the notes was due to thefailure of the Co((ission to pay defendants after the latter hadco(plied with their contractual obligations= and that the 4resident ofplainti1 Ban too steps to collect fro( the Co((ission, but no

collection was e1ected.

7or failure of defendants to pay the su(s due on the 4ro(issory !ote,this action was instituted on !ove(ber *", *#:#, originally againstthe 7ather, 8on, and the latters wife. Because the 7ather died,however, during the pendency of the suit, the case as against hi(was dis(iss under the provisions of 8ection 0*, Rule " of the Rules ofCourt. )he action, then is against defendants 8on and his wife for thecollection of the su( of 4 *&,%"$.** on 4ro(issory !ote !o. *HH@$=and against defendant 8on for the recovery of 4 @,"#H.$.H on4ro(issory !otes !os. **&*& and **:##, plus interest on botha(ounts at *0P per annu( fro( 8epte(ber "%, *#:# until fully paid,and *%P of the a(ounts due as attorneys fees.

!either of the parties presented any testi(onial evidence andsub(itted the case for decision based on their 8tipulations of 7act andon then, docu(entary evidence.

)he issues, as dened by the parties are ;*> whether or not plainti1clai( is already considered paid by the Deed of Assign. +udg(ent ofReceivables by the 8on= and ;0> whether or not it is plainti1 whoshould directly sue the 4hilippine 7isheries Co((ission for collection.;Record on Appeal, p. 0#- "0>.

?n April *$, *#$0, the trial court rendered its +udg(ent adverse to

defendants. ?n June @, *#$0, defendants led a (otion forreconsideration ;Record on Appeal, p. ""> which was denied by thetrial court in its order of June *H, *#$0 ;Record on Appeal, p. "$>. ?n

June 0", *#$0, defendants led with the lower court their notice ofappeal together with the appeal bond ;Record on Appeal, p. "@>. )herecord of appeal was forwarded to the Court of Appeals on August 00,*#$0 ;Record on Appeal, p. H0>.

n their appeal ;Brief for the Appellants, Rollo, p. *0>, appellantsraised a single assign(ent of error, that is U

)FA) )F9 D9C8?! ! S598)?! A6?5!)8 )? A J5DCAKR96AN!G ?7 )F9 C?!)RAC) B9)E99! )F9 4AR)98, ! ?KA)?!?7 KAE= F9!C9, )A!)A6?5!) )? KACN ?R 9OC988 ?7 J5R8DC)?!.

As the appeal involves a pure uestion of law, the Court of Appeals, inits resolution pro(ulgated on 6arch :, *#@%, certied the case to thisCourt ;Rollo, p. 0H>. )he record on Appeal was forwarded to this Courton 6arch "*, *#@% ;Rollo, p. *>.

n the resolution of 6ay "%, *#@%, the 7irst Division of this Courtordered that the case be doceted and declared sub(itted fordecision ;Rollo, p. "">.

?n 6arch $, *#@@, considering the length of ti(e that the case hasbeen pending with the Court and to deter(ine whether superveningevents (ay have rendered the case (oot and acade(ic, the Courtresolved ;*> to reuire the parties to 6?9 ! )F9 4R96898 withinthirty days fro( notice, and in case they fail to (ae the proper(anifestation within the reuired period, ;0> to consider the caseter(inated and closed with the entry of +udg(ent accordingly (adethereon ;Rollo, p. H%>.

?n April 0$, *#@@, appellee (oved for a resolution of the appealreview interposed by defendants-appellants ;Rollo, p. H*>.

)he (a+or issues raised in this case are as follows ;*> whether or notthe assign(ent of receivables has the e1ect of pay(ent of all theloans contracted by appellants fro( appellee ban= and ;0> whetheror not appellee ban (ust rst e<haust all legal re(edies against the4hilippine 7isheries Co((ission before it can proceed againstappellants for collections of loan under the pro(issory notes whichare plainti1s bases in the action for collection in Civil Case !o. $@*$@.

Assign(ent of credit is an agree(ent by virtue of which the owner ofa credit, nown as the assignor, by a legal cause, such as sale, dationin pay(ent, e<change or donation, and without the need of theconsent of the debtor, transfers his credit and its accessory rights toanother, nown as the assignee, who acuires the power to enforce itto the sa(e e<tent as the assignor could have enforced it against the

debtor. ... t (ay be in the for( of a sale, but at ti(es it (ayconstitute a dation in pay(ent, such as when a debtor, in order toobtain a release fro( his debt, assigns to his creditor a credit he hasagainst a third person, or it (ay constitute a donation as when it is bygratuitous title= or it (ay even be (erely by way of guaranty, aswhen the creditor gives as a collateral, to secure his own debt in favorof the assignee, without trans(itting ownership. )he character that it(ay assu(e deter(ines its reuisites and e1ects. its regulation, andthe capacity of the parties to e<ecute it= and in every case, theobligations between assignor and assignee will depend upon the

+udicial relation which is the basis of the assign(ent ;)olentino,Co((entaries and Jurisprudence on the Civil Code of the 4hilippines,ol. &, pp. *:&-*::>.

)here is no uestion as to the validity of the assign(ent ofreceivables e<ecuted by appellants in favor of appellee ban.

)he issue is with regard to its legal e1ects.

t is evident that the assign(ent of receivables e<ecuted byappellants on January 0H, *#:H did not transfer the ownership of thereceivables to appellee ban and release appellants fro( their loanswith the ban incurred under pro(issory notes !os. **H@$,**&*& and**:##.

)he Deed of Assign(ent provided that it was for and in considerationof certain credits, loans, overdrafts, and their credit acco((odationsin the su( of 4*%,%%%.%% e<tended to appellants by appellee ban,and as security for the pay(ent of said su( and the interest thereon=

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *%




that appellants as assignors, re(ise, release, and uitclai( toassignee ban all their rights, title and interest in and to the accountsreceivable assigned ;lst paragraph>. t was further stipulated that theassign(ent will also stand as a continuing guaranty for future loans of appellants to appellee ban and correspondingly the assign(ent shallalso e<tend to all the accounts receivable= appellants shall also obtainin the future, until the consideration on the loans secured byappellants fro( appellee ban shall have been fully paid by the( ;!o.#>.

)he position of appellants, however, is that the deed of assign(ent isa uitclai( in consideration of their indebtedness to appellee ban,

not (ere guaranty, in view of the following provisions of the deed ofassign(ent

... the Assignor do hereby remise% release andquit&claim unto said assignee all its ri"hts% title andinterest in the accounts receivable describedhereunder. ;9(phasis supplied by appellants, rstpar., Deed of Assign(ent>.

... that the title and right of possession to saidaccount receivable is to re(ain in said assigneeand it shall have the ri"ht to collect directl$ fromthe debtor , and whatever the Assignor does inconnection with the collection of said accounts, itagrees to do so as a"ent and representative of theAssignee and it trust for said Assignee ...;:bid. par.

0 of Deed of Assign(ent>. ;Record on Appeal, p.0$>

)he character of the transactions between the parties is not,however, deter(ined by the language used in the docu(ent but bytheir intention. )hus, the Court, uoting fro( the A(erican

Jurisprudence ;:@ 0d, 8ecured )ransaction, 8ection &%> said

)he characters of the transaction between theparties is to be deter(ined by their intention,regardless of what language was used or what thefor( of the transfer was. f it was intended tosecure the pay(ent of (oney, it (ust beconstrued as a pledge. Fowever, even though atransfer, if regarded by itself, appellate to havebeen absolute, its ob+ect and character (ight stillbe ualied and e<plained by a conte(poraneous

writing declaring it to have been a deposit of theproperty as collateral security. t has been d that atransfer of property by the debtor to a creditor,even if su'cient on its far( to (ae an absoluteconveyance, should be treated as a pledge if thedebt continues in e<istence and is not dischargedby the transfer, and that accordingly, the use ofthe ter(s ordinarily e<porting conveyance, ofabsolute ownership will not be given that e1ect insuch a transaction if they are also co((only usedin pledges and (ortgages and therefore do notunualiedly indicate a transfer of absoluteownership, in the absence of clear and a(biguouslanguage or other circu(stances e<cluding anintent to pledge. ;Kope v. Court of Appeals, **H8CRA :$* 2*#@03>.

Denitely, the assign(ent of the receivables did not result fro( a saletransaction. t cannot be said to have been constituted by virtue of adation in pay(ent for appellants loans with the ban evidenced bypro(issory note !os. **H@$, **&*& and **:## which are the sub+ectof the suit for collection in Civil Case !o. $@*$@. At the ti(e the deedof assign(ent was e<ecuted, said loans were non-e<istent yet. )hedeed of assign(ent was e<ecuted on January 0H, *#:H ;9<h. G>,while pro(issory note !o. **H@$ is dated April 0&, *#:: ;9<h. A>,pro(issory note **&*&, dated 6ay ", *#:: ;9<h. B>, pro(issory note**:##, on June 0%, *#:: ;9<h. C>. At (ost, it was a dation inpay(ent for 4*%,%%%.%%, the a(ount of credit fro( appellee banindicated in the deed of assign(ent. At the ti(e the assign(ent wase<ecuted, there was no obligation to be e<tinguished e<cept thea(ount of 4*%,%%%.%%. 6oreover, in order that an obligation (ay bee<tinguished by another which substitutes the sa(e, it is i(perativethat it be so declared in uneuivocal ter(s, or that the old and thenew obligations be on every point inco(patible with each other;Article *0#0, !ew Civil Code>.

?bviously, the deed of assign(ent was intended as collateral securityfor the ban loans of appellants, as a continuing guaranty forwhatever su(s would be owing by defendants to plainti1, as stated instipulation !o. # of the deed.

n case of doubt as to whether a transaction is a pledge or a dation inpay(ent, the presu(ption is in favor of pledge, the latter being thelesser trans(ission of rights and interests ;Kope v. Court ofAppeals, supra>.

n one case, the assign(ents of rights, title and interest of thedefendant in the contracts of lease of two buildings as well as herrights, title and interest in the land on which the buildings were

constructed to secure an overdraft fro( a ban a(ounting to4**%,%%%.%% which was increased to 4*&%,%%%.%%, then to4*:&,%%%.%% was considered by the Court to be docu(ents of(ortgage contracts inas(uch as they were e<ecuted to guaranteethe principal obligations of the defendant consisting of the overdraftsor the indebtedness resulting therefro(. )he Court ruled that anassign(ent to guarantee an obligation is in e1ect a (ortgage and notan absolute conveyance of title which confers ownership on theassignee ;4eoples Ban )rust Co. v. ?do(, :H 4hil. *0: 2*#"$3>.

As to whether or not appellee ban (ust have to e<haust all legalre(edies against the 4hilippine 7isheries Co((ission before it canproceed against appellants for collection of loans under theirpro(issory notes, (ust also be answered in the negative.

)he obligation of appellants under the pro(issory notes not havingbeen released by the assign(ent of receivables, appellants re(ain asthe principal debtors of appellee ban rather than (ere guarantors.

)he deed of assign(ent (erely guarantees said obligations. )hat theguarantor cannot be co(pelled to pay the creditor unless the latterhas e<hausted all the property of the debtor, and has resorted to allthe legal re(edies against the debtor, under Article 0%&@ of the !ewCivil Code does not therefore apply to the(. t is of course of theessence of a contract of pledge or (ortgage that when the principalobligation beco(es due, the things in which the pledge or (ortgageconsists (ay be alienated for the pay(ent to the creditor ;Article

0%@$, !ew Civil Code>. n the instant case, appellants are both theprincipal debtors and the pledgors or (ortgagors. Resort to one is,therefore, resort to the other.

Appellee ban did try to collect on the pledged receivables. As the9(ergency 9(ploy(ent Agency ;99A> which issued the receivableshad been abolished, the collection had to be coursed through the?'ce of the 4resident which disapproved the sa(e ;Record onAppeal, p. *:>. )he receivable beca(e virtually worthless leavingappellants loans fro( appellee ban unsecured. t is but proper thatafter their repeated de(ands (ade on appellants for the settle(entof their obligations, appellee ban should proceed against appellants.t would be an e<ercise in futility to proceed against a defunct o'cefor the collection of the receivables pledged.

EF9R97?R9, the appeal is Dis(issed for lac of (erit and theappealed decision of the trial court is a'r(ed in toto.

8? ?RD9R9D.

5ernan% C.,.% ;utierre% ,r. and Cortes% ,,.% concur.

Se=arate O=i&i$&s

/E,ICIANO* J., concurring

uite agree with the general reasoning of and the results reached by(y distinguished brother Bidin in respect of both of the principalissues he addressed in his opinion.

would (erely wish to add a few lines in respect of the point (ade byBidin, J., that the character of the transactions between the parties isnot, however, deter(ined by the language used in the docu(ent butby their intention. )his state(ent is basically not e<ceptionable, sofar as it goes. t (ight, however, be borne in (ind that the intent ofthe parties to the transaction is to be deter(ined in the rst instance,by the very language which they use. )he deed of assign(entcontains language which suggest that the parties intended to e1ect aco(plete alienation of title to and rights over the receivables whichare the sub+ect of the assign(ent. )his language is co(prised ofwors lie re(ise, release and uitclai( and clauses lie the titleand right of possession to said accounts receivable is to re(ain insaid assignee who shall have the right to collect directly fro( the

debtor. )he sa(e intent is also suggested by the use of the wordsagent and representative of the assignee in re1ering to theassignor.

)he point that appears to (e to be worth (aing is that although inits for(, the deed of assign(ent of receivables partaes of the natureof a co(plete alienation of the receivables assigned, such for(should be taen in con+unction with, and indeed (ust be ualied andcontrolled by, other language showing an intent of the parties thattitle to the receivables shall pass to the assignee for the limited

purpose of securin" another% principal< obli"ation owed by theassignor to the assignee. )itle (oves fro( assignor to asignee butthat title is defeasible being designed to collateralie the principalobligation. ?perationally, what this (eans is that the assignee isburdened with an obligation of taing the proceeds of the receivables

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage **




assigned and applying such proceeds to the satisfaction of theprincipal obligation and returning any balance re(aining thereafter tothe assignor.

)he parties gave the deed of assign(ent the for( of an absoluteconveyance of title over the receivables assigned, essentially for theconvenience of the assignee. Eithout such for(ally unli(itedconveyance of title, the assignee would have to treat the deed ofassign(ent as no (ore than a deed of pledge or of chattel (ortgage.n other words, in such hypothetical case, should the assignee see torealie upon the security given to hi( through the deed ofassign(ent ;which would then have to co(ply with the

docu(entation and registration reuire(ents of a pledge or chattel(ortgage>, the assignee would have to foreclose upon the securitiesor credits assigned and place the( on public sale and there acuirethe sa(e. t should be recalled that under the principle which forbidsa pactum commisorium Article 0%@@, Civil Code>, a (ortgagee orpledgee is prohibited fro( si(ply taing and appropriating thepersonal property turned over to hi( as security for the pay(ent of aprincipal obligation. A deed of assign(ent by way of security avoidsthe necessity of a public sale i(pose by the rule on pactumcommisorium, by in e1ect placing the sale of the collateral up front.;9(phasis supplied>

)he foregoing is applicable where, as in the present instance, thedeed of assign(ent of receivables co(bines ele(ents of both aco(plete or absolute alienation of the credits being assigned and asecurity arrange(ent to assure pay(ent of a principal obligation.Ehere the second ele(ent is absent, that is, where there is nothing to

indicate that the parties intended the deed of assign(ent to functionas a security device, it would of course follow that the si(ple absoluteconveyance e(bodied in the deed of assign(ent would be operative=the assign(ent would constitute essentially a (ode of pay(entor dacion en pa"o. 4ut a little di1erently, in order that a deed ofassign(ent of receivables which is in for( an absolute conveyance of title to the credits being assigned, (ay be ualied and treated as asecurity arrange(ent, language to such e1ect (ust be found in thedocu(ent itself and that language, precisely, is e(bodied in the deedof assign(ent in the instant case. 7inally, it (ight be noted that thatdeed si(ply follows a for( in standard use in co((ercial baning.

"#R# N$# 227 arc< 22* 1)07

PEDRO A,CANTARA* plainti1-appellee,vs.AROSIO A,INEA* ET A,#* defendants-appellants.

0.!. 9e$es for appellants. ,. ;erona for appellee.

TORRES* J.:

?n the *"th day of 6arch, *#%&, the plainti1 led a co(plaint in theCourt of 7irst nstance of Ka Kaguna, praying that +udg(ent berendered in his behalf ordering the defendants to de liver to hi( thehouse and lot clai(ed, and to pay hi( in addition thereto as rent thesu( of @ pesos per (onth fro( 7ebruary of that year, and to pay thecosts of the action= and the plainti1 alleged in e1ect that on the 0#thday of 7ebruary, *#%H, the defendants, A(brosio Alinea and 9udosia

Belar(ino, borrowed fro( hi( the su( of H@% pesos, payable in January of said year *#%& under the agree(ent that if, at thee<piration of the said period, said a(ount should not be paid it wouldbe understood that the house and lot, the house being constructed ofstrong (aterials, owned by the said defendants and located in thetown of 8an 4ablo on the street of the sa(e na(e, 4rovince of KaKaguna, be considered as absolutely sold to the plainti1 for the saidsu(= that the supercial e<tent and boundaries of said property aredescribed in the co(plaint= and that, notwithstanding that the ti(efor the pay(ent of said su( has e<pired and no pay(ent has been(ade, the defendants refuse to deliver to plainti1 the said property,openly violating that which they contracted to do and depriving hi(to his loss of the rents which plainti1 should received, the sa(ecounting fro( 7ebruary, *#%&.

)he defendants, after the overruling of a de(urrer to the co(plaintherein, answered denying generally and specically all the allegations

contained in the co(plaint, e<cept those which were e<presslyad(itted, and alleged that the a(ount clai(ed included the interest=and that the principal borrowed was only 0%% pesos and that theinterest was 0@% pesos, although in drawing the docu(ent by (utualconsent of the parties thereto the a(ount of indebtedness was (adeto appear in the su( of H@% pesos= and that as their special defensedefendants alleged that they o1ered to pay the plainti1 the su( ofH@% pesos, but the plainti1 had refused to accept the sa(e, thereforethey persisted in (aing said o1er and tender of pay(ent, placing atthe disposal of the plainti1 the said H@% pesos rst tendered= anddefendants ased for the costs of action.

After having taen the evidence of both parties and attaching thedocu(ents presented in evidence to the record, the +udge on!ove(ber 0$, *#%&, rendered a +udg(ent ordering the defendants todeliver to the plainti1 the house and lot, the ob+ect of this litigation,

and to pay the costs of the action, not (aing any nding upon theuestion of loss or da(ages by reason of the absence of proof onthese points. )he defendants duly too e<ception to this decision, andased for a new trial of the case on the ground that the ndings of thecourt below in its decision were plainly contrary to law, which (otionwas overruled and fro( which ruling defendants also e<cepted.

Ee have in this case a contract of loan and a pro(ise of sale of ahouse and lot, the price of which should be the a(ount loaned, ifwithin a <ed period of ti(e such a(ount should not be paid by thedebtor-vendor of the property to the creditor-vendee of sa(e.

9ither one of the contracts are perfectly legal and both are authoriedrespectively by articles *H&*, *$H%, and *$&", and those following, ofthe Civil Code. )he fact that the parties have agreed at the sa(eti(e, in such a (anner that the fulll(ent of the pro(ise of salewould depend upon the nonpay(ent or return of the a(ount loaned,has not produced any charge in the nature and legal conditions ofeither contract, or any essential defect which would tend to nullify thesa(e.

f the pro(ise of sale is not vitiated because, according to theagree(ent between the parties thereto, the price of the sa(e is to bethe a(ount loaned and not repaid, neither would the loan be null orillegal, for the reason that the added agree(ent provides that in theevent of failure of pay(ent the sale of property as agreed will taee1ect, the consideration being the a(ount loaned and not paid. !oarticle of the Civil Code, under the rules or regulations of which such

double contract was e<ecuted, prohibits e<pressly, or by inferencefro( any of its provisions, that an agree(ent could not be (ade inthe for( in which the sa(e has been e<ecuted= on the contrary,article *0$@ of the aforesaid code provides that contracts shall bebinding, whatever (ay be the for( in which they (ay have beene<ecuted, provided the essential conditions reuired for their validitye<ist. )his legal prescription appears r(ly sustained by the settledpractice of the courts.

)he property, the sale of which was agreed to by the debtors, doesnot appear (ortgaged in favor of the creditor, because in order toconstitute a valid (ortgage it is indispensable that the instru(ent beregistered in the Register of 4roperty, in accordance with article *@$&of the Civil Code, and the docu(ent of contract, 9<hibit A, does notconstitute a (ortgage, nor could it possibly be a (ortgage, for thereason of said docu(ent is not vested with the character andconditions of a public instru(ent.

By the aforesaid docu(ent, 9<hibit A, said property could not bepledged, not being personal property, and notwithstanding the saiddouble contract the debtor continued in possession thereof and thesaid property has never been occupied by the creditor.

!either was there ever nay contract of antichresis by reason of thesaid contract of loan, as is provided in articles *@@* and thosefollowing of the Civil Code, inas(uch as the creditor-plainti1 hasnever been in possession thereof, nor has he en+oyed the saidproperty, nor for one (o(ent ever received its rents= therefore, thereare no proper ter(s in law, taing into consideration the ter(s of theconditions contained in the aforesaid contract, whereby this court cannd that the contract was null, and under no consideration whateverwould it be +ust to apply to the plainti1 articles *@&# and *@@H of thesa(e code.

)he contract ; pactum commissorium> referred to in Kaw H*, title &,and law *0, title *0, of the fth 3artida, and perhaps included in theprohibition and declaration of nullity e<pressed in articles *@&# and*@@H of the Civil Code, indicates the e<istence of the contracts of(ortgage or of pledge or that of antichresis, none of which havecoincided in the loan indicated herein.

t is a principle in law, invariably applied by the courts in the decisionsof actions instituted in the (atter of co(pliance with obligations, thatthe will of the contracting parties is the law of contracts and that a(an obligates hi(self to that to which he pro(ises to be bound, aprinciple in accordance with Kaw *, title *, boo *% of theNovisima9ecopilacion, and article *%#* of the Civil Code. )hat which is agreedto in a contract is law between the parties, a doctrine established,a(ong others, in +udg(ents of the supre(e court of 8pain of7ebruary 0%, *@#$, and 7ebruary *", *#%H.

t was agreed between plainti1 and defendants herein that ifdefendants should not pay the loan of H@% pesos in January, *#%&, theproperty belonging to the defendants and described in the contractshould re(ain sold for the aforesaid su(, and such agree(ent (ustbe co(plied with, inas(uch as there is no ground in law to opposethe co(pliance with that which has been agreed upon, having beenso acnowledged by the obligated parties.

)he supre(e court of 8pain, applying the afore(entioned laws of8panish origin to a si(ilar case, establishes in its decision of January*:, *@$0, the following legal doctrine

Basing the co(plaint upon the obligation signed by thedebtor, which +udicially recognied his signature= and after

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *0




confessing to have received fro( the plainti1 a certaina(ount, binding hi(self to return sa(e to the satisfaction of the plainti1 within the ter( of four years, or in case ofdefault to transfer direct do(ain of the properties describedin the obligation and to e<ecute the necessary sale= and theter( having e<pired and the aforesaid a(ount not havingbeen paid, said plainti1 has his right free fro( i(pedi(entto clai( sa(e against the heirs of the debtor.

)he docu(ent of contract has been recognied by the defendantAlinea and by the witnesses who signed sa(e with hi(, beingtherefore an authentic and e'cacious docu(ent, in accordance with

article *00& of the Civil Code= and as the a(ount loaned has not beenpaid and continues in possession of the debtor, it is only +ust that thepro(ise of sale be carried into e1ect, and the necessary instru(entbe e<ecuted by the vendees.

)herefore, by virtue of the reasons given above and accepting thendings given in the +udg(ent appealed fro(, we a'r( the said

+udg(ent herein, with the costs against the appellants.

After e<piration of twenty days fro( the date of the notication of thisdecision let +udg(ent be entered in accordance herewith and tendays thereafter let the case be re(anded to the court fro( whence itca(e for proper action. 8o ordered.

Arellano% C.,.% /apa% ,ohnson% and #race$% ,,.% concur.

Se=arate O=i&i$&s

4I,,ARD* J., dissenting

)his contract violates the funda(ental principle of the 8panish law,which does not per(it a debtor, at the ti(e he secures a loan of(oney, to (ae an agree(ent whereby the (ere failure to pay theloan at (aturity shall divest hi( irrevocably of allow his interest inthe specic property (entioned in the agree(ent without any righton his part to redee( or to have the property sold to pay the debt.;Civil Code, arts. *@&#, *@$0, and *@@H.> therefore dissent.

"#R# N$# 776?5 a 21* 1)88

SPO.SES .+ TON" 9O PO "IO9* petitioners,vs.ONORA,E CO.RT O/ APPEA,S* ONORA,E IENVENIDO C#E%ERCITO* %'dge $; t<e C$'rt $; /irst I&sta&ce $; a&ila*ra&c< BBBVII a&d A+ANIAN A.TOOTIVECORPORATION* respondents.

3laton A. )a$sa for petitioner.

/anuel #. 4barra for respondents.

CORTES* J.:

n the present petition, petitioners assail the validity of a deed of

assign(ent over an apart(ent unit and the leasehold rights over theland on which the building housing the said apart(ent stands forallegedly being in the nature of a pactum commissorium.

)he facts are not disputed.

4etitioners 5y )ong ;also nown as Fenry 5y> and Nho 4o Gio;84?5898> used to be the owners of Apart(ent !o. "%$ of the KigayaBuilding, together with the leasehold right for ninety- nine ;##> yearsover the land on which the building stands. )he land is registered inthe na(e of Kigaya nvest(ents, nc. as evidenced by )ransferCerticate of )itle !o. $#H0% of the Registry of Deeds of the City of6anila. t appears that Kigaya nvest(ents, nc. owned the buildingwhich houses the apart(ent units but sold Apart(ent !o. "%$ andleased a portion of the land in which the building stands to the84?5898.

n 7ebruary, *#:#, the 84?5898 purchased fro( private respondentBayanihan Auto(otive, nc. ;BAVA!FA!> seven ;$> units of (otorvehicles for a total a(ount of 4H$,$%%.%% payable in three ;">install(ents. )he transaction was evidenced by a writtenAgree(ent wherein the ter(s of pay(ent had been specied asfollows

)hat i((ediately upon signing of this Agree(ent,the 9!D99 shall pay unto the 9!D?R thea(ount of 8even )housand 8even Fundred;4$,%%%.%%> 4esos, 4hilippine Currency, and thea(ount of 7ifteen )housand ;4*&,%%%.%%> 4esosshah be paid on or before 6arch "%, *#:# and thebalance of )wenty 7ive )housand ;40&,%%%.%%>4esos shall be paid on or before April "%, *#:#, the

said a(ount again to be secured by anotherpostdated chec with (aturity on April "%, *#:# tobe drawn by the 9!D99=

)hat it is fully understood that should the two ;0>afore(entioned checs be not honored on theirrespective (aturity dates, herein 9!D?R will give9!D99 another si<ty ;:%> days fro( (aturitydates, within which to pay or redee( the value ofthe said checs=

)hat if for any reason the 9!D99 should fail topay her afore(entioned obligation to the9!D?R,the latter shall become automaticall$ theowner of the former=s apartment which is locatedat No. >?@% +i"a$a )uildin"% Alvarado 0t.% )inondo%/anila% with the onl$ obli"ation on its part to pa$unto the (N!(( the amount of #hree #housand5ive Bundred #hirt$ 5ive -3>%>.?? 3esos%3hilippine Currenc$< and in such event the (N!((shall execute the correspondin" !eed of absolute0ale in favor of the (N!79 and or the

Assi"nment of +easehold 9i"hts. 2e(phasissupplied3. ;Suoted in Decision in Civil Case !o.@%H0%, 9<hibit A of Civil Case !o. *"*&"0*3.

After (aing a downpay(ent of 4$,$%%.%%, the 84?5898 failed to paythe balance of 4H%,%%%.%%. Due to these unpaid balances, BAVA!FA!

led an action for specic perfor(ance against the 84?5898doceted as Civil Case !o. @%H0% with the Court of 7irst nstance of6anila.

?n ?ctober 0@, *#$@, after hearing, +udg(ent was rendered in favorof BAVA!FA! in a decision the dispositive portion of which reads

EF9R97?R9, +udg(ent is hereby rendered,ordering the defendants, +ointly and severally, topay the plainti1s, the su( of 4H%,%%%.%%, withinterest at the legal rate fro( July *, *#$% until fullpay(ent. :n the event of their failure to do sowithin thirt$ ->? da$s from notice of this

'ud"ment% the$ are hereb$ ordered to execute thecorrespondin" deed of absolute sale in favor of the

plainti8 andDor the assi"nment of leasehold ri"htsover the defendant=s apartment located at >?@

+i"a$a )uildin"% Alvarado 0treet% )inondo% /anila%upon the pa$ment b$ the plainti8 to thedefendants of the sum of 3>%>.??. 2e(phasissupplied3.

4ursuant to said +udg(ent, an order for e<ecution pending appeal wasissued by the trial court and a deed of assign(ent dated 6ay 0$,*#$0, was e<ecuted by the 84?5898 29<hibit B, C7 Records, p. *0$3over Apart(ent !o. "%$ of the Kigaya Building together with theleasehold right over the land on which the building stands. )he84?5898 acnowledged receipt of the su( of 4",%%%.%% (ore or less,paid by BAVA!FA! pursuant to the said +udg(ent.

!otwithstanding the e<ecution of the deed of assign(ent the84?5898 re(ained in possession of the pre(ises. 8ubseuently, theywere allowed to re(ain in the pre(ises as lessees for a stipulated(onthly rental until !ove(ber "%,*#$0.

Despite the e<piration of the said period, the 84?5898 failed tosurrender possession of the pre(ises in favor of BAVA!FA!. )hispro(pted BAVA!FA! to le an e+ect(ent case against the( in theCity Court of 6anila doceted as Civil Case !o. 0H%%*#. )his actionwas however dis(issed on the ground that BAVA!FA! was not thereal party in interest, not being the owner of the building.

?n 7ebruary $, *#$#, after de(ands to vacate the sub+ect apart(ent(ade by BAVA!FA!s counsel was again ignored by the 84?5898, anaction for recovery of possession with da(ages was led with theCourt of 7irst nstance of 6anila, doceted as Civil Case !o. *0*&"0against the 84?5898 and i(pleading Kigaya nvest(ents, nc. asparty defendant. ?n 6arch *$, *#@*, decision in said case wasrendered in favor of BAVA!FA! ordering the following

EF9R97?R9, +udg(ent is hereby rendered in favorof the plainti1 and against the defendants spouses5V )?!G and NF? G?N and defendant Kigayanvest(ent, nc., dis(issing defendantscounterclai( and ordering

*. )he defendants spouses 5V )?!G and NF? 4?G?N and any andlor persons clai(ing right underthe(, to vacate, surrender and deliver possessionof Apart(ent "%$, Kigaya Building, located at :HAlvarado 8treet, Binondo, 6anila to the plainti1=

0. ?rdering defendant Kigaya nvest(ent, nc. torecognie the right of ownership and possession of

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *"




the plainti1 over Apart(ent !o. "%$, KigayaBuilding=

". ?rdering Kigaya nvest(ent, nc. toacnowledge plainti1 as assignee-lessee in liue ofdefendants spouses 5y )ong and Nho 4o Gio overthe lot on which the building was constructed=

H. ?rdering the defendants spouses 5y )ong andNho 4o Gio to pay to the plainti1 the su( of40%%.%% co((encing fro( June, *#$* to

!ove(ber "%, *#$0, or a total a(ount of4",H%%.%% as rental for the apart(ent, and thesu( of 40%%.%% fro( Dece(ber *, *#$0 until thepre(ises are nally vacated and surrendered tothe plainti1, as reasonable co(pensation for theuse of the apart(ent= and

&. ?rdering the defendants spouses 5y )ong andNho 4o Gio to pay 4",%%%.%% as and for attorneysfees to the plainti1, and the costs of this suit.

!ot satised with this decision, the 84?5898 appealed to the Court of Appeals. ?n ?ctober 0,*#@H, the respondent Court of Appealsa'r(ed in toto the decision appealed fro( 24etition, Anne< A, Rollo,pp. *&-0%3. A (otion for reconsideration of the said decision wasdenied by the respondent Court in a resolution dated 7ebruary **,*#@$ 24etition, Anne< C, Rollo, pp. "*- "H3.

4etitioners-84?5898 in seeing a reversal of the decision of the Courtof Appeals rely on the following reasons

. )he deed of assign(ent is null and void becauseit is in the nature of a pactumcommissorium andWor was borne out of the sa(e.

. )he genuineness and due 4rosecution of thedeed of assign(ent was not dee(ed ad(itted bypetitioner.

. )he deed of assign(ent is unenforceablebecause the condition for its e<ecution was notco(plied with.

. )he refusal of petitioners to vacate andsurrender the pre(ises in uestion to privaterespondent is +ustied and warranted by thecircu(stances obtaining in the instant case.

. n support of the rst argu(ent, petitioners bring to the fore thecontract entered into by the parties whereby petitioner Nho 4o Gioagreed that the apart(ent in uestion will auto(atically beco(e theproperty of private respondent BAVA!FA! upon her (ere failure topay her obligation. )his agree(ent, according to the petitioners is inthe nature of a pactum commissorium which is null and void, hence,the deed of assign(ent which was borne out of the sa(e agree(entsu1ers the sa(e fate.

)he prohibition on pactum commissorium stipulations is provided forby Article 0%@@ of the Civil Code

Art. 0%@@. )he creditor cannot appropriate thethings given by way of pledge or (ortgage, ordispose of the sa(e. Any stipulation to thecontrary is null and void.

)he aforeuoted provision furnishes the two ele(entsfor pactum commissorium to e<ist ;*> that there should be a pledgeor (ortgage wherein a property is pledged or (ortgaged by way ofsecurity for the pay(ent of the principal obligation= and ;0> that thereshould be a stipulation for an auto(atic appropriation by the creditorof the thing pledged or (ortgaged in the event of non-pay(ent of theprincipal obligation within the stipulated period.

A perusal of the ter(s of the uestioned agree(ent evinces no basisfor the application of the pactum commissorium provision. 7irst, thereis no indication of any contract of (ortgage entered into by the

parties. t is a fact that the parties agreed on the sale and purchase of trucs.

8econd, there is no case of auto(atic appropriation of the property byBAVA!FA!. Ehen the 84?5898 defaulted in their pay(ents of thesecond and third install(ents of the trucs they purchased,BAVA!FA! led an action in court for specic perfor(ance. )he trialcourt rendered favorable +udg(ent for BAVA!FA! and ordered the84?5898 to pay the balance of their obligation and in case of failureto do so, to e<ecute a deed of assign(ent over the property involvedin this case. )he 84?5898 elected to e<ecute the deed of assign(entpursuant to said +udg(ent.

Clearly, there was no auto(atic vesting of title on BAVA!FA!because it too the intervention of the trial court to e<act fulll(ent

of the obligation, which, by its very nature is . . anathe(a to theconcept of pacto commissorio 2!orthern 6otors, nc. v. Ferrera, G.R.!o. K-"0:$H, 7ebruary 00, *#$", H# 8CRA "#03. And even grantingthat the original agree(ent between the parties had the badgesof pactum commissorium, the deed of assign(ent does not su1er thesa(e fate as this was e<ecuted pursuant to a valid +udg(ent in CivilCase !o. @%H0% as can be gleaned fro( its very ter(s and conditions

D99D ?7 A88G!69!)

N!?E AKK 69! BV )F989 4R989!)8

)his deed (ade and entered into by 5y )iong alsonown as Fenry 5y and Nho 4o Gio, both of legalage, husband and wife, respectively, and presentlyresiding at "%$ Kigaya Bldg., Alvarado 8t., Binondo,6anila, and hereinafter to be nown and called asthe A88G!?R8, in favor of Bayanihan Auto(otiveCorporation, an entity duly organied and e<istingunder the laws of the 4hilippines, with principalbusiness address at *:#% ?tis 8t., 4aco, 6anilaand hereinafter to be nown and called theA88G!99=

-witnesseth-

EF9R9A8, the A88G!99 has led a civil co(plaintfor 8pecic 4erfor(ance with Da(ages againstthe A88G!?R8 in the Court of 7irst nstance of6anila, Branch , said case having been docetedas Civil Case !o. @%H0%=

EF9R9A8, the A88G!99 was able to obtain a +udg(ent against the A88G!?R wherein the latterwas ordered by the court as follows, to wit

EF9R97?R9, +udg(ent ishereby rendered ordering thedefendants, +ointly andseverally to pay the plainti1 thesu( of 4H%,%%%.%%, withinterest at the legal rate fro(

July "*, *#$% until full pay(ent.n the event of their failure to

do so within thirty ;"%> daysfro( notice of this +udg(ent,they are hereby ordered toe<ecute the correspondingdeed of absolute sale in favor of the plainti1 andWor theassign(ent of leasehold, rightsover the defendants apart(entlocated at !o. "%$ KigayaBuilding, Alvarado 8treet,Binondo, 6anila, upon thepay(ent by the plainti1 to thedefendants the su( of 4",&"&.%%. )he defendants shallpay the costs.

EF9R9A8, the court, upon petition by hereinA88G!99 and its deposit of su'cient bond, hasordered for the i((ediate e<ecution of the saiddecision even pending appeal of the aforesaiddecision=

EF9R9A8, the A88G!?R8 have elected to +uste<ecute the necessary deed of sale andWorassign(ent of leasehold rights over the apart(ent(entioned in the decision in favor of the hereinA88G!99=

!?E, )F9R97?R9, for and in consideration of theforegoing pre(ises, the A88G!?R8 havetransferred assigned and ceded, and by thesepresents do hereby transfer, assign and cede alltheir rights and interests over that place nown asApart(ent !o. "%$ at the Kigaya Building which is

located at !o. @:H Alvarado 8t., Binondo, 6anila,together with the corresponding leasehold rightsover the lot on which the said building isconstructed, in favor of the hererein A88G!99, itsheirs or assigns.

! E)!988 EF9R9?7, Ee have hereunto signedour na(es this 0$th day of 6ay, *#$* at 6anila,4hilippines.

5V )?!GWF9!RV 5V NF? 4? G?N

Assignor Assignor

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *H




ACR-0*&**:: 6anila *W*"W&* ACR-C-%%*:0%

6anila 6arch ", *#:&

)his being the case, there is no reason to i(pugn the validity of thesaid deed of assign(ent.

. )he 84?5898 tae e<ception to the ruling of the Court of Appealsthat their failure to deny the genuineness and due e<ecution of thedeed of assign(ent was dee(ed an ad(ission thereof. )he basis forthis e<ception is the 84?5898 insistence that the deed of assign(ent

having been borne out of pactum commissorio is not sub+ect toratication and its invalidity cannot be waived.

)here is no co(pelling reason to reverse the above(entioned rulingof the appellate court. Considering this Courts above conclusion thatthe deed of assign(ent is not invalid, it follows that when an actionfounded on this written instru(ent is led, the rule on contesting itsgenuineness and due e<ecution (ust be followed.

)hat facts reveal that the action in Civil Case !o. *0*&"0 was foundedon the deed of assign(ent. Fowever, the 84?5898, in their answer tothe co(plaint, failed to deny under oath and specically thegenuineness and due e<ecution of the said deed. 4erforce, under8ection @, Rule @ of the Revised Rules of Court, the 84?5898 aredee(ed to have ad(itted the deeds genuineness and due e<ecution.Besides, they the(selves ad(it that . . . the contract was dulye<ecuted and that the sa(e is genuine 28ur-Re+oinder, Rollo, p. :$3.

)hey cannot now clai( otherwise.

. )he 84?5898 also uestion the enforceability of the deed ofassign(ent. )hey contend that the deed is unenforceable becausethe condition for its e<ecution was not co(plied with. Ehatpetitioners 84?5898 refer to is that portion of the disposition in CivilCase !o. @%H0% reuiring BAVA!FA! to pay the for(er the su( of 4",&"&.%%. )o buttress their clai( of non- co(pliance, they invoe thefollowing receipt issued by the 84?5898 to show that BAVA!FA! was4&"&.%% short of the co(plete pay(ent.

R9C94)

)his is to acnowledge the fact that the a(ount of )FR99 )F?58A!D ;4",%%%.%%> 498?8, more orless as indicated in the 'ud"ment of the Bon.

Conrado asque% 3residin" ,ud"e of the Court of5irst :nstance of /anila, Branch , in Civil Caseentitled Bayanihan Auto(otive Corp. v. 4ho ;sic>4o Gio, etc. and doceted as Civil Case !o.@%H0% has been applied for the pay(ent of theprevious rentals of the property which is thesub+ect (atter of the aforesaid +udg(ent.2e(phasis supplied.3 ;8gd.> 4ho;sic> 4o Glo ;8gd.> Fenry 5y

August 0*, *#$*

)he issue presented involves a uestion of fact which is not withinthis Courts co(petence to loo into. 8u'ce it to say that this Court isof the view that ndings and conclusion of the trial court and theCourt of Appeals on the uestion of whether there was co(pliance byBAVA!FA! of its obligation under the decision in Civil Case !o. @%H0%

to pay the 84?5898 the su( of 4",&"&.%% is borne by the evidenceon record. )he Court nds (erit in the following ndings of the trialcourt

... Defendants contention that the 4 ",&"&.%%reuired in the decision in Civil Case !o. @%H0% asa condition for the e<ecution of the deed ofassign(ent was not paid by the plainti1 to thedefendants is belied by the fact that thedefendants acEnowled"ed pa$ment of 3>%???.??%more or less% in a receipt dated Au"ust F1%1G@1. )his a(ount was e<pressly (entioned inthis receipt as indicated in the +udg(ent of theFonorable Conrado asue, presiding Judge of theC7 of 6anila, Branch , in Civil Case entitledBayanihan Auto(otive Corp. versus Nho 4o Gio,doceted as Civil Case !o. @%H0%, and also

e<pressly (entioned as having been applied forthe pay(ent of the previous rentals of theproperty sub+ect (atter of the said +udg(ent.!othing could be (ore e<plicit. )he contentionthat there is still a di1erence of 4&"&.%% is had tobelieve because the spouses Nho 4o Gio and 5y

)ong e<ecuted the deed of assign(ent without rstde(anding fro( the plainti1 the pay(ent of4&"&.%%. ndeed, as contended by the plainti1, forit to refuse to pay this s(all a(ount and thus gavedefendants a reason not to e<ecute the Deed ofAssign(ent. is hard to believe !efendants furtherconrm b$ the 'oint manifestation of plainti8 anddefendants% dul$ assisted b$ counsel% 3uerto and

Associates% dated 0eptember% 1G@1% (xhibit 272%

wherein it was stated that plainti8 has full$complied with its obli"ation to the defendantscaused upon it -sic b$ the pronouncement of the

'ud"ment as a condition for the execution of their-sic leasehold ri"hts of defendants% as evidencedb$ the receipt dul$ executed b$ the defendants%and which was alread$ submitted in open court for the consideration of the sum of 3>%>.??.29(phasis supplied3. 2Decision, Civil Case !o.*0*&"0, pp. "-H3.

)his Court agrees with private respondent BAVA!FA!s reasoning

that inas(uch as the decision in Civil Case !o. @%H0% i(posed uponthe parties correlative obligations which were si(ultaneouslyde(andable so (uch so that if private respondent refused to co(plywith its obligation under the +udg(ent to pay the su( of 4 ",&"&.%%then it could not co(pel petitioners to co(ply with their ownobligation to e<ecute the deed of assign(ent over the sub+ectpre(ises. )he fact that petitioners e<ecuted the deed of assign(entwith the assistance of their counsel leads to no other conclusion thatprivate respondent itself had paid the full a(ount.

. 4etitioners atte(pt to +ustify their continued refusal to vacate thepre(ises sub+ect of this litigation on the following grounds

;a> )he deed of assingn(ent is in the nature ofa pactum commissorium and, therefore, null andvoid.

;b> )here was no full co(pliance by privaterespondent of the condition i(posed in the deed of assign(ent.

;c> 4roof that petitioners have been allowed to stayin the pre(ises, is the very ad(ission of privaterespondent who declared that petitioners wereallowed to stay in the pre(ises until !ove(ber 0%,*#$0. )his ad(ission is very signicant. 4rivaterespondent (erely stated that there was a ter(-until !ove(ber "%, *#$0-in order to give ase(blance of validity to its atte(pt to dispossessherein petitioners of the sub+ect pre(ises. n short,this is one way of rendering see(ingly illegalpetitioners possession of the pre(ises after!ove(ber "%, *#$0.

)he rst two classications are (ere reiterations of the argu(entspresented by the petitioners and which had been passed uponalready in this decision. As regards the third ground, it is enough tostate that the deed of assign(ent has vested in the privaterespondent the rights and interests of the 84?5898 over theapart(ent unit in uestion including the leasehold rights over theland on which the building stands. BAVA!FA! is therefore entitled tothe possession thereof. )hese are the clear ter(s of the deed ofassign(ent which cannot be superseded by bare allegations of factthat nd no support in the record.

EF9R97?R9, the petition is hereby D9!9D for lac of (erit and thedecision of the Court of Appeals is A77R69D in toto.

8? ?RD9R9D.

5ernan -Chairman% ;utierre% ,r.% and 5eliciano% ,,.% concur.

SECOND DIVISION

SPO.SES 4I,/REDO N# ON" a&d EDNA SIE,A PA".IO-ON"*

Vs#

ROAN ,ENDIN" CORPORATION

CARPIO ORA,ES* J.:

?n di1erent dates fro( July *H, *### to 6arch 0%, 0%%%,petitioner-spouses Eilfredo !. ?ng and 9dna 8heila 4aguio-

?ng obtained several loans fro( Roban Kending Corporation;respondent> in the total a(ount of 4

H,%%%,%%%.%%. )hese loans weresecured by a real estate (ortgage on petitioners parcels of landlocated in Binauganan, )arlac City and covered by )C) !o. 0#$@H%.2*3

?n 7ebruary *0, 0%%*, petitioners and respondent e<ecutedan A(end(ent to A(ended Real 9state 6ortgage203 consolidatingtheir loans inclusive of charges thereon whichtotaled 4&,#*:,**$.&%. ?n even date, the parties e<ecuted a Dacionin 4ay(ent Agree(ent2"3 wherein petitioners assigned the propertiescovered by )C) !o. 0#$@H% to respondent in settle(ent of their totalobligation, and a 6e(orandu( of Agree(ent 2H3 reading

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *&

http://sc.judiciary.gov.ph/jurisprudence/2008/july2008/172592.htm#_ftn2













)hat the 7R8) 4AR)V 2Roban KendingCorporation3 and the 89C?!D 4AR)V 2thepetitioners3 agreed to consolidate andrestructure all afore(entioned loans, whichhave been all past due and delinuentsince April *#, 0%%%, and outstandingobligations totaling 4&,#*:,**$.&%. )he89C?!D 4AR)V hereby sign 2sic3 anotherpro(issory note in the a(ount of 4&,#*:,**$.&% ;a copy of which is hereto

attached and for(s <<< an integral part of thisdocu(ent>, with a pro(ise to pay the 7R8)4AR)V in full within one year fro( the date of the consolidation and restructuring, otherwisethe 89C?!D 4AR)V agree to have theirYDAC?! ! 4AV69!)Z agree(ent, which theyhave e<ecuted and signed today in favor of the7R8) 4AR)V be enforced2.32&3

n April 0%%0 ;the day is illegible>, petitioners led aCo(plaint,2:3 doceted as Civil Case !o. #"00, before the Regional

)rial Court ;R)C> of )arlac City, for declaration of (ortgage contract asabandoned, annul(ent of deeds, illegal e<action, un+ust enrich(ent,accounting, and da(ages, alleging that the 6e(orandu( of Agree(ent and the Dacion in 4ay(ent e<ecuted are void forbeing pactum commissorium.2$3

4etitioners alleged that the loans e<tended to the( fro( July *H, *### to 6arch 0%, 0%%% were founded on several unifor(pro(issory notes, which provided for ".&P (onthly interest rates, &Ppenalty per (onth on the total a(ount due and de(andable, and afurther su( of 0&P attorneys fees thereon,2@3 and in addition,respondent e<acted certain su(s deno(inated asY9A)WAR.Z2#3 4etitioners decried these additional charges as Yillegal,

iniuitous, unconscionable, and revolting to the conscience as theyhardly allow any borrower any chance of survival in case of default.Z2*%3

4etitioners further alleged that they had previously (adepay(ents on their loan accounts, but because of the illegal e<actionsthereon, the total balance appears not to have (oved at all, hence,accounting was in order.2**3

4etitioners thus prayed for +udg(ent

a> Declaring the Real

9state 6ortgage Contract and its a(end(ents< < < as null and void and without legal forceand e1ect for having been renounced,abandoned, and given up=

;b> Declaring theY6e(orandu( of Agree(entZ <<< and YDacionin 4ay(entZ < < < as null and void forbeing pactum commissorium=

;c> Declaring the interests,penalties, 9vat 2sic3 and attorneys feesassessed and loaded into the loan accounts of the plainti1s with defendant as un+ust,iniuitous, unconscionable and illegal andtherefore, stricen out or set aside=

d> ?rdering an accountingon plainti1s loan accounts to deter(ine thetrue and correct balances on their obligationagainst legal charges only= and

e> ?rdering defendant to2pay3 to the plainti1s --

e.* 6oral da(ages in ana(ount not less than4*%%,%%%.%% and e<e(plaryda(ages of 4&%,%%%.%%=

e.0 Attorneys fees in thea(ount of 4&%,%%%.%% plus4*,%%%.%% appearance feeper hearing= and

e." )he cost of suit.2*03aswell as other +ust andeuitable reliefs.

n its Answer with Counterclai(,2*"3 respondent (aintained thelegality of its transactions with petitioners, alleging that

f the voluntary e<ecution of the 6e(orandu( of Agree(ent andDacion in 4ay(ent Agree(ent novated the Real 9state 6ortgage thenthe allegation of 4actu( Co((issoriu( has no (ore legal leg tostand on=

)he Dacion in 4ay(ent Agree(ent islawful and valid as it is recognied < < < underArt. *0H& of the Civil Code as a special for( of pay(ent whereby the debtor-4lainti1salienates their property to the creditor-Defendant in satisfaction of their (onetary

obligation=

)he accu(ulated interest and othercharges which were co(puted for (ore thantwo ;0> years would stand reasonable and validtaing into consideration 2that3 the principalloan is 4H,%%%,%%% and if indeed it beca(ebeyond the 4lainti1s capacity to pay then thefault is attributed to the( and not theDefendant2.32*H3

After pre-trial, the initial hearing of the case, originally seton Dece(ber **, 0%%0, was reset several ti(es due to, a(ong otherthings, the parties e1orts to settle the case a(icably.2*&3

During the scheduled initial hearing of 6ay $, 0%%", the R)Cissued the following order

Considering that the plainti1 Eilfredo?ng is not around on the ground that he isin 6anila and he is attending to a very sicrelative, without ob+ection on the part of thedefendants counsel, the initial hearing of thiscase is reset to June *@, 0%%" at *%%%ocloc in the (orning.

Just in case 2plainti1s counsel3 Atty.Concepcion cannot present his witness in theperson of 6r. Eilfredo ?ng in the ne<tscheduled hearing, the counsel (anifestedthat he will sub(it the case for su((ary

+udg(ent. 2*:3 ;5nderscoring supplied>

t appears that the June *@, 0%%" setting was eventuallyrescheduled to 7ebruary **, 0%%H at which both counsels werepresent2*$3 and the R)C issued the following order

)he counsel2s3 agreed to reset thiscase on April *H, 0%%H, at *%%% ocloc in the(orning. Fowever, the counsels are directedto be ready with their (e(orand2a3togetherwith all the e<hibits or evidence needed tosupport their respective positions which shouldbe the basis for the +udg(ent on thepleadings if the parties fail to settle the case inthe ne<t scheduled setting.

At the scheduled April *H, 0%%H hearing, both counselsappeared but only the counsel of respondent led a (e(orandu(.2*#3

By Decision of April 0*, 0%%H, Branch :H of the )arlac CityR)C, nding on the basis of the pleadings that there was no pactumcommissorium, dis(issed the co(plaint.20%3

?n appeal,20*3 the Court of Appeals2003 noted that

< < < 2E3hile the trial court in itsdecision stated that it was rendering +udg(enton the pleadings, < < < what it actuallyrendered was a su((ary +udg(ent. A

+udg(ent on the pleadings is proper when theanswer fails to tender an issue, or otherwisead(its the (aterial allegations of the adversepartys pleading. Fowever, a +udg(ent on the

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *:




















































pleadings would not have been proper in thiscase as the answer tendered an issue, i.e. thevalidity of the 6?A and D4A. ?n the otherhand, a su((ary +udg(ent (ay be renderedby the court if the pleadings, supportinga'davits, and other docu(ents show that,e<cept as to the a(ount of da(ages, there isno genuine issue as to any (aterial fact.20"3

!evertheless, nding the error in no(enclature Yto be (erese(antics with no bearing on the (erits of the caseZ, 20H3 the Court of Appeals upheld the R)C decision that there was no pactum

commissorium.20&3

)heir 6otion for Reconsideration20:3 having been denied,20$3 petitioners led the instant 4etition for Review on Certiorari,20@3 faulting the Court of Appeals for having co((itted a clear andreversible error

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)he petition is (eritorious.

Both parties ad(it the e<ecution and contents of the6e(orandu( of Agree(ent and Dacion in 4ay(ent. )hey di1er,however, on whether both contracts constitute pactumcommissorium or dacion en pa"o.

)his Court nds that the 6e(orandu( of Agree(ent andDacion in 4ay(ent constitute pactum commissorium, which isprohibited under Article 0%@@ of the Civil Code which provides

)he creditor cannot appropriate thethings given by way of pledge or (ortgage, ordispose of the(. Any stipulation to thecontrary is null and void.Z

)he ele(ents of pactum commissorium, which enables the(ortgagee to acuire ownership of the (ortgaged property withoutthe need of any foreclosure proceedings,2"%3 are ;*> there should be aproperty (ortgaged by way of security for the pay(ent of theprincipal obligation, and ;0> there should be a stipulation forauto(atic appropriation by the creditor of the thing (ortgaged in

case of non-pay(ent of the principal obligation within the stipulatedperiod.2"*3

n the case at bar, the 6e(orandu( of Agree(ent and theDacion in 4ay(ent contain no provisions for foreclosure proceedingsnor rede(ption. 5nder the 6e(orandu( of Agree(ent, the failureby the petitioners to pay their debt within the one-year period givesrespondent the right to enforce the Dacion in 4ay(ent transferring toit ownership of the properties covered by )C) !o. 0#$@H%.

Respondent, in e1ect, auto(atically acuires ownership of theproperties upon petitioners failure to pay their debt within thestipulated period.

Respondent argues that the law recognies dacion en pa"o as a special for( of pay(ent whereby the debtor alienatesproperty to the creditor in satisfaction of a (onetary obligation.2"03 )his does not persuade. n a true dacion en pa"o, the assign(entof the property e<tinguishes the (onetary debt. 2""3 n the case at bar,the alienation of the properties was by way of security, and not byway of satisfying the debt.2"H3 )he Dacion in 4ay(ent did note<tinguish petitioners obligation to respondent. ?n the contrary,under the 6e(orandu( of Agree(ent e<ecuted on the sa(e day asthe Dacion in 4ay(ent, petitioners had to e<ecute a pro(issory notefor 4&,#*:,**$.&% which they were to pay within one year.2"&3

Respondent cites 0olid Bomes% :nc. v. Court of Appeals2":3 where this Court upheld a 6e(orandu( of Agree(entW!acion en 3a"o.2"$3 )hat case did not involve the issueof pactum commissorium.2"@3

)hat the uestioned contracts were freely and voluntarilye<ecuted by petitioners and respondent is of no(o(ent, pactum commissorium being void for being prohibited bylaw.2"#3

Respecting the charges on the loans, courts (ay reduceinterest rates, penalty charges, and attorneys fees if they areiniuitous or unconscionable.2H%3

)his Court, based on e<isting +urisprudence,2H*3 nds the

(onthly interest rate of ".&P, or H0P per annu( unconscionable andthus reduces it to *0P per annu(. )his Court nds too the penaltyfee at the (onthly rate of &P ;:%P per annu(> of the total a(ountdue and de(andable Q principal plus interest, with interest not paidwhen due added to and beco(ing part of the principal and liewisebearing interest at the sa(e rate, co(pounded (onthly2H03 Qunconscionable and reduces it to a yearly rate of *0P of the a(ountdue, to be co(puted fro( the ti(e of de(and.2H"3 )his Court nds theattorneys fees of 0&P of the principal, interests and intereststhereon, and the penalty fees unconscionable, and thus reduces theattorneys fees to 0&P of the principal a(ount only.2HH3

)he prayer for accounting in petitioners co(plaint reuirespresentation of evidence, they clai(ing to have (ade partialpay(ents on their loans, vis a visrespondents denial thereof.2H&3 Are(and of the case is thus in order.

4rescinding fro( the above disuisition, the trial court andthe Court of Appeals erred in holding that a su((ary +udg(ent isproper. A su((ary +udg(ent is per(itted only if there is no genuineissue as to any (aterial fact and a (oving party is entitled to a

+udg(ent as a (atter of law.2H:3 A su((ary +udg(ent is proper if,while the pleadings on their face appear to raise issues, the a'davits,depositions, and ad(issions presented by the (oving party show thatsuch issues are not genuine.2H$3 A genuine issue, as opposed to actitious or contrived one, is an issue of fact that reuires thepresentation of evidence.2H@3 As (entioned above, petitioners prayerfor accounting reuires the presentation of evidence on the issue of partial pay(ent.

But neither is a +udg(ent on the pleadings proper. A +udg(ent on the pleadings (ay be rendered only when an answerfails to tender an issue or otherwise ad(its the (aterial allegations of the adverse partys pleadings.2H#3 n the case at bar, respondents

Answer with Counterclai( disputed petitioners clai(s that the6e(orandu( of Agree(ent and Dation in 4ay(ent are illegal andthat the e<tra charges on the loans are unconscionable.2&%3 Respondent disputed too petitioners allegation of bad faith.2&*3

4ERE/ORE, the challenged Court of Appeals Decisionis REVERSED and SET ASIDE. )he 6e(orandu( of Agree(ent andthe Dacion in 4ay(ent e<ecuted by petitioner- spouses Eilfredo !.?ng and 9dna 8heila 4aguio-?ng and respondent Roban KendingCorporation on 7ebruary *0, 0%%* are declared !5KK A!D ?D forbeing pactum commissorium.

n line with the foregoing ndings, the following ter(s of theloan contracts between the parties are ODI/IED as follows

I# Pr$isi$&s C$33$& t$ Pledge a&d $rtgage *$










































































*. )he (onthly interest rate of ".&P, or H0P per annum, is reduced to *0P per annum<

0. )he (onthly penalty fee of &P of the totala(ount due and de(andable is reduced to*0P per annum, to be co(puted fro( the ti(e of de(and= and

". )he attorneys fees are reduced to 0&P of theprincipal a(ount only.

Civil Case !o. #"00 is REANDED to the court of originonly for the purpose of receiving evidence on petitioners prayer foraccounting.

8? ?RD9R9D.

credtrans pledge

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