FIRST DIVISION

[G.R. No. 171035. August 24, 2009.]

WILLIAM ONG GENATO , petitioner, vs . BENJAMIN BAYHON, MELANIE

BAYHON, BENJAMIN BAYHON, JR., BRENDA BAYHON, ALINA
BAYHON-CAMPOS, IRENE BAYHON-TOLOSA, and the minor GINO
BAYHON, as represented herein by his natural mother as guardian
ad-litem, JESUSITA M. BAYHON , respondents.

DECISION

PUNO , C.J : p

At bar is a Petition for Review on Certiorari assailing the Decision of the Court of
Appeals dated September 16, 2005 1 and Resolution denying the petitioner's motion
for reconsideration issued on January 6, 2006. cCESaH

This is a consolidated case stemming from two civil cases led before the
Regional Trial Court (RTC) — Civil Case No. Q-90-7012 and Civil Case No. Q-90-7551.
Civil Case No. Q-90-7012
On October 18, 1990, respondents Benjamin M. Bayhon, Melanie Bayhon,
Benjamin Bayhon Jr., Brenda Bayhon, Alina Bayhon-Campos, Irene Bayhon-Tolosa and
the minor Gino Bayhon, as represented by his mother Jesusita M. Bayhon, led an
action before the RTC, Quezon City, Branch 76, docketed as Civil Case No. Q-90-7012.
In their Complaint, respondents sought the declaration of nullity of a dacion en pago
allegedly executed by respondent Benjamin Bayhon in favor of petitioner William Ong
Genato. 2
Respondent Benjamin Bayhon alleged that on July 3, 1989, he obtained from the
petitioner a loan amounting to PhP1,000,000.00; 3 that to cover the loan, he executed a
Deed of Real Estate Mortgage over the property covered by Transfer Certi cate of Title
(TCT) No. 38052; that, however, the execution of the Deed of Real Estate Mortgage was
conditioned upon the personal assurance of the petitioner that the said instrument is
only a private memorandum of indebtedness and that it would neither be notarized nor
enforced according to its tenor. 4
Respondent further alleged that he led a separate proceeding for the
reconstitution of TCT No. 38052 before the RTC, Quezon City, Branch 87. 5 Petitioner
William Ong Genato led an Answer in Intervention in the said proceeding and attached
a copy of an alleged dacion en pago covering said lot. 6 Respondent assailed the
dacion en pago as a forgery alleging that neither he nor his wife, who had died 3 years
earlier, had executed it. 7
In his Answer, petitioner Genato denied the claim of the respondent regarding the
death of the latter's wife. 8 He alleged that on the date that the real estate mortgage was
to be signed, respondent introduced to him a woman as his wife. 9 He alleged that the
respondent signed the dacion en pago and that the execution of the instrument was
above-board. 1 0
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 Civil Case No. Q-90-7551
On December 20, 1990, petitioner William Ong Genato led Civil Case No. Q-90-
7551, an action for speci c performance, before the RTC, Quezon City, Branch 79. In his
Complaint, petitioner alleged that respondent obtained a loan from him in the amount
of PhP1,000,000.00. Petitioner alleged further that respondent failed to pay the loan
and executed on October 21, 1989 a dacion en pago in favor of the petitioner. The
dacion en pago was inscribed and recorded with the Registry of Deeds of Quezon City.
11 STcAIa

Petitioner further averred that despite demands, respondent refused to execute

the requisite documents to transfer to him the ownership of the lot subject of the
dacion en pago. Petitioner prayed, inter alia, for the court to order the respondent to
execute the final deed of sale and transfer of possession of the said lot. 1 2
Decision of the Consolidated Cases
The two cases were consolidated and transferred to the RTC, Quezon City,
Branch 215. On October 9, 1997, the trial court rendered its Decision. It found that
respondent obtained a loan in the amount of PhP1,000,000.00 from the petitioner on
July 3, 1989. The terms of the loan were interest payment at 5% per month with an
additional 3% penalty in case of nonpayment. 1 3
With respect to the dacion en pago, the trial court held that the parties have
novated the agreement. 1 4 It deduced the novation from the subsequent payments
made by the respondent to the petitioner. Of the principal amount, the sum of
PhP102,870.00 had been paid: PhP27,870.00 on March 23, 1990, PhP55,000.00 on 26
March 1990 and PhP20,000.00 on 16 November 1990. 1 5 All payments were made
after the purported execution of the dacion en pago.
The trial court likewise found that at the time of the execution of the real estate
mortgage, the wife of respondent, Amparo Mercado, was already dead. It held that the
property covered by TCT No. 38052 was owned in common by the respondents and
not by respondent Benjamin Bayhon alone. It concluded that the said lot could not have
been validly mortgaged by the respondent alone; the deed of mortgage was not
enforceable and only served as evidence of the obligation of the respondent. 1 6
In sum, the trial court upheld the respondent's liability to the petitioner and
ordered the latter to pay the sum of Php5,647,130.00. 1 7 This amount included the
principal, the stipulated interest of 5% per month, and the penalty; and, was calculated
from the date of demand until the date the RTC rendered its judgment.
Appeal to the Court of Appeals
Respondents appealed before the Court of Appeals. On March 28, 2002,
respondent Benjamin Bayhon died while the case was still pending decision. 1 8 On
September 16, 2005, the Court of Appeals rendered a decision reversing the trial court.
cSIHCA

The Court of Appeals held that the real estate mortgage and the dacion en pago
were both void. The appellate court ruled that at the time the real estate mortgage and
the dacion en pago were executed, or on July 3, 1989 and October 21, 1989,
respectively, the wife of respondent Benjamin Bayhon was already dead. 1 9 Thus, she
could not have participated in the execution of the two documents. The appellate court
struck down both the dacion en pago and the real estate mortgage as being simulated
or fictitious contracts pursuant to Article 1409 of the Civil Code. 2 0
The Court of Appeals held further that while the principal obligation is valid, the
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 death of respondent Benjamin Bayhon extinguished it. 2 1 The heirs could not be
ordered to pay the debts left by the deceased. 2 2 Based on the foregoing, the Court of
Appeals dismissed petitioner's appeal. Petitioner's motion for reconsideration was
denied in a resolution dated January 6, 2006. 2 3
Petition for Review
Petitioner now comes before this Court assailing the decision of the Court of
Appeals and raising the following issues:
Whether or not Benjamin Bayhon is liable to Mr. Genato in the amount of
Php5,647,130.00 in principal and interest as of October 3, 1997 and 5% monthly
interest thereafter until the account shall have been fully paid. 2 4

The Court of Appeals erred in declaring the Real Estate Mortgage dated
July 3, 1989 and the Dacion en Pago dated October 21, 1989, null and void. 2 5

We shall first tackle the nullity of the dacion en pago.

We a rm the ruling of the appellate court that the subject dacion en pago is a
simulated or ctitious contract, and hence void. The evidence shows that at the time it
was allegedly signed by the wife of the respondent, his wife was already dead. This
finding of fact cannot be reversed.
We now go to the ruling of the appellate court extinguishing the obligation of
respondent. As a general rule, obligations derived from a contract are transmissible.
Article 1311, par. 1 of the Civil Code provides:
Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the decedent. cAaTED

In Estate of Hemady v. Luzon Surety Co., Inc. , 2 6 the Court, through Justice
JBL Reyes, held:
While in our successional system the responsibility of the heirs for the
debts of their decedent cannot exceed the value of the inheritance they receive
from him, the principle remains intact that these heirs succeed not only
to the rights of the deceased but also to his obligations . Articles 774 and
776 of the New Civil Code (and Articles 659 and 661 of the preceding one)
expressly so provide, thereby confirming Article 1311 already quoted.

"ART. 774. — Succession is a mode of acquisition by virtue of which

the property, rights and obligations to the extent of the value of the
inheritance, of a person are transmitted through his death to another or
others either by his will or by operation of law."
"ART. 776. — The inheritance includes all the property, rights and
obligations of a person which are not extinguished by his death." 2 7
(Emphasis supplied)

The Court proceeded further to state the general rule:

Under our law, therefore, the general rule is that a party's
contractual rights and obligations are transmissible to the successors.
The rule is a consequence of the progressive "depersonalization" of patrimonial
rights and duties that, as observed by Victorio Polacco, has characterized the
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 history of these institutions. From the Roman concept of a relation from person to
person, the obligation has evolved into a relation from patrimony to patrimony,
with the persons occupying only a representative position, barring those rare
cases where the obligation is strictly personal, i.e., is contracted intuitu personae,
in consideration of its performance by a speci c person and by no other. The
transition is marked by the disappearance of the imprisonment for debt. 2 8
(Emphasis supplied)

The loan in this case was contracted by respondent. He died while the case was
pending before the Court of Appeals. While he may no longer be compelled to pay the
loan, the debt subsists against his estate. No property or portion of the inheritance may
be transmitted to his heirs unless the debt has rst been satis ed. Notably, throughout
the appellate stage of this case, the estate has been amply represented by the heirs of
the deceased, who are also his co-parties in Civil Case No. Q-90-7012. acHETI

The procedure in vindicating monetary claims involving a defendant who dies

before nal judgment is governed by Rule 3, Section 20 of the Rules of Civil Procedure,
to wit:
When the action is for recovery of money arising from contract, express or
implied, and the defendant dies before entry of nal judgment in the court in
which the action was pending at the time of such death, it shall not be dismissed
but shall instead be allowed to continue until entry of nal judgment. A favorable
judgment obtained by the plaintiff therein shall be enforced in the manner
especially provided in these Rules for prosecuting claims against the estate of a
deceased person.

Pursuant to this provision, petitioner's remedy lies in ling a claim against the
estate of the deceased respondent.
We now go to the interest awarded by the trial court. We note that the interest
has been pegged at 5% per month, or 60% per annum. This is unconscionable, hence
cannot be enforced. 2 9 In light of this, the rate of interest for this kind of loan
transaction has been xed in the case of Eastern Shipping Lines v. Court of
A p p e al s , 3 0 at 12% per annum, calculated from October 3, 1989, the date of
extrajudicial demand. 3 1
Following this formula, the total amount of the obligation of the estate of Benjamin
Bayhon is as follows:
Principal Php1,000,000.00
Less: Partial Payments 27,870.00
55,000.00
20,000.00
———————
897,130.00
Plus: Interest
(12% per annum x 20 years) 2,153,552.00
———————
TOTAL: Php3,050,682.00
=============

IN VIEW WHEREOF , the decision of the Court of Appeals dated September 16,
2005 is AFFIRMED with the MODIFICATION that the obligation to pay the principal loan
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 and interest contracted by the deceased Benjamin Bayhon subsists against his estate and
is computed at PhP3,050,682.00.
No costs.
SO ORDERED.
Carpio, Corona, Leonardo-de Castro and Bersamin, JJ., concur.

Footnotes

1. CA G.R.-CV No. 63626, Benjamin M. Bayhon, Melanie Bayhon, Benjamin Bayhon, Jr.,
Brenda Bayhon, Alina Bayhon-Campos, Irene Bayhon-Tolosa, and the minor Gino
Bayhon, represented herein by his natural mother as guardian-ad-litem, Jesusita M.
Bayhon v. William Ong Genato; penned by Associate Justice Vicente Q. Roxas and
concurred in by Associate Justices Portia Aliño-Hormachuelos and Juan Q. Enriquez, Jr.

2. Original Records, pp. 1-9.

3. Id., pp. 3-4.
4. Id., p. 4.
5. Designated as LRC Case No. Q-1957.
6. Original Records, p. 4.

7. Id., p. 5.
8. Id., p. 166.
9. Id., p. 169.
10. Id., p. 170.
11. Id., pp. 353-354.
12. Id.
13. Id., p. 650.
14. Id., p. 657.
15. Id., pp. 656-657.
16. Id., p. 658.
17. Id., p. 659.
18. CA rollo, p. 148.
19. Rollo, pp. 47-48.
20. Article 1409 provides that:

The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;

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 (2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract
cannot be ascertained;

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality
be waived.

21. Rollo, p. 46.

22. Id.
23. Id., pp. 37-39.
24. Id., p. 18.
25. Id., p. 20.
26. No. L-8437, 100 Phil. 388 (1958).
27. Id., p. 393.
28. Id., p. 394.
29. Imperial v. Jaucian, G.R. No. 149004, 14 April 2004, 427 SCRA 517, 525.
30. G.R. No. 97412, July 12, 1994, 234 SCRA 78, 95.

31. Rollo, p. 28.

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